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European gas levels drop as winter cold arrives

European Union countries are continuing negotiations on a price cap for natural gas after a meeting of the bloc’s energy ministers on November 24 failed to approve an initial plan proposed by the European Commission. The plan specified a cap if month-ahead contracts on the Dutch TTF exceeded €275 ($282) per MWh for two weeks and was at least €58 ($61) higher than the reference price for a basket of spot liquefied natural gas (LNG) for at least ten days. However, the plan was blocked by a minority of member states including Belgium, Poland, and Spain which argued that the market correction mechanism under the plan would take too long to come into effect in the event of a spike in gas prices.

Several revised proposals have been submitted by member states in place of the EU’s initial plan. The Czech Republic, which currently holds the EU’s rotating presidency, has developed a plan that would trigger the price cap if gas prices rose above €264 ($279) per MWh for month-ahead contracts on the Dutch TTF for more than five days. Spain has also proposed its own plan for a fully fluctuating price cap based on average LNG prices while a consortium of countries that include Italy, Poland, Greece, Belgium, and Slovenia support a plan that reduces the price cap dramatically to €160 ($169) per MWh. Meanwhile, Germany, the Netherlands, and other European countries continue to warn against a gas price cap over fears that it could negatively affect energy supplies to the continent.

EU countries are also yet to sign off on a package of already agreed-upon intervention measures because of the deadlock surrounding the price cap, meaning that joint gas purchases, establishing an alternate price benchmark, and gas sharing rules between member states have not yet come into effect. The impasse comes at a time when gas prices are continuing to rise in winter and prices on the TTF neutral gas index reached levels not seen since the beginning of October.

Countries announce more mitigation measures

European countries are spending record amounts on mitigation measures as the winter season gets underway. Some estimates suggest that EU governments have spent more than €674 billion ($713 billion) on aid packages and subsidies since the energy crisis began, with Germany being the continent’s major spender with more than €264 billion ($279 billion) in intervention measures announced so far. The German government earmarked up to €54 billion ($57 billion) of this amount to pay for a planned cap on gas and power prices until April 2024.

The French government is also turning to a windfall tax levy on power providers to help fund existing subsidies for companies plus a 15% cap on gas price increases for small users that will come into effect in 2023. The French government has also received approval from regulators to begin fully nationalizing France’s largest power provider, Electricite de France (EDF), for around €10 billion ($12 billion). The struggling power provider has debts of more than €40 billion ($47 billion) and is behind on repairs for several of the country’s aging nuclear power reactors. France is currently facing a five-GW shortage in its nuclear power output due to the repair delays, leaving the country’s grid vulnerable to an early cold snap.

The United Kingdom will also introduce a new tax on revenues from renewable power and will extend a windfall tax on North Sea energy companies until 2028 while also implementing an energy bill relief scheme for businesses. The relief scheme will provide non-domestic users with energy price discounts against a baseline government price of GBP 211/MWh (€233 / $276) for electricity and GBP 75/MWh (€82 / $98) for natural gas until March 31, 2023.

Companies consider relocating

In addition to short-term production disruptions, the energy crisis is set to cause long-term impacts to manufacturing investment throughout the continent as uncertainty forces businesses to consider relocating production outside of Europe.

For example, a survey by the Foundation for Family Businesses revealed that up to 9% of German SMEs were considering relocating production abroad to escape price increases while an executive from Volkswagen AG, one of the country’s biggest automotive manufacturers, warned that despite energy prices dropping from all-time highs, production costs in Europe were becoming practically unviable.

EU officials have signalled that the bloc also risks losing renewable energy manufacturers to the United States which unveiled a new $369 billion (€369 billion) subsidy package for green energy providing tax incentives and grants for solar, turbine, battery, and EV manufacturers. The package increased tensions between the United States and European leaders over concerns that the subsidy package unfairly targets struggling renewables manufacturers that are seeking to relocate from the EU due to high energy costs.

Gas storage levels begin to fall 

Gas storage facilities across the continent have begun to decrease following a late start to the winter season and increased gas savings throughout fall season. Slovakia and Hungary have seen the largest drops in gas levels since mid-November – levels there dipped by more than 5%. The continent is on track to end the winter season with above-average gas storage levels, but this remains dependent on winter temperatures in the coming months.

The start of the heating season in Europe has been unusually warm, which resulted in below-normal heating demand and gave authorities additional time to fill storage facilities. The start of the season saw the lowest heating demand of any comparable period since the beginning of the century, and as of November 30, heating requirements were still 15% below the 10-year normal.

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