The role of gas prices:
- On spot markets, gas prices reflect the fundamental physical situation. They are essential for short-term adjustment.
- On futures markets, gas prices reflect the expection of the future physical situation. They are essential for hedging price risks and guiding investment decisions.
- Market prices are the core of the allocation function of the market. When determined under transparent conditions, like on an exchange market, they connect sellers and buyers.
Why caution before intervention is warranted:
A gas price cap1 undermines the basic economic principle of price signals and leads to significant unintended negative side effects such as:
- Move towards less transparent trading: OTC-transactions could be concluded at a different price than on the exchange. A shadow gas market with shadow gas prices might arise.
- Impair the negotiating position of European actors: A wholesale gas price cap would make EU-destinations less attractive for very price-sensitive LNG.
- Distortion of the short-term price signal and the market as allocation mechanism: It would bring inefficient distribution of physical/financial resources, distorted incentive for energy efficient consumption behaviour, loss of efficient allocation mechanism.
- Negative impact on long-term gas price signal and hedging function: Traders would not be able to transparently hedge against price and counterparty risk.
- Disincentivise decarbonisation: Renewable energy, including renewable gases, needs high-price periods to improve their competitiveness.
- Uncertainty around execution of contracts already entered into: Capping prices undermines forward contract conditions leading to an increase of political risk.
What needs to be done:
- Prioritize short- to medium-term framework conditions to diversify supply and ensure an adequate level of stored gas and;
- Support vulnerable households to cope with the situation on the retail-level.
Until there is an actual physical shortage of gas, the market is the most efficient and effective allocation mechanism based on flexible market price signals. Capping wholesale market prices may even lead to physical supply shortage.
1 In the frame of this position paper, gas price caps are understood as a fixed, politically-set limit to wholesale gas market prices stable over the medium to long term.