High gas prices in Europe : a matter for policy intervention?

Abstract

The dramatic surge in electricity and gas prices recently experienced across Europe was due to a combination of factors. These include a decline in gas supply to Europe, meeting rising post-pandemic demand (especially in Asia) and supply shocks around the globe. In October 2021, the TTF spot price signalled a +216% increase with respect to July levels, while forward contract prices experienced a relatively lower – but still dramatic – increase (+155% with respect to July levels for Calendar 2022 contracts). European gas storages can normally provide the necessary flexibility and contribute to hedging price spikes. However, in the course of 2021 hesitation to fill storages through the summer period led to particularly low storage levels (-22% on 30/9/2021 compared to 30/9/2020, and -15% with respect to the average in the last 10 years). The surge in natural gas prices has important redistributive effects, both within Europe and between European and non-European suppliers. The consequences of this sudden surge have triggered reflections on the need for a revision of European natural gas policies aimed at increasing security of supply and, more generally, reducing European gas procurement costs.[1] Various measures are currently being discussed to achieve these objectives, ranging from establishing a centralised gas procurement mechanism to coordinating storage facility usage across Europe. A recent communication from the European Commission[2] envisages a number of possible measures, including a voluntary joint gas procurement mechanism and coordinated usage of storage facilities. In this policy brief we analyse these measures and assess their likely implications for the European gas market. The paper is organised as follows. In section 1 we review the structure of the wholesale European gas market and explain its price setting mechanism. In section 2 we discuss policies based on centralisation of gas procurement in Europe. In section 3 we discuss potential improvements to the current security of supply regulation in the natural gas sector. Section 4 summarises the policy implications of our analysis.