Saturday, November 26

Europe’s Energy Price Caps Risk Derailing Efforts to Curb Demand

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(Bloomberg) — Europe’s efforts to reduce energy demand this winter risk getting derailed by government measures to ease the economic impact of surging fuel and power costs.

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That’s according to analysts from Morgan Stanley to Rystad Energy AS and Citigroup Inc. who argue that price caps and subsidies are eroding the urgency to curb consumption at a time when Europe still faces a struggle to keep homes warm and the lights on in the coming months .

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The warning comes as the European Commission mulls whether to put forward legislation next week that would temporarily cap the price of natural gas used for electricity generation. Such a measure has raised concern in some countries that it could spur demand for gas, meaning extra measures to counteract that would have to be taken.

“The negative is that it will create artificially high demand,” said Fabian Ronningen, an analyst at Rystad Energy. “Consumers will have less incentive to save power.”

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So far, Europe has imported record volumes of liquefied natural gas to replace dwindling pipeline flows from Russia, and winter gas storage levels are robust. But cold snaps, supply disruptions, as well as lower wind and hydropower output, would bring back risks of energy rationing or even blackouts.

That makes lower energy consumption more crucial than ever for the continent to cope with this winter. But recent moves from governments to shield consumers from the effects of rising energy prices may blunt those efforts, according to Morgan Stanley.

“The precise impact of this is hard to estimate, but likely leads to higher demand than previously estimated,” Morgan Stanley analysts wrote in a note.

Rocketing fuel rices have curbed consumption, particularly in industrial gas use, which may have contributed to driving down benchmark prices over the past month, Citigroup analysts said. However, demand curtailments may be getting smaller.

“Consumers and industrials could be reacting to government support, such as price caps and subsidies, by reducing the size of their own demand cuts,” Citigroup analysts wrote. “Meanwhile, gas demand for power generation remains robust for this time of the year. “

Europe’s Energy Commissioner Kadri Simson acknowledged the risk of price caps to demand after her meeting with EU energy ministers Wednesday. She said the commission could consider making a voluntary 15% gas demand reduction mandatory, with the EU so far averaging around a 10% cut compared with previous years.