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Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
The writer is head of European gas prices at Argus Media
The European gas market has proved far more resilient to the major political and security challenges it has faced since the full-scale invasion of Ukraine in 2022 than many would have thought. Just two years ago, giving up the Russian pipeline habit seemed almost impossible.
But the EU is not out of the woods yet: Maintaining Europe’s single gas market is likely to cost much more in the future. The EU system has already had to reconfigure itself around the loss of its largest source of supply. And as the switch from gas to greener alternatives gathers pace, a shrinking pool of remaining customers will have to shoulder the cost of maintaining large gas networks.
To address these challenges and others, some of the costs of maintaining the network may have to be met differently. Europe needs a way to avoid creating a vicious circle in which system charges keep rising because fewer users are around to pay for them.
Two years ago, European businesses and governments moved extremely quickly to build enough floating liquefied natural gas terminals to replace lost Russian supply. As a result, the continent avoided gas rationing and market prices fell back to near pre-crisis levels after just 12 months.
However, the most controversial new cost of 2022 has been Germany’s so-called “storage tax”. The country introduced this new fee for all gas leaving its network as a way to offset the multibillion-euro losses the government incurred in buying gas at record high prices two years ago to fill deposits. The German tax is €1.86/MWh at the moment and will rise to €2.50/MWh from the beginning of July. However, the German government announced on Thursday that it plans to remove the fee from the beginning of 2025.
Meanwhile, Europe’s gas transmission network operators, which provide pipeline arteries across the continent, must rethink their revenue models for a world in which Russian gas does not flow through the system. The so-called transmission system operators (TSOs) in the Czech Republic, Austria and Slovakia are planning to increase their tariffs for transporting gas through their systems to cover lost revenues from Russian transit.
These additional transport costs will make it more expensive to transport gas south and west to Central Europe. Shippers are already doing everything they can to avoid shipping gas through Germany, the main route for LNG to reach landlocked eastern markets. When companies cannot avoid the German route, the local price at the final gas destination must be at a significant premium to that in Germany to attract imports.
As a result, cross-border trading opportunities are drying up, with the consequence that flexible assets such as storage sites are now underutilized and emerging markets such as Ukraine are finding it harder to integrate into the European network. For example, traders have been left with little incentive this summer to store gas in Ukraine as before, because the differences between summer and winter prices are too narrow to cover even half the cost of transporting gas from Austria to Ukraine and back again.
There are several possibilities. Perhaps more support can be provided to TSOs in former Russian transit countries.
The EU could consider creating an EU-owned “bad TSO”, like a bad bank, which could own (and pay for) capacity that the market no longer needs, but which is not yet are completely dismantled. A subsidized reduction of the grid in those countries that used to transport a lot of Russian gas could also be part of the solution. In the other direction, perhaps there should be an exemption from tariffs for companies using new or reused pipelines between LNG terminals and landlocked countries.
Network charges are a useful way to spread costs across the industry. System usage is usually a good indicator of market share and therefore how much of the market maintenance costs a company has to pay. But some costs can be better offset in other ways to avoid network charges that discourage the kind of behavior the EU wants to promote – for example, shipping more LNG inland from the coast. As Europe builds its LNG import capacity, maintaining a limited market price differential between the coast and the hinterland will require spare pipeline capacity.
In short, maintaining a single European gas market, which was never free, will be more expensive from now on. Europe must rethink how these additional costs are met, or the fragmentation of its traded markets may be inevitable.