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23 November 2022

European Commission speeds permits, looks to impose gas ceiling

The European Commission has put forward two measures over the last two weeks to prevent gas price fluctuations and to speed up renewable energy permitting pipelines.

November 9th saw the Commission propose a temporary emergency regulation that would set maximum permitting periods for renewable energy projects for each different technologies. This temporary fix should last at least one year.

For solar and co-located storage projects the Commission has proposed a maximum deadline of one month for the permitting process and would consider that the installation of new renewable energy plants would override public interest over this one-year period.

Heat pump installations will also be covered by a 3-month maximum deadline and a simplified process for grid connection for larger heat pump installations. This is part of the EU’s broader goal of reducing natural gas consumption which also includes a demand-side program that will be launched in the new year.

This measure was originally put forward as part of the REPowerEU plan as a means to accelerate permitting for low-risk areas, which will be determined by the EU’s digital mapping tool which sets out risk profiles for different states based on environmental and industrial considerations.

Permitting within the EU is well known to be sluggish, with companies often waiting years to finally get permission to put diggers to work and break ground on projects that would help address some of Europe’s biggest energy concerns. This directive aims to build upon the measures set forward in the REPowerEU plan set out only a month ago as “the situation has changed since then”.

While this directive may not cover all renewable energy projects it does address those with inarguable environmental impact. The original planning and permitting times for the installation of solar and the necessary grid connections was utterly ridiculous if you look at the total risk in any given  project. Heat pumps fall in a similar category where it is incredible that this hasn’t happened sooner considering the EU’s dire situation when it comes to natural gas reliance in home heating.

The reduction of planning and permitting times, even temporarily, is a considerable boon for developers looking to invest in European infrastructure. Taking the EU’s reasoning of the need for renewable energy overriding public interest, there is reason to believe that this could be extended in some capacity after this initial time period should 2023 prove fruitful in reducing gas consumption through sufficient renewable deployment.

Speaking of natural gas reliance, the Commission has put forward legislation to impose a circuit breaker of sorts on month-ahead TTF derivatives. This instrument, what the Commission calls its market correction mechanism, will in theory limit the price of gas on the exchange to a maximum of €275 per MWH while reducing intra-day volatility arising from external pressures.

The price ceiling will trigger should two conditions simultaneously be true. Firstly the front-month TTF derivative settlement price exceeds €275 for two weeks continuously. And TTF prices are €58 higher than the LNG reference price for ten consecutive trading days within those two weeks.

It is at this point that the Agency for the Cooperation of Energy Regulators (ACER) will publish a market correction notice, which will inform the European Commission, the European Securities and Markets Authority (ESMA), and the European Central Bank (ECB). The price correction mechanism will enter into force the following day and offers above the limit price of €275 will no longer be accepted. This will enter into force from the 1st of January.

Looking at the current price bounds and past prices, it is unlikely that it will even be triggered, at the height of gas prices in August it wouldn’t have been triggered had it been in place despite prices going past €350. This is because it peaked and fell over a short period rather than maintaining a sustained level of pressure over time. Considering how this is currently designed it will attract attention as a policy failure and will need amendments if it is going to be relevant at implementation.

It also only covers gas futures on the TTF exchange, which make up just 22% of transactions, leaving spot pricing and counter-trading to the whims of the market.

The Commission has built in a failsafe should unintended circumstances arise as a result of this interference. The mechanism will be automatically deactivated when the condition comparing LNG prices and front-month TTF derivatives no longer holds true, and the mechanism which amounts to a manual override through a Commission suspension decision should it significantly threaten gas supplies.

One of the common arguments against price ceilings from an economic perspective is that price-setters will gravitate towards the upper bounds of this price ceiling, effectively creating a price fluctuation zone just below the ceiling where the price becomes extremely sticky. This ceiling pricing has been witnessed in a number of other consumer related markets, for instance education costs.

The implementation of regional consumer support packages where costs are partially paid by a government’s unlimited credit card alongside this price ceiling, threatens to create a similar situation that remains below the threshold for unintended consequences yet still higher than would be considered comfortable by normal standards.

On the other hand, we do see similar circuit breaker type mechanisms in stock markets as a means to prevent bot-trading cycles, and so there is precedent for this type of mechanism being effective in mitigating significant volatility.