After months of wrangling, European Union (EU) energy ministers have struck a deal for a gas price cap, aimed at protecting the bloc’s economies – and citizens – against excessively high gas prices.
Energy ministers meeting in Brussels on Dec. 19 reached a political agreement on a so-called “market correction mechanism” (GM Dec. 16, p. 27; Dec. 9, p. 1; Dec. 2., p. 34).
Under the agreed plan, which will come into force on Feb. 15 and last for one year, the market correction mechanism will be triggered if the month-ahead price on Europe’s main gas trading hub, the TTF in Amsterdam, exceeds €180 (approximately $191 at current exchange rates) per megawatt-hour (MWh) for three working days and the month-ahead price on TTF is €35 higher than a reference price for liquefied natural gas (LNG) on global markets for the same three working days, according to a Council of the EU statement.
Member states agreed that the mechanism will apply to month-ahead, three-months ahead, and a year-ahead derivatives contracts, but the price ceiling will not apply to over-the-counter trades, day-ahead exchanges, and intra-day exchanges.
The price cap is aimed at avoiding the price hikes seen in Europe this past summer when the front-month TTF briefly hit €345 per MWh. Price levels have now eased considerably – closing at €92.195 on Dec. 22 – but remain higher than where they largely were trading in January and much of February this year before Russia invaded Ukraine, at between €71-€80 per MWh.
The price cap agreed has been set well below the European Commission’s original proposed trigger price of €275 per MWh, and was approved by EU countries with a qualified majority, while Hungary opposed and Austria and the Netherlands abstained, Politico reported.
Germany, which had been long opposed to the price cap proposals, finally supported the plan, but only with significant “safeguards” that address the country’s concerns that intervening in the European gas market could drive LNG cargoes away from Europe at a time when the continent – and Germany in particular – is trying to reduce its dependence on Russian gas, according to the report.
Germany has not imported gas from Russia since the leaks – subsequently confirmed to be sabotage – on the Nord Stream 1 and 2 undersea pipelines on Sept. 26 and 27 (GM Sept. 30, p. 1). Russia supplied some 55% of Germany’s natural gas before the start of the Russian invasion of Ukraine in February.
Sharing the concerns of the members countries opposed to price cap, the European Commission included in the new regulation a suspension mechanism if risks to security of energy supply, financial stability, intra-EU gas flows, or risks of increased gas demand are identified.
The market correction mechanism will be suspended, notably if gas demand increases by 15% a month or 10% in two months, LNG imports into the EU decrease significantly, or traded volume on the TTF drops significantly compared to the same period a year ago, according to the EU Council statement.
However, one commentator cited by the Politico report, Simone Tagliapietra, a senior fellow at the Bruegel think tank, said there are so many safeguards that it is difficult to understand fully how the price cap will play out.
German gas industry group Zukunft Gas CEO Timm Kehler, also cited by Politico, described the new regulation as a “political illusion” and one that will not “survive the reality check” given that in a market economy, prices are determined by supply and demand, and not by political decrees.
Others warned that the price cap could hinder efforts to secure gas supplies next year, since Europe will need to buy a lot of gas during the spring and summer to fill up its reserves ahead of next winter.
Thierry Bros. oil and gas analyst, as cited by an Agence France Presse (AFP) report, believes the price cap will have negative consequences since usually supply is guaranteed with high prices. “With low prices, you no longer guarantee anything,” he said.