In Europe, gas prices have risen to unprecedented levels. Traders in the spot market have to pay more than 300 euros for a megawatt hour. The long-term average is ten to 20 euros. On the other hand, in the United States, the price of natural gas is only one-tenth of the current European spot market prices. This leads to attractive arbitrage deals – deals that take advantage of different price levels at different trading locations.
Fascinating Tanker Operations Between the United States and Europe
People who currently have natural gas tankers can earn huge amount of money with them. This is related to the huge price difference in natural gas markets in Europe and the United States. It currently costs about 60 million euros to fill a large tanker with liquid, deep-frozen natural gas, or LNG, in the United States. In Europe, the cost of gas then ranges from 200 to 300 million euros. Depends on current prices.
However, there is hardly any convergence in price between regions, as there are very few free LNG tankers that traders can use to transport the gas they bought cheaply. Around 700 LNG tankers on the road are well put to use around the world. The daily charter rate has increased from 80,000 to 120,000 euros with an annual contract.
Prices of new tankers have increased significantly
It takes time to build new tankers. There are only a few shipyards that manufacture them and at very high prices. The tankers costing 200 million euros are now about 250 million. And if you order now, you will have to wait several years for delivery. The situation is even more extreme for ships that can also be used as landing terminals. So they convert liquid, deep-frozen LNG back into gaseous natural gas for pipelines.
US price difference to Asia similar to Europe
However, sending natural gas to Europe is not only attractive. The price level is also very high in Asia. Since prices in Asian markets are on average slightly lower than in Europe, much more natural gas is being shipped to Europe. As a result, natural gas reserves filled up faster than expected.
For this reason, the price in Europe has now fallen again significantly – at 200 euros per MWh in mid-September, well below the previous high of over 300 EUR per MWh. This is due to well-loaded storage facilities and – at least temporarily – the more cautious buying policy of natural gas traders. However, if cold weather sets in or it’s getting colder, natural gas prices in the spot market could again rise significantly.
Expensive natural gas also makes electricity generation more expensive.
Extremely high natural gas prices in Europe and Germany not only make heating and some industrial processes very expensive. Electricity consumers are also facing problems due to high gas prices. Because on electricity exchanges, the most expensive power plant currently required always determines the electricity price for all the electricity that is currently being traded. The highest price then applies to all offers. The mechanism is called “merit order”.
After all, the cheapest power generation offer is first contracted by the dealers. These are usually renewable energies. But nuclear and coal-fired power plants are also currently – comparatively – considered cheap. If one or more gas-fired power plants are required to meet the electricity demand for a certain period of time, these gas-fired power plants are currently extremely expensive types of power plants. The gas-fired power plant always causes the exchange value for the remaining types of generation to rise substantially. The price of gas also affects the price of electricity.
“merit order” increased electricity prices
Basically, this “order of merit” was exactly what we wanted. The right incentives should be set in the electricity market so that adequate generation capacity is always available. But now the electricity market is completely out of balance due to exorbitant gas prices and the “qualification order” generates very high consumer prices on the one hand and huge profits for many power plant operators on the other – including producers of renewable energy.
Hence efforts are being made to minimize the effects of the “Order of Merit”. Recently, EU Commission President Ursula von der Leyen made proposals in this direction. She wants to give up similar profits.