PARIS: EU nations have adopted a mechanism to cap natural gas prices, but experts say it will likely have only a limited impact on reducing what businesses and households pay -- and could harm efforts to purchase supplies next winter.
How does the price cap work?
Natural gas is traded on wholesale exchanges where utilities and even some large industrial firms can buy supplies.
The European benchmark price for gas, a contract called Dutch TFF to be delivered the following month, is currently around 95 euros (about $100) per megawatt hour. In August, it briefly spiked to 345 euros.
The European price cap will be triggered if two conditions are met: If the benchmark price rises above 180 euros per megawatt hour over three consecutive days, and if it exceeds a reference price for liquefied natural gas (LNG) prices by at least 35 euros.
Once triggered, the cap remains in place for 20 days -- unless the benchmark price falls back below 180 euros for three consecutive days, or a supply emergency in the EU is declared.
Are fuel bills going to fall?
It is hard to judge the impact of the mechanism because it hinges on a double constraint of very high prices which may rarely happen.
"The ultimate impact of it is very uncertain," said Simone Tagliapietra at the Bruegel think-tank.
But if there are tensions in world gas supplies -- especially due to heightened Chinese demand -- certain conditions could combine to trigger the cap, Katja Yafimava from Oxford Energy said.
"Any potential problems with supplies, cold weather snaps, and insufficient demand reduction could all contribute towards these two conditions being met at the same time," she said.
Ultimately however, the cap aims to prevent "extreme volatility", she added rather than bringing down bills.
"But this has nothing to do with lowering energy prices overall, which will indeed remain high with this price gap."
The impact for consumers will be negligible, warned oil and gas analyst Thierry Bros.
"There will be no impact for individuals and very little for manufacturers," he said.
"There is not necessarily a direct link between the wholesale price and the price you pay for electricity or gas."
Governments have already spent 700 billion euros to "limit the rise in prices and prevent the price from being passed on" to consumers, he added.
Acting on the wholesale price will mainly have consequences for the small number of manufacturers that buy directly from the wholesale market.
What will happen next winter?
"The main issue related to next year is the fact that (the price cap) might compromise your opportunity to secure the supplies. But in that case, the system will just be deactivated," said Tagliapietra.
But there is a risk that more transactions will be made outside regulated exchanges to avoid the cap, leading to "less transparent" over-the-counter trades that are riskier for financial stability, he added.
Others warned that the price cap could hinder efforts to get supplies for next year, since Europe will need to buy a lot of gas during spring and summer to fill up its reserves ahead of next winter.
"This will have negative consequences since usually supply is guaranteed with high prices," said Bros.
"With low prices, you no longer guarantee anything."
He says another risk is that it creates a precedent for intervention in the market.
"You will have operators who will say that now, there is a risk that politics could intervene at any time."
Norway -- which has become Europe's main gas supplier as Russian deliveries have fallen -- has already expressed its concern, and said that the cap will not resolve the problem of a shortage of gas.
Africa's top gas exporter Algeria has also spoken out against the cap, saying it would threaten upstream investments.
What are the solutions to the energy crisis?
Thierry Bros believes that the best solution is for the EU to separate the price of gas and electricity.
"That is one way to promote decarbonisation of the system and to lower the price of electricity," he said.
"This crisis will only be solved if we maximise the alternative supply to Russian gas, including renewables, and if we got the demand (down)," said Tagliapietra, insisting that Europeans need to keep burning less gas.
"There is no easy way around this." -- AFP
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