European Union energy ministers agreed Monday to a price cap for gas after weeks of negotiations on an emergency measure. This was despite polarizing opinion within the bloc, which is trying to manage the crisis in energy.
This cap represents the latest effort by 27 member states of EU to reduce gas prices. They have seen record high inflation and increased energy bills this year, after Russia stopped most of its gas supplies to Europe.
Ministers have agreed to impose a price cap on prices exceeding 180 euro ($191.11) for three consecutive days at the Dutch Title Transfer Facility gas hub’s front month contract. This serves as the European benchmark.
TTF prices must be at least 35 eur/MWh above a reference price that is based on three-day LNG price assessments.
Jozef Sikela (Czech Republic’s industry minister) said that “we have achieved an important agreement which will protect citizens from skyrocketing fuel prices.” He is currently the rotating EU presidency.
You can activate the cap starting February 15, 2023. After formal approval by the countries, it will become effective.
Trades on front-month, 3-month, and 1-year TTF contracts priced at more than 35 Euros/MWh higher than the reference LNG prices will not be allowed once they are activated.
The price of gas is now limited, but the global LNG prices can fluctuate. This system allows EU countries to still be competitive in gas imports from international markets.
Three EU officials stated that Germany supported the agreement despite raising concerns over the impact of the policy on Europe’s ability attract supplies to price-competitive global market prices.
Reuters was told by an EU official that Germany had agreed to the price limit after the countries changed to another regulation governing the speedy issuance of renewable energy permits. Additionally, stronger safeguards were included in the cap.
These safeguards are that the EU will not be able to suspend the cap if there is a shortage of gas or if it causes TTF trading to drop, an increase in gas consumption or significant increases in margin calls by gas market participants.
Energy companies in Europe have been hit hard by rising power and gas prices. This has forced traders and utilities to seek additional funds from banks and governments to meet margin calls.
Uniper, Germany, has suffered billions in derivative losses. This is adding to the crisis. Uniper was trying to plug the supply gap that Russia left.
Senior associate with Aurora Energy Research Jacob Mandel stated that the TTF front month contract had rarely been closed at 180 eur/MWh. This was despite it having occurred 64 times in its history. All were made in 2022.
According to two EU officials, only Hungary voted for the price caps.
The Netherlands, Austria and Slovenia abstained. Each had opposed the cap in negotiations because they feared it would disrupt Europe’s electricity markets and threaten Europe’s energy security.
Rob Jetten, Dutch Energy Minister said that despite progress in the past few weeks, “the market correction mechanism is still potentially dangerous.”
He added that he was still concerned about disruptions to the European energy markets, financial consequences, and most importantly, European supply security.
Some market players have also voiced opposition to the EU proposal, claiming that it might cause financial instability.
TTF trading is hosted on the Intercontinental Exchange (ICE.N), and it was announced last week that TTF trading could be moved to an outside EU if prices are capped by the bloc.
It stated Monday that it would assess its ability to continue operating fair and orderly TTF gas hub trading markets. ICE TTF markets are expected to continue normal trading for the time being.
Refinitiv Eikon data revealed that the front-month TTF gas prices closed trading Monday at 9% less, at 107 euro/MWh.
In August, the contract reached a record 343 euro high. This price rise prompted EU to increase its price caps.
According to its president Stefano Besseghini, the Italian energy agency ARERA anticipates more increases in gasoline prices in winter.
Dmitry Peskov, Russia’s Kremlin spokesperson, said that the cap was an attack against market prices, which is unacceptable, Russia’s Interfax news agency reported.
After months of discussion on the topic and two emergency meetings in which EU members failed to reach an agreement on whether or not a price cap would be beneficial to Europe’s efforts to control the crisis, the deal was reached.
A total of 15 countries including Greece, Poland and Belgium demanded that a limit be set below 200 euro/MWh. This is far less than the trigger limit of 275 euros/MWh originally suggested by the European Commission last week.
The Polish prime minister stated that the price caps would stop Russia’s and Gazprom from distorting the market.
Mateusz Morawiecki tweeted, “At recent meetings in Brussels our majority coalition succeeded to break the resistance-mainly from Germany.” This means that Russia’s market manipulation of Gazprom and its subsidiary Gazprom is over.
