Europe’s Energy Shock Spurs Rethink of Liberalized Gas Markets

Leaders of EU member states agreed Friday to push the planned market shake-up forward, asking energy ministers and the bloc’s executive body to hash out concrete decisions on which measures to proceed with and how to put them into effect.

The proposals are laden with caveats that could prevent their activation or blunt their impact. Nonetheless, they would amount to a major intervention in a market that Europe has long strived to crack open to reduce prices, break monopolies and weaken Russia’s grip on its energy. That liberalization was an important part of the bloc’s broader drive to create single markets extending across national borders.

The EU is battling an energy crisis sparked by Moscow’s invasion of Ukraine. Mandatory storage levels, demand targets and levies on energy companies have already been agreed, while governments are spending heavily to shield consumers and businesses.

EU officials say the new steps would curb prices and prepare for a potential emergency. But energy traders, executives and analysts say some steps are irrelevant, while others risk making the situation worse.

“

Jacques Delors

: What must he be thinking?” said

Øystein Kalleklev,

chief executive of

Flex LNG Ltd.,

FLNG -1.16%

referring to the architect of the EU’s single market in the 1980s and 1990s. Oslo-listed shares of Flex, which owns a fleet of vessels that transport liquefied natural gas, have gained nearly 65% this year.

Mr. Kalleklev pointed to the EU’s almost-full storage facilities. “The free market is the reason why we have 90% gas storage in the EU, and so far avoided a much worse crisis,” he said.

At the center of the storm is the digital marketplace TTF, or the Title Transfer Facility. Run by Dutch transmission company Gasunie Transport Services B.V., it lets gas in over 8,000 miles of pipeline change hands between utilities, producers, banks, factory owners and others.

Companies across the continent refer to the benchmark in energy contracts. That means it affects businesses, households and economies far beyond the Dutch border, much as Brent crude futures or Treasury yields underpin many other transactions.

Gasunie launched TTF in 2003 as the EU was opening up a monopolistic gas market, separating activities such as gas production and transportation, so companies like Germany’s now-defunct Ruhrgas AG couldn’t dominate the supply chain.

Usage has taken off since 2014, helped in part by the Brexit vote two years later. TTF has overtaken its U.K equivalent to become one of the three key markers in the global gas market alongside Henry Hub in the U.S. and JKM in Asia. Traders compare the three when deciding where to send liquefied gas.

Meantime, Europe has pushed suppliers, including Russia’s Gazprom PJSC, to tie long-term supply deals to real-time gas prices like the Dutch benchmark, rather than oil indexes. Almost 80% of European gas flows were linked to spot prices in 2021, according to the International Gas Union, up from 15% in 2005.

That made the gas benchmark a boogeyman in Brussels when prices rocketed. Despite a recent pullback, prices are almost nine times as high as they were two years ago.

A central concern in Brussels is that prices are higher than in Asia. Officials say that reflects local shortages and infrastructure bottlenecks in northwestern Europe, and doesn’t capture conditions elsewhere, like in Spain, which imports plenty of liquefied gas and has lower prices.

The bloc this week called for the creation of a separate, LNG-based pricing reference, which could launch early next year. Meanwhile, officials want the ability to temporarily cap TTF prices if needed.

The EU is undermining almost 30 years of work to create a competitive gas market, said Jonathan Stern, distinguished research fellow at the Oxford Institute for Energy Studies.

“Once you take out TTF and say, ‘No, we don’t like this and we’re going to change it,’ you will destroy confidence and you will have transferred control over the market to governments,” Mr. Stern said.

European officials see it differently. Rising imports of liquefied gas and the loss of Russian gas have changed the market dramatically, European Commission President

Ursula von der Leyen

said this week.

“The TTF benchmark has been mainly designed for pipeline gas,” she said, adding that it “is no more really reflecting the true market situation.”

The Commission, the bloc’s executive body, said it doesn’t intend to ditch TTF entirely but acknowledged that the proposals would affect markets broadly.

“What we are doing here is a departure from the way the energy market has operated because we are now in a new reality,”

Tim McPhie,

a Commission spokesman, said.

Traders and energy executives said the alternative benchmark might bring more transparency but wouldn’t solve the underlying problems: a shortage of supplies, and a lack of import terminals in Northern Europe. New commodity benchmarks often struggle to gain traction, and high TTF prices have helped attract liquefied gas into Europe this year.

The cap carries greater risks because it could remove the incentive to reduce demand and would force governments to apportion gas.

“I’d be worried that the price cap isn’t at the right level, so demand is too high and we get shortages in the network,” said Britta van Boven, manager for commerce and regulation at Gasunie.

Other aspects of the proposal perplexed some traders, such as an exemption for over-the-counter trades, which account for about a third of the TTF market.

Ms. von der Leyen said details of the measures would be discussed by EU energy ministers Tuesday.

Write to Joe Wallace at [email protected] and Kim Mackrael at [email protected]

Leaders of EU member states agreed Friday to push the planned market shake-up forward, asking energy ministers and the bloc’s executive body to hash out concrete decisions on which measures to proceed with and how to put them into effect.

The proposals are laden with caveats that could prevent their activation or blunt their impact. Nonetheless, they would amount to a major intervention in a market that Europe has long strived to crack open to reduce prices, break monopolies and weaken Russia’s grip on its energy. That liberalization was an important part of the bloc’s broader drive to create single markets extending across national borders.

The EU is battling an energy crisis sparked by Moscow’s invasion of Ukraine. Mandatory storage levels, demand targets and levies on energy companies have already been agreed, while governments are spending heavily to shield consumers and businesses.

EU officials say the new steps would curb prices and prepare for a potential emergency. But energy traders, executives and analysts say some steps are irrelevant, while others risk making the situation worse.

“

Jacques Delors

: What must he be thinking?” said

Øystein Kalleklev,

chief executive of

Flex LNG Ltd.,

FLNG -1.16%

referring to the architect of the EU’s single market in the 1980s and 1990s. Oslo-listed shares of Flex, which owns a fleet of vessels that transport liquefied natural gas, have gained nearly 65% this year.

Mr. Kalleklev pointed to the EU’s almost-full storage facilities. “The free market is the reason why we have 90% gas storage in the EU, and so far avoided a much worse crisis,” he said.

At the center of the storm is the digital marketplace TTF, or the Title Transfer Facility. Run by Dutch transmission company Gasunie Transport Services B.V., it lets gas in over 8,000 miles of pipeline change hands between utilities, producers, banks, factory owners and others.

Companies across the continent refer to the benchmark in energy contracts. That means it affects businesses, households and economies far beyond the Dutch border, much as Brent crude futures or Treasury yields underpin many other transactions.

Gasunie launched TTF in 2003 as the EU was opening up a monopolistic gas market, separating activities such as gas production and transportation, so companies like Germany’s now-defunct Ruhrgas AG couldn’t dominate the supply chain.

Usage has taken off since 2014, helped in part by the Brexit vote two years later. TTF has overtaken its U.K equivalent to become one of the three key markers in the global gas market alongside Henry Hub in the U.S. and JKM in Asia. Traders compare the three when deciding where to send liquefied gas.

Meantime, Europe has pushed suppliers, including Russia’s Gazprom PJSC, to tie long-term supply deals to real-time gas prices like the Dutch benchmark, rather than oil indexes. Almost 80% of European gas flows were linked to spot prices in 2021, according to the International Gas Union, up from 15% in 2005.

That made the gas benchmark a boogeyman in Brussels when prices rocketed. Despite a recent pullback, prices are almost nine times as high as they were two years ago.

A central concern in Brussels is that prices are higher than in Asia. Officials say that reflects local shortages and infrastructure bottlenecks in northwestern Europe, and doesn’t capture conditions elsewhere, like in Spain, which imports plenty of liquefied gas and has lower prices.

The bloc this week called for the creation of a separate, LNG-based pricing reference, which could launch early next year. Meanwhile, officials want the ability to temporarily cap TTF prices if needed.

The EU is undermining almost 30 years of work to create a competitive gas market, said Jonathan Stern, distinguished research fellow at the Oxford Institute for Energy Studies.

“Once you take out TTF and say, ‘No, we don’t like this and we’re going to change it,’ you will destroy confidence and you will have transferred control over the market to governments,” Mr. Stern said.

European officials see it differently. Rising imports of liquefied gas and the loss of Russian gas have changed the market dramatically, European Commission President

Ursula von der Leyen

said this week.

“The TTF benchmark has been mainly designed for pipeline gas,” she said, adding that it “is no more really reflecting the true market situation.”

The Commission, the bloc’s executive body, said it doesn’t intend to ditch TTF entirely but acknowledged that the proposals would affect markets broadly.

“What we are doing here is a departure from the way the energy market has operated because we are now in a new reality,”

Tim McPhie,

a Commission spokesman, said.

Traders and energy executives said the alternative benchmark might bring more transparency but wouldn’t solve the underlying problems: a shortage of supplies, and a lack of import terminals in Northern Europe. New commodity benchmarks often struggle to gain traction, and high TTF prices have helped attract liquefied gas into Europe this year.

The cap carries greater risks because it could remove the incentive to reduce demand and would force governments to apportion gas.

“I’d be worried that the price cap isn’t at the right level, so demand is too high and we get shortages in the network,” said Britta van Boven, manager for commerce and regulation at Gasunie.

Other aspects of the proposal perplexed some traders, such as an exemption for over-the-counter trades, which account for about a third of the TTF market.

Ms. von der Leyen said details of the measures would be discussed by EU energy ministers Tuesday.

Write to Joe Wallace at [email protected] and Kim Mackrael at [email protected]