Europe must act over vicious circle in gas supply

by Admin
Europe must act over vicious circle in gas supply

Unlock the Editor’s Digest for free

The writer is head of European gas pricing at Argus Media

The European gas market has proved far more resilient to the immense political and security challenges it has faced since the full-scale invasion of Ukraine in 2022 than many would have guessed. It was only two years ago that giving up the Russian pipeline habit seemed nigh-on impossible.

But the EU is not yet out of the woods: Maintaining Europe’s single gas market is likely to cost a lot more in the future. The EU system has already had to reconfigure itself around the loss of its largest source of supply. And as the transition from gas to greener alternatives gains pace, a shrinking pool of remaining customers will have to shoulder the cost of maintaining oversized gas grids.

To address these challenges and others, some of the network maintenance costs may have to be borne differently. Europe needs a way of avoiding the creation of a vicious circle in which system tariffs keep having to go up because fewer users are around to pay for them.

Two years ago, European businesses and governments acted remarkably swiftly to build enough floating liquefied natural gas terminals to replace lost Russian supply. As a result, the continent avoided gas rationing, and market prices fell back to near pre-crisis levels after just 12 months.

The most controversial new cost to come out of 2022, though, has been Germany’s so-called “storage levy”. The country introduced this new charge on all gas leaving its grid as a way to make up the multibillion-euro losses the government incurred in buying gas at record-high prices two years ago in order to fill storage. The German levy is €1.86/MWh at the moment and will increase to €2.50/MWh from the start of July. The German government announced on Thursday, however, that it plans to abolish the charge from the start of 2025.

Meanwhile, the operators of Europe’s gas transmission networks, which provide the arteries of pipelines across the continent, are having to rethink their revenue models for a world in which no Russian gas flows through the system. So-called transmission system operators (TSOs) in Czechia, Austria and Slovakia are all planning to raise their fees for transporting gas through their systems to cover lost Russian transit revenue.

These extra transport costs will make it more expensive to ship gas south and west to central Europe. Shippers are already doing what they can to avoid transporting gas through Germany, the main route for LNG to reach landlocked eastern markets. When companies cannot avoid the German route, the local price at the final destination of the gas must be at a significant premium to that in Germany to attract imports.

Cross-border trading opportunities are drying up as a result, with the consequence that flexible assets like storage sites are now underused and developing markets such as Ukraine are finding it harder to integrate into the European network. For example, traders are left with little incentive this summer to store gas in Ukraine as they used to, because the spreads between summer and winter prices are too narrow to cover even half the cost of shipping gas from Austria to Ukraine and back again.

There are several possibilities. More support could perhaps be provided for TSOs in former Russian transit countries.

The EU might consider the creation of an EU-owned “bad TSO”, like a bad bank, which could own (and pay for) capacity that the market no longer needs but has not yet been fully decommissioned. A subsidised network downsizing in those places that used to carry a lot of Russian gas may also be part of the solution. In the other direction, there should perhaps be an exemption from tariffs for companies using new or repurposed pipelines between LNG terminals and landlocked countries.

Network tariffs are a useful way of spreading costs across the industry. System use is usually a good proxy for market share and therefore how much of the market upkeep costs a company should pay. But some costs may be better recouped in other ways to avoid network fees discouraging the kind of behaviour that the EU wants to promote — for example, shipping more LNG inland from the coasts. As Europe builds out its LNG import capacity, maintaining a limited difference in market price between the coasts and the interior will require cheap pipeline capacity.

In short, maintaining a single European gas market, which was never free, will be more expensive from now on. Europe needs to rethink how these additional costs are borne, or the fragmentation of its traded markets may be unavoidable.

 

Source Link

You may also like

Leave a Comment

This website uses cookies. By continuing to use this site, you accept our use of cookies.