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Europe

EU green lights first-ever cap for gas prices

After months of political bickering that has seen a dizzying succession of draft proposals, joint letters, emergency meetings and increasingly exasperated statements, the European Union on Monday approved the first-ever cap on gas prices.

EU ministers hammered out a deal on the cap during the last Energy Council of the year in Brussels.

“Another mission impossible accomplished,” Czech Trade Minister Jozef Síkela told reporters.

“To agree today was not only our obligation,” he said. “Most importantly it was our duty towards our citizens and businesses who were waiting for us to act.”

The unprecedented measure is aimed at curbing energy prices as the bloc reels from a crisis exacerbated by Russia’s decision to stop supplying the EU with fossil fuels to retaliate against sanctions over its war in Ukraine.

The cap, as approved by ministers, will be triggered when gas prices reach €180 per megawatt-hour during at least three consecutive trading days.

This is a significant shift from the initial proposal by the European Commission which planned for the cap to be activated when gas prices reach €275/MWh for 10 consecutive days.

Prices traded last week at around €135 per megawatt-hour.

Safeguards to ensure safety of supply

The gas cap, which is to be implemented on 1 February and come into force on 15 February, will however come with stringent conditions attached and safeguards for suspension in case it backfires.

EU officials had previously described it as an instrument of “deterrence” aimed at preventing the most excessive episodes of volatility and speculation.

The cap is to apply to the Title Transfer Facility (TTF), Europe’s leading hub for gas trading, and other similar venues. The prices set every day at the TTF have a strong influence on the bills that companies and consumers receive every month.

It will be automatically activated but only if two key conditions are met:

  • If TTF prices reach or surpass €180 per megawatt-hour for at least 3 days.
  • If TTF prices are €35 higher than the market reference of liquefied natural gas (LNG) during at least 3 consecutive trading days.

The EU’s goal is to prevent the record-breaking surge the TTF experienced over the summer when governments rushed to pump gas into their underground storages. Prices have since then stabilised but remain high.

Once activated, it will remain active for 20 days but in case the cap leads to a drop in gas supplies, forces rationing, fuels financial instability, jeopardises existing contracts or encourages power consumption, it can be outright suspended by a decision of the European Commission.

The cap will exclusively apply to one-month ahead, three-month ahead and year-ahead contracts struck at the TTF, which represent over a fifth of the hub’s transactions but have a large influence on all gas transactions.

‘Everyone should be held responsible’

Such safeguards were of particular concern for countries like Germany, the Netherlands, Austria, Denmark and Estonia, who have for months expressed deep scepticism regarding the price cap, arguing reliable supplies were a greater priority than affordable prices.

On the other hand, countries like Belgium, Poland, Italy, Greece, Spain and Portugal have insisted the price cap was an indispensable tool to combat the energy crisis and protect consumers and companies against skyrocketing bills.

Germany voted in favour of the cap on Monday while both the Netherlands and Austria abstained. Hungary voted against it.

Budapest described the cap as a “harmful, dangerous and completely unnecessary” measure and railed against the fact it required a qualified majority and not unanimity to be introduced.

“When it turns out to have been a completely unnecessary, dangerous, damaging measure for the whole of Europe, then everyone should be held responsible,” Foreign Minister Péter Szijjártó said.

Energy ministers appeared to brush off a recent threat from the Intercontinental Exchange (ICE), the American firm that operates financial exchanges and clearing houses, that it would pull out of the TTF if the cap were to be introduced.

ICE argued in a statement seen by Reuters that the market correction mechanism would be imposed on customers and market infrastructure without time for sustained testing and careful risk management.

The Kremlin described the cap as “unacceptable” on Monday, claiming it was a “violation” of the market process which set prices.


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