European energy traders warn: Gas price cap could worsen crisis

A gas price cap in any form could have the exact opposite effect to that expected by proponents of price caps, warns the European Federation of Energy Traders (EFET). Instead of price caps, EFET would prefer to leave the free market without price restrictions – the free market would then itself, with the help of price signals, ensure lower consumption or increased gas imports to Europe.

A cap on gas prices is one of the solutions being discussed at European Union level in response to the current energy crisis. Although it has been discussed for several months, EU member states have still not reached agreement on its form.

Following sustained pressure from member states, the European Commission eventually prepared a proposal for a price cap. However, it set it at EUR 275/MWh, with gas required to trade above this level at the TTF trading hub for two weeks. At the same time, TTF prices must be EUR 58 higher than the reference price for liquefied natural gas for 10 trading days. Member states firmly rejected it as ineffective.

Conversely, the EFET traders' federation opposes the introduction of any cap. It published a total of eleven arguments against introducing price caps. Instead, it would prefer the EU to introduce incentives to increase gas imports, reduce consumption, strengthen infrastructure to limit the impact of bottlenecks, and target support at the most vulnerable people.

While the European Union is trying to combat high prices, EFET sees the main problem elsewhere – the problem is the physical shortage of gas in Europe. The European Union should therefore focus more on ensuring that suppliers increase deliveries and want to supply gas specifically to Europe.

A price cap will not help with this. If suppliers can sell gas at a higher price elsewhere than in Europe, they will quite reasonably sell it elsewhere. They also point out that Europe is currently competing for a commodity that is in short supply worldwide. Deliveries will certainly not be helped if the European Union intervenes in a stable market environment.

A free gas market without price caps also has the advantage of motivating consumers to reduce consumption, EFET says. High prices have already helped with this – thanks to high gas prices, consumption this year is up to 11% lower than in the comparable period between 2019 and 2021.

Price caps have often had unpredictable effects

Moreover, introducing price caps in the energy sector has often failed to deliver the expected benefits. Quite the opposite. There are numerous examples of commodity price caps causing chaos in the market.

One recent example is the introduction of price caps in Australia. After prices were capped in its eastern region, some producers refused to generate electricity. Australia was ultimately saved from a system collapse only by the market operator, which ordered some producers to supply electricity.

Another example is the current situation in Hungary. Price caps on motor fuels were introduced there. Virtually all retailers refused to supply fuel, leaving only the state-owned MOL. Subsequently, fuel began to run out, and Hungary even had to abolish the price cap in the middle of this week. However, confidence in a stable business environment had already been undermined.

EFET therefore urges that all effects be carefully examined before price caps are introduced.