This content is not available in your region

Explainer-Can joint gas buying tackle Europe's high prices?

Explainer-Can joint gas buying tackle Europe's high prices?
Explainer-Can joint gas buying tackle Europe's high prices?   -   Copyright  Thomson Reuters 2021
By Reuters

By Kate Abnett, Nina Chestney and Susanna Twidale

BRUSSELS/LONDON – The European Union is expected to propose a system this week to allow countries to jointly buy strategic stocks of gas, a measure drawn up in response to soaring energy prices.

Benchmark wholesale European gas prices rose by more than 500% this year, hitting record highs in October as tight gas supplies coincided with strong demand in economies recovering from the COVID-19 pandemic. While prices have retreated from their peak, they remain high.

Most European governments responded with emergency measures, such as subsidies or tax breaks, to protect households from higher energy bills.

Countries including Spain and France have also called for the EU to allow them to jointly buy gas and form strategic reserves to bolster their supplies.

The European Commission will propose a reform of EU gas market rules this week. EU energy policy chief Kadri Simson has said it will include a framework to enable joint procurement of strategic gas stocks. A Commission document, seen by Reuters, said any joint buying among countries would be voluntary.

WHY IS GASSTORAGEIMPORTANT?

The EU has the capacity to store over 117 billion cubic meters (bcm) of natural gas, or roughly a fifth of its annual consumption, according to Gas Infrastructure Europe.

Gas storage sites are typically salt caverns or depleted gas fields. Storage is needed to balance fluctuations in daily and seasonal demand. It can secure the supply of gas in times of disruptions, major outages at infrastructure, or particularly high demand in cold spells.

Storage capacity in the EU is unevenly distributed with large facilities in France, Germany, Italy and the Netherlands, but interconnection by pipelines means member states can use stored gas in neighbouring countries.

(Graphic for, Gas storage in Europe and Britain by country: https://fingfx.thomsonreuters.com/gfx/ce/klpykgawjpg/Pasted%20image%201633516421066.png)

During the summer months, when wholesale prices tend to be lower, gas is typically injected into storage for use in the winter, when demand goes up and prices rise.

This year was exceptional as storage levels ended the summer season much lower for a variety of reasons, including unseasonably high prices that meant gas was sold rather than stored.

WHATARESTRATEGICGASSTOCKS?

Simply put, countries could jointly buy gas and share their gas storage with one another.

Spain, France and other countries in favour of the idea have said common guidelines on gas storage could “mitigate and smooth price increases”, while coordinating countries’ gas buying could increase their bargaining power.

The Commission has yet to unveil the details of its plan, and many questions need to be answered, including how countries would access gas stocks and the implications for companies that own them.

Any overhaul of EU rules would need to be negotiated by EU countries and the European Parliament, a process that can take years – although urgent measures could be pushed through faster.

WOULD IT HELPAVOIDPRICESPIKES?

EU countries are responsible for their own energy policies, so individual states have varying energy mixes and gas storage facilities.

EU gas storage is lower than usual for this time of year. EU gas storage was roughly 68% full at the end of November, meaning the bloc would need to import 5%-10% more in a cold winter, according to a European Commission document shared with EU countries ahead of a Nov. 16 summit, seen by Reuters.

Low storage levels are not the only cause of high prices: Europe competes with Asia for liquefied natural gas supplies, which drives up prices; Russian gas supply has been lower than usual; carbon prices have reached record levels this year; wind output has fallen; and there have been extended infrastructure outages.

Countries have mooted other proposals in response to the energy price spikes.

Spain and France are among the EU countries seeking to change regulation to de-link the price of electricity from gas prices and tie it to the average cost of production in each EU state.

They say the current system, whereby gas plants typically set the price of electricity, means consumers do not benefit from the increasing share of cheaper renewable energy in countries’ energy mixes.

WHATABOUTBRITAIN?

Britain can receive and send pipeline gas to Europe. It has no large-scale gas storage site after Centrica closed the Rough facility in 2017, saying that maintaining the 30-year-old plant was too costly.

This left Britain, where around 80% of homes are heated using gas, with storage capacity equivalent to around four-to-five days of winter gas demand, down from 15 days previously.

Should the EU develop a strategic reserve it is unlikely Britain would be included since it is no longer a member of the European Union following Brexit at the end of 2020.