Gas shortages in winter 2023 are increasingly likely, and the threat of government-mandated gas rationing could see a return
The failure to agree on a gas price cap changes little in terms of businesses’ strategic considerations, especially in light of how ineffective the European Commission’s (EC’s) proposal was in substance. MNCs should continue to monitor the situation closely and revisit their scenario planning for 2023, accounting for a much tougher energy situation and supply outlook next winter.
Overview
- The EU failed to agree on the adoption of gas price cap measures introduced during the bloc’s emergency meeting on November 24.
- Germany, Austria, the Netherlands, Denmark, and Hungary opposed the gas price measures, citing concerns over existing Russian gas supplies and LNG suppliers that might be enticed to redirect flows to Asia.
- EU members supporting a price cap also rejected the EC’s proposals, viewing them as weak and inefficient.
- Existing consensus over the bulk buying mechanism, which will allow EU gas suppliers to bid as a single bloc to cover 15% of existing gas inventory, may see the introduction of joint gas purchases in 2023.
Our View
As expected, the proposed cap was envisioned to be relatively inefficient and designed in a way that would not spook LNG suppliers. Under the EC’s proposals, the mechanism was supposed to be activated once the Dutch TTF index exceeds EUR 275 for two weeks and when TTF prices are EUR 58 higher than the average LNG reference price for 10 consecutive trading days. The mechanism would mean that the price cap’s effectiveness will be severely constrained under a scenario similar to the one in August 2022, when the Dutch TTF index jumped to over EUR 275 for around 10 days, before falling to EUR 250 at the end of the month. The weakness of the proposals and concerns over supplies have divided the bloc, with additional proposals to make gas consumption reduction targets mandatory also being widely rejected by member states. The ongoing disagreement will severely dampen the ability of the EU to introduce price correction mechanisms, and while a price corridor tool is still on the table, it is likely that, in substance, it will still fall short of the demands of the majority of EU member states. Given the increased danger of gas shortages into the winter of 2023 and the constrained supply of LNG going into Europe, risks involving acute gas price volatility, elevated utility prices, and the threat of government-mandated gas rationing may see a return.
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