October 4, 2022

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How is the price of gas determined?

From October 1, the way the price of natural gas is set on most domestic consumption bills will change. Decided in late July By the Energy, Networks and Environment Regulatory Authority (ARERA), a government body that regulates the functioning of the energy market, to try to ensure continuity of supply and reduce the impact on people’s lives from the massive gas price increases in recent months: on August 26, it reached 343 euros per megawatt-hour At the Address Transfer Facility (TTF), the main market for gas exchange; A year ago it was six times lower, with values Approximately 50 euros per megawatt-hour.

The ARERA decision relates specifically to the TTF and its significance in gas costs for those in the home who have a contract under the Higher Protection Regime, i.e. for those who have not yet done so Subscribe to the offer in the free market, which has been around since 2007 and which states that companies that sell gas and electricity can offer different types of offers at variable prices. ARERA has set Protected Market Tariffs, which will remain in place until next January for gas, excluding other deferrals, and they currently concern approximately 7.3 million home users, just over a third of the total.

So far, prices have been updated quarterly based on supply and demand in the wholesale market, using FTT quotations as a reference.

TTF is a virtual platform (and index) for the Amsterdam Stock Exchange, in the Netherlands, where gas and futures On gas, i.e. contracts to exchange a certain amount of gas at a future date and at a predetermined price, it is a form of investment.

Since the energy sector was liberalized at the European level, there have been markets of this type on all stock exchanges, but the TTF is the main center of trade: it is managed by the Intercontinental Exchange (ICE), an American company that also controlled the New York Stock Exchange, and like any market index For securities, it is affected by the global economic and political context as well as by speculation. In particular, the day is affected by the fear that Russia will stop supplying European countries with natural gas for a long time.

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Only a part of the gas used in Europe is traded in the boxes, but the index affects the prices that producers and distributors directly agree on. The billing share determined by the TTF market is that of gas as a raw material, thus excluding transportation and management costs and so-called system fees (which cover the costs of Activities of general interest to the gas systemSuch as the implementation of energy saving projects) which, moreover, in the last quarter bills He will be acquitted by the “help bis” decree..

The fund is suitable not only for contracts in the protected market, but also for contracts in the free market because many supply contracts provide updates to the index or prices for greater protection.

Italy also has its own gas exchange with its own index: PSV, which stands for “virtual trading point”. It is this indicator that ARERA will refer to as of October to determine protected market prices, which will be updated once a month rather than quarterly. This change will not have significant consequences for the billed gas price but in ARERA’s intentions it will help deal with the situation thanks to more frequent updates.

Indeed, in the event of significant price changes in the world market from month to month, the new system will allow them to be taken into account faster than the quarterly update. It is an advantage above all for companies that sell gas to consumers, so they will not have to do so at a loss and will be more protected from the risks of not being able to supply their customers with gas. It would also be an advantage for consumers themselves: not only because it would be difficult for them to see intermittent supplies, but also because, as we are discussing, as new measures to contain billed amounts are introduced at the national or European level, the repercussions will be more urgent.

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“The intervention adopted, although unable to act structurally at exceptional levels of market prices, is aimed at making supplies to consumers safer,” ARERA explained. “Naturally, these interventions should be accompanied by national and international initiatives to restore the balance between supply and demand, such as demand reduction on a voluntary basis and the identification of mechanisms for managing emergency interventions.”

The EU’s gas price cap is the most discussed potential measure, which has been mentioned a lot recently in the Italian election campaign. Some parties (the Democratic Party and the Lega Party) also talked about the possibility of introducing a national ceiling, which some experts consider inappropriate. How explain to tomorrow Gilberto Dialos, President of Enea, National Agency for New Technologies, Energy and Sustainable Economic Development:

In an interconnected market, even physically, it is not possible to create national ceilings, even if we imagine detracting from European rules of freedom of movement. They were able to do this in Spain, because Spain’s energy connections are very limited, while Italy imports from Russia, with a gas pipeline going through Ukraine, the Czech Republic and Austria, and connected through Switzerland to the French and German markets. If, according to the hypothesis, we impose a ceiling on gas, we will have those who come to buy from us at a lower price and then export.

It is still difficult to make general predictions about the consequences of the increase in the price of gas, which had already risen significantly in 2021 due to the impact of the pandemic in the global socio-economic context and then continued to grow due to the war. In Ukraine, subsequent restrictions on trade with Russia and its decision to restrict gas supplies to European countries.

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In winter, the season when more gas is consumed, the trend will depend, among other things, on temperatures (if it is especially cold, then more gas will be needed for heating systems) and on Competing with Asian countries for LNG suppliesas well as from future political decisions, at the European and national level.

In various European countries, in particular in Germany, the possibility of rationing supplies to some industrial sectors, which would be subject to priority for such measures, is being discussed. At the moment, such decisions have not been made in Italy, although in fact many companies independently chose to limit production due to the high cost of gas.

In addition to the introduction of a European ceiling for gas prices, the industrial world in general is also asking for a plan for a possible rationing this winter, to regulate production activities accordingly. Moreover, some sectors have to face the problem that in this situation of uncertainty, energy suppliers are reluctant to renew their contracts for the next few months.

How sum up Jack Sharples, a researcher at the Oxford Institute for Energy Studies, in an early August analysis, Europe will spend the next two or three months preparing for winter in which it will have to face the “equivalent of walking a tightrope between two skyscrapers: if the conditions are positive, the undertaking is possible, even If he was tired. If this is not the case, Europe may be attacked by strong winds that will portend higher gas prices than last winter.”