EU action to buy gas stocks and form a collective gas reserve for storage in response to surging gas prices would not help solve the current energy crisis across the EU, experts told Anadolu Agency on Tuesday.
Soaring global energy demand driven by the economic recovery from COVID-19 and low levels of supply pushed gas prices in the EU to record highs. Prices saw almost a 600% increase compared to last year, resulting in an 'energy crisis' across the continent.
To mitigate the effects of the crisis that is expected to last through winter, the European Commission unveiled a 'toolbox' last week comprising several actions that member states can take, such as emergency income support to households, state aid for companies, and targeted tax reductions.
EU leaders are expected to discuss all these issues in an upcoming summit on Oct. 21-22, along with the establishment of an EU-wide strategic reserve for natural gas, with particular support from Italy and Spain, as a potential longer-term solution to the ongoing energy crunch.
'In principle, this proposal raises a lot of questions about how this measure will correspond to the gas market design in the EU,' Irina Kustova, a research fellow at the Centre for European Policy Studies (CEPS) in Brussels, told Anadolu Agency in an interview.
Kustova explained that not only is gas more difficult to store than oil, relying on two choices: via injection in underground storage or in floating storage and regasification units but that difficulties could arise with determining who is responsible for payment of the storage under the current market model.
'Who will bear the costs of booking the capacity without getting immediate profits on the market? Especially when gas prices are high, storing gas contradicts market logic accordingly. Higher stocks will certainly have implications for hub activity as well,' she stressed.
Storage capacity in the EU is unevenly distributed with large facilities in Italy, France, Germany and the Netherlands. However, geological restraints mean that only small gas capacities can be stored in the east and southeast of Europe to allow for continuous gas supplies, although when well connected via pipelines, member states can benefit from stored gas in neighboring countries.
The EU has the storage capacity to hold over 117 billion cubic meters (bcm) of natural gas, or roughly a fifth of its annual consumption, according to Gas Infrastructure Europe.
Kustova noted market trends in recent years have seen low prices in gas markets with many in the EU over-relying on short-term LNG deliveries, which reduced significantly this year.
She said the factors for the crisis are numerous - a long winter, cold spring and hot summer, low wind generation in Europe this summer, increased demand in Asia and lowered domestic production in Europe.
She also cited peak demand in Asia that heightened competition for LNG supplies worldwide in a market that has had under-investment in the last years and cargo cancellations.
Commenting on gas price predictions this winter, Kustova said as a rule of thumb, the market expectation is that LNG supplies will resume to a fuller mode to Europe but will have to compete with Asian ‘premium’ market prices.
'Weather – not only in Europe but most importantly in China – is likely to become a decisive factor this winter,' she stressed, adding that any incidents at facilities will further increase market pressure.
-Risks to green transition
She also addressed the issue of high gas prices generating a demand rebound for alternative fuel, namely coal generation in Europe, which could impede the EU’s energy transition.
'The question is whether these effects will have only relatively short-term implications for the energy transition agenda. Much will depend on whether gas prices stabilize or lower throughout the winter,' she said.
- Factors to watch: Russian supply dynamics and demand reduction
Marco Giuli, an associate policy analyst at the European Policy Centre (EPC), also echoed the sentiment that a strategic reserve would not solve the present crisis, as a revision of the power market design and the joint purchase to fill a new strategic reserve would take a lot of time to execute.
'Under any circumstance, it would take time, political negotiations, and significant financial and administrative resources. It is not sure that everyone will be able to agree to that, especially as benefits are quite unclear,' Giuli said.
However, he suggested that such instruments could be considered to help organize the transition for both Europe and its suppliers by adopting long-term planning on the gas quantity that is needed during the transition.
'A sort of insurance mechanism to reserve idle capacity from suppliers, as proposed by some, may help also in this respect,' he added.
He also concurred that the post-COVID growth rebound, especially in Asia, has driven the price spike.
'This cause interacted with EU-specific issues such a higher-than-usual summer demand due to low storage level, a period of exceptionally low wind, and limited additional quantities put on the market by suppliers,' Giuli explained, adding that Russian supply dynamics and demand reduction may be the factors to watch for in the foreseeable future.
He urged for signals from major supplies on price predictions on the spot markets for the winter season, while acknowledging that they are difficult to forecast.
'Over the coming decade, significant new capacity is expected to come onstream – yet, the biggest issue seems to be the development with demand - both in Europe and Asia,' he added.
By Ebru Sengul Cevrioglu