Here are possible causes and answers to the gas price crisis
Startmag conversation with Guido Bortoni, former head of the Energy Department at Mise, former president of the Authority for Energy, now president of Cesi (Centro Elettrotecnico Sperimentale Italiano), on gas price cap, ttf market and more
The EU Energy Council has not found an agreement on the gas price ceiling. Germany joined the nos of Holland and Denmark; therefore Italy and France have been isolated. Do you think the roof is feasible as well as desirable?
For some time the discussion in Europe has revolved around the concept of "natural gas price ceiling", without fully clarifying what is meant by this. And you know: the more a debate lacks the minimum rules of engagement – which is, for example, a common lexicon on fundamentals – the more this leads to a Babel of apparently consonant or controversial positions or even both.
Specifically, in the shelter of this Babel, the divergent interests of the individual Member States (legitimate, of course!) Harbor a jumble of recipes, each of which is designed to effectively resolve, once and for all and in the (self-styled) interest of all the dramatic gas crisis. Not only. The portentous recipes also aim to dispel that sort of “perfect storm” that has added electrical drama to the already heavy gas crisis.
What does it refer to?
I refer to the causes of tension that originate on the European electricity markets beyond the gas problem such as, for example, the extreme summer drought that weakened hydroelectric power generation and greatly reduced the cooling capacity of thermoelectric plants, the poor windiness in the countries and in the North Sea and, last but not least, the large and persistent out-of-service of the French nuclear fleet.
But what is really meant behind the “gas price cap” concept?
There are at least four different meanings of the concept. There is talk of a ceiling on the price of gas:
- for thermoelectric use as a marginal source that sets (high) prices in the electricity markets;
- for all uses imported via pipeline from specific countries (eg from Russia);
- for all uses placed on transactions in individual national natural gas markets;
- for all uses placed to transactions in a uniform manner across all European markets.
The ambitiousness of the meanings is clearly in increasing order. If it were to be resolved with the last one (4), that is to say with the pan-European roof, the previous ones would also benefit in some way. Unfortunately, however, as the degree of ambitiousness increases, the gap between the diversity of national interests opens up for many reasons. This explains the difficulty of reaching an agreement within the Energy Council along the lines of what was the proposal of the Italian government, that is, a proposal within the meaning of 4.
Do you think the European Commission has made mistakes?
From what we have seen so far, the European Commission has too early placed itself in a position of mediation between the various positions of the Member States on the gas roof, without however having drawn up its own synthesis proposal that takes into account the various interests at stake. In my opinion we could have been more creative.
What were the most easily achievable roof proposals?
On the proposal of the meaning 1) – the narrowest – there was and is agreement, so much so that the Energy Council has given the Commission a mandate to outline the details of mechanisms capable of extracting in the spot electricity market the excess economic margins compared to a "fair" remuneration defined administratively by the non-gas-thermoelectric sources (which are remunerated in the wake of the high prices set by the thermoelectric gases).
Regardless of the type of mechanism hypothesized by the Commission from among those possible (e.g. market with el tope iberico, market with inframarginal revenue capture , ex-post parafiscal levy such as that provided for in Italian law by article 15-bis of Legislative Decree Sostegni-ter ), the related gas price cap in the electricity market will probably be made operational by winter 2022 and will help to calm down electricity prices a little.
What will the effects be?
Beyond the various market distortions introduced by the mechanism, the calming effect will in any case be partial and, for Italy, less significant in terms of the effect on prices compared to France and Germany due to the high share of gas-fired thermoelectric in the mix. electricity in our country (45% of the total) from which it will not be possible to extract any inframarginal income, the higher expected value of remuneration of our renewables and the absence of other inframarginal technologies such as nuclear power.
And what about the Russian gas roof?
The meaning 2) would lead to the configuration of the gas price cap as a real "duty" on pipeline gas imports from Russia and therefore – prima facie – belonging to the family of sanctions against Russia with all the implications of governance of the European Council in order to be able to adopt them (unanimity of the Member States).
How could Russia react?
Should we also overcome the obstacle of governance , the reaction of the Russian gas operator to the imposition of a duty should in any case be evaluated. If this were to trigger a reaction of total interruption of Russian gas supplies (although already reduced by 40% today compared to the pre-crisis situation), it is clear that it would be necessary to be ready to re-proportion the European gas demand to avoid unexpected and uncontrolled shortages of gas, given that Russian volumes are still indispensable (one would say pivotal) for supplying the EU gas system, at least during the next winter.
Are we ready with a rationing plan, just in case?
Not really, given that the EU asked to postpone the matter to October and the Energy Council in turn invited the Commission to study mechanisms for reducing gas and electricity demand in the face of demand-side compensation that remunerate these services. I would like to return to the essential point of intelligent preparation for the rationing of European demand.
On the other hand, what do you think about the proposal for a ceiling on transactions in national gas markets?
There is no need to comment on the dangerousness of the proposals in meaning 3. A system of gas price caps for each single Member State would produce serious distortions for the distribution of gas between them, generating problems of competitiveness of national industries and discrimination of cost and burden of the gas and electricity bills for citizens.
And on the roof at European level?
As I said, this proposal is certainly the most ambitious and the one that would give solutions to the various problems just mentioned. However, any proposed pan-European roof requires two additional mechanisms to be in place to complement the pan-European roof.
Which?
First. A well-planned system of intelligent rationing of gas / electricity demand to minimize or cancel the “destruction of European demand” effect in the event of a gas shortage . Second: an over-the-cap (i.e. over-the-roof) gas purchase mechanism, most likely from LNG, if rationing is not sufficient to re-proportion demand with respect to the already scarce or insufficient supply of gas.
These mechanisms are obviously onerous and could be extraordinarily charged to the general taxation of the Member State or to the EU budget. It is clear that if the individual State were to bear the burden, the different financing capacities of the individual Member States would be immediately combated. Italy would certainly be better off uploading it to the EU budget.
What are the critical aspects?
Some observers have correctly pointed out that the sequence of introduction of the measures outlined above for acceptance 4 on the calming effect on European gas is not irrelevant. In particular, if an effective rationing program were to be introduced primarily to re-proportion the demand, it would be possible to avoid the affixing of a price ceiling and therefore over-the-cap purchases (the cap would no longer be necessary).
What do you think?
I have some doubts that the dynamic situation of supply shortages, even in the presence of rationing, can bring the price of gas down to acceptable levels, so it is probably appropriate that all three mechanisms must be prepared and contribute to the solution.
However you look at it, it is clear how essential it is to work on the gas / electricity demand rationing program in Europe while – up to now – this aspect has unfortunately been overshadowed by the institutions.
It must be said, then, that we are facing truly unprecedented situations in energy for which pret-a-porter recipes of suitable interventions in normal times or thought without taking into account the entire global energy picture are of no help.
It does not even help that in the electoral campaign underway in Italy hyper-simplifications of energy situations are transmitted (instead very complex even for energy experts) and solutions with an almost miraculous effect on the current crisis are proposed. Unfortunately, the search for solutions is not so simple and straightforward. If only it were! We would not have been basking for more than a year in the more serious energy price crisis than ever, even more so than the oil shocks of the 1970s.
In these increases in gas prices, what is it that affects the most? Lower Russian gas supplies? The offer of the other countries? The Dutch TTF market?
Let us proceed in order along the various phases of this crisis in the cost of electricity and gas prices which has persisted and intensified for more than a year and let us focus on the gas market.
Ok let's proceed with order.
At the beginning, last autumn until the beginning of the Russian invasion of Ukraine on February 24, 2022, we were in a "short" market state in terms of matching supply and demand; part of the gas supply had been attracted to post-Covid recovery markets capable of paying a higher price than the European one (Far-East); global investments in new gas were at stake either due to the contraction of the economy from Covid or due to ideological announcements that the fossil gas season would soon be over.
We certainly cannot forget the bizarre declarations of those who wished that the "re-ignition" of the post-Covid energy system would have taken place almost entirely on the green , completely forgetting the ten-year time constants typical of the transition of energy systems.
What happened instead?
In this phase, the sales operators, trying to rebalance their portfolios with gas supplies, contributed to the price increases. I do not exclude that there have also been transactions by dominant producers (primarily Russian ones) to support the price through commercial contractions in the gas supply.
Then came a second phase – after February 24 – in which the Russian offer began to be used also as a means of reacting to the policy of European and American sanctions against Russia itself. The specter of a possible total interruption of Russian gas has burst into the market, contributing not a little to raising gas prices even in summer (where they are typically low), also due to the fact that European countries have increased demand for filling gas storage in view of winter '22 -'23.
Here, too, I do not forget the completely inappropriate declarations of those who made themselves prophets of doom as to stop Russian flows already in May, with the result of driving up prices dramatically. Certainly, in a scenario of feared interruption of Russian gas, we are turning to other markets, for example those that bring gas to Europe through LNG. Typically, gas via LNG has always been more expensive than gas via pipeline.
Because?
LNG responds to short-term competitive logic on a global market as it has practically more sales alternatives in practically all world ports as long as there is a regasifier; the gas pipeline, on the other hand, responds to long-term logic where the price of gas must cover long-term investments in wells and pipes.
Furthermore, with LNG the logistics are complicated and it is necessary to take into account the long-distance freight market.
Finally, there is the additional infrastructure data in the LNG value chain. There is always liquefaction to be built in the LNG shipping site and regasifiers in the ports of destination: investments that have been activated in recent years and therefore are in a phase of acute remuneration of the related investments.
Can we talk about the "TTF effect" on prices, in your opinion?
Certainly the TTF phenomenon has complicated the price-gas equation. As is the case in (almost) all cases of market economy, where there are trading places already in price tension and increasing its volatility, it is possible to insert speculation mechanisms on short-very short-term traded items. But here it would take a long ad hoc examination to be able to discern the physical effect from the purely financial one. In this regard, it does not seem to me that there are such in-depth analyzes on the phenomenon and such as to draw objective cognitive elements.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/crisi-prezzi-gas-cause-bortoni-arera/ on Tue, 13 Sep 2022 05:19:00 +0000.