European gas price cap to counteract the crisis - experts warn of risky effects

Created: 10/22/2022 9:17 am

By: Matthew Schneider

Combined heat and power plants that produce local and district heating also work with natural gas, among other things.

© Marijan Murat/dpa/dpa-tmn

In the fight against high gas prices, France is pushing ahead: A European price cap should help.

But this could jeopardize the security of supply and bring back past record prices.

Brussels – Yesterday it became official: The federal government wants to cushion the worst hardships of the high gas prices with a package worth 200 billion euros.

At the same time there was a row at the EU energy summit: a number of countries, above all France, want to cap prices on imports.

A requirement that is problematic due to the changed circumstances: Germany received almost 40 percent of its natural gas from Russian pipelines in 2019 - these deliveries no longer exist.

They have largely been replaced by shiploads of liquefied natural gas (LNG) – a far more volatile resource, explains Tobias Federico, managing director of energy consultancy Energy Brainpool: “Unlike pipelines, LNG connects various natural gas markets around the world.

That is why we are in direct competition with other customers.” The most important are Japan and Korea, which have been using liquid gas for a long time.

Warm October has helped temporary price reductions in Europe

"Due to the high prices in Europe, we were able to buy deliveries at short notice to replace Russian gas - sometimes the ships in the Indian Ocean turned around to supply us." Because there are no friendly prices for deliveries from the USA and Qatar either.

In the meantime, natural gas on the Dutch reference market has cost 15 times the pre-crisis level, currently it is around five times as much.

"Due to the exceptionally warm October and the full storage facilities, some German retailers were able to stop buying and prices have fallen significantly," explains Federico.

“Several freighters are currently in front of the Spanish terminals and are waiting until it gets colder, i.e. prices rise again.” Or there are more attractive conditions in East Asia: “There are no contractual commitments on the spot market, so the tankers deliver as soon as the trip is worthwhile to Japan and South Korea,” says the market analyst.

The market there is closely related to the European one.

According to experts, the European gas price cap is associated with a dangerous risk

It is becoming clear that Europe's storage facilities could be filled primarily in the second half of the year due to the higher price level.

However, an analysis of the figures provided by the rating agency S&P to our newspaper shows that on average over the year, gas costs around 145 US dollars per megawatt hour in Europe and around 119 dollars in East Asia.

"If the European gas price were to fall permanently below the level in East Asia, for example due to a cap, freighters would of course increasingly head towards the Pacific again," says Federico.

A risky scenario: Russian pipeline gas was available for a long time this year.

In the winter of 2023/2024, Europe – and Germany in particular – will be even more dependent on LNG supplies than today.

The psychological effect of full gas tanks should not be underestimated

The psychological effect should not be underestimated: "As soon as the storage tanks were filled, gas prices eased significantly," says Tobias Federico.

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"But if deliveries don't come due to a low price level, then the prices will rise again very quickly because of the fear of a shortage."

Europe should be prepared for this eventuality, advises Federico: "We definitely have to expand large LNG landing capacities: Because when prices are rising, we have to be able to absorb the price-dampening gas."

So are we threatened with a cat-and-mouse game on the world market in the next few years?

Not necessarily: “Supply contracts over 20 years are also possible for LNG,” explains Tobias Federico.

Because of the high prices, however, many retailers do not want to commit themselves at the moment.

“But as supply increases – and demand decreases – prices are likely to fall as well.”