EU energy ministers have reached an agreement to cap gas prices in the bloc when they hit €180 per megawatt hour for three days despite fears that such an intervention could cause greater volatility in the market.
The ceiling — equivalent to around $275 a barrel in oil terms — is almost €100 per MWh less than the European Commission first proposed last month when it suggested a mechanism to limit prices when they reached €275 per MWh for 10 consecutive days. That proposal was branded “a joke” by several ministers as it would not have been activated even when prices in the bloc hit record highs in August.
The final deal was reached after Germany, which had been strongly opposed to the cap due to fears that it would cause valuable gas supplies to be redirected from Europe to higher paying regions, eventually agreed to the measure. The Netherlands and Austria, which had also been against the cap, abstained in the final vote and Hungary voted against.
Several market operators, including ICE, the operator of the benchmark European TTF gas benchmark, has warned that a cap risks an increase in volatility as traders would circumvent it through unregulated over-the-counter trades.
The cap will initially apply to gas contracts traded on the TTF between one month and a year ahead. Prices must also be €35/MWh above an average of global liquefied natural gas prices in order to be triggered. Over-the-counter deals may be included at a later stage subject to review by Brussels.
The measure must now go through the EU’s legal procedures and can be implemented from February 15 in order to quell prices ahead of the next gas storage filling season.
Gas price soared last year as EU countries rushed to fill their storage containers ahead of winter and fears of shortages for next year have been exacerbated by the huge cuts in Russian gas now being supplied to the bloc. Previously, gas imports from Russia via pipelines made up two-fifths of the EU’s supply.
After the announcement, month-ahead gas futures on the Netherlands-based benchmark were down about 8 per cent at €107/MWh, far below a high of over €340/MWh in August but still well above €69/MWh at the end of 2021.
Claude Turmes, Luxembourg’s energy minister, said the deal “showed unity and we avoided the trap of division set by [Russian president Vladimir] Putin”. Agreement on the gas price cap allows two other pieces of legislation designed to speed up the permitting of renewables projects and for joint purchasing of gas to take effect after several countries threatened to vote against them unless a limit on gas prices was approved.
The Dutch energy regulator AFM said that it took “note of the decision” to introduce a cap but “believes the proper functioning of the gas futures market benefits most from measures that support efficient price formation and stable liquidity”.
“We will continue to pay close attention to the gas futures market and remain in dialogue with the industry and relevant authorities,” it said.
Konstantinos Skrekas, Greek energy and environment minister, said before the meeting that a price cap of €188/MWh “will give the right signals to the market”, but added that “any rate” between €150-€200/MWh “would work”.
A paper sent by 11 EU capitals including Greece, Belgium and Poland to other member states at the weekend, and seen by the Financial Times, proposed a cap activated when prices reached €160/MWh for three days and €20/MWh above an average of global liquefied natural gas prices.
Monday’s meeting was seen as the last chance for the ministers to find an agreement on one of the EU’s most divisive pieces of energy policy this year.
German chancellor Olaf Scholz, who has been sceptical about a gas price cap, signalled after a summit of EU leaders last Thursday that Berlin could be open to a deal. “On the side of the conference . . . there were some proposals that sounded like a good solution,” he said.
To placate Germany and other countries that were worried about a cap, several safeguards have been inserted into the regulation that make the ceiling quicker to remove should there be concerns about gas shortages in the EU.
ICE, which operates the TTF, warned last week that it might pull operations out of the EU if a cap was introduced.
Additional reporting by Henry Foy in Brussels and Philip Stafford in London
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