The EU hardly reached an agreement for limiting gas prices

The European Union countries agreed on Monday to cap gas prices, after debating for months over the extent to which the measure would support or discourage Europe’s efforts to deal with the energy crisis.

The aim of a gas price cap is to protect European households and companies from the gas price hikes that Europe has suffered since Russia’s invasion of Ukraine.

Fueled by rising energy prices in Europe, inflation reached its highest level in decades.

But the idea has divided the 27-nation bloc, with some countries, including Germany, Europe’s largest economy and biggest gas consumer, concerned that the price cap would make it more difficult to obtain supplies in competitive global markets.

The bloc’s energy ministers agreed Monday, on a compromise proposal under which the maximum price would be applied if the prices of the nearest-month contracts on the Dutch Gas Contracts Trading Platform (TTF) exceeded 180 Euros per megawatt hour for a period of three days.

Russia cut gas shipments to Europe after its invasion of Ukraine in February.

In an attempt to limit the impact of the resulting price hike, about 15 EU countries, including Belgium, Italy, Greece and Poland, called for a cap on gas prices at the European level.

Gas prices have fallen in the past few months as the bloc agreed to some emergency measures, including a commitment to fill gas tanks, but prices remain high.

The contracts for the month closest to maturity on the Dutch Gas Contracts Trading Platform (TTF) amounted to 107 Euros per megawatt hour, Monday.

This compares to 95 Euro per MWh a year ago and 14.20 Euro per MWh two years ago.

Under the plan agreed on Monday, the price cap will start from February 15, 2023 if prices exceed 180 Euros per megawatt-hour for three days.

To trigger the cap, TTF contracts to nearest maturity must be 35 Euro per megawatt-hour above the reference level derived from the three-day LNG price assessments.

Once in effect, the price cap prevents deals from being concluded on the Dutch Gas Contracts trading platform for the month, three months, and nearest year at a price higher than 35 Euro per MWh over the reference price for LNG.

This puts an effective ceiling on the price at which gas can be traded.

The bloc’s price cap will not fall below 180 Euro per MWh, even if the price of LNG falls to much lower levels.

But if the reference price for LNG rises to higher levels, the EU cap will move with it, keeping it within the range of 35 Euro per MWh over the LNG price.

This is a system designed to ensure that the cartel can bid above market prices to attract scarce fuels.

With the start of implementation, the price cap will be applied for at least 20 business days.

After that it can be deactivated if prices fall below 180 Euro per MWh for three days.

The cap applies to all virtual gas trading platforms in the European Union.

At least initially, this won’t affect private gas trading outside energy exchanges, which the European Commission said constitutes a safety valve for critical deliveries that are unlikely to account for a significant share of the trade.

The European Union has long been divided over a price cap.

The Commission’s original proposal last month, which aimed to impose a ceiling if the price reached 275 Euros per megawatt-hour, was widely criticized among countries.

This proposal included conditions so stringent that even a record rise in European gas prices above 340 Euros per megawatt-hour, as happened in August, wouldn’t have triggered it.

Meanwhile, Germany, along with the Netherlands and Austria, resisted capping, fearing that this would disrupt Europe’s energy market and divert gas shipments to regions accepting higher prices.

An EU official told Reuters that Germany eventually agreed to the price cap after Berlin secured tougher rules for suspending the policy if it had unintended consequences and amended another EU law on renewable energy permits.

The Netherlands and Austria abstained.

EU officials said Hungary was the only EU country to oppose the proposal.

The safeguards obtained by the skeptical countries include suspending the cap if the bloc encounters a shortage of gas supplies, or if the cap causes a decrease in trading on the Dutch Gas Contracting Platform (TTF), a jump in gas consumption, or a significant increase, in requests to cover gas market participants.

European Energy Commissioner Cadre Simson said the European Commission could also halt the cap if an analysis of the bloc’s regulators, due by March 2023, finds that the policy risks outweigh the benefits.

Market players including the Intercontinental Exchange, which hosts trading for the Gas Contracts Trading Platform (TTF) in Amsterdam, have warned the commission not to go ahead with its proposal.

The Intercontinental Exchange said, the proposal could cause liquidity providers to stop selling gas futures contracts on the TTF gas futures trading platform, which could push prices higher.

The Federation of European Energy Exchanges said the bloc’s plan could pose a significant risk to financial stability in European energy markets and could push utilities into riskier private deals to avoid the cap.

The bloc wanted a price limiting to be a temporary solution and to be applied for one year.

As a long-term solution, the commission wants to set a new benchmark for the price of LNG in Europe, given that the price of the Dutch gas contract trading platform (TTF) is largely guided by gas supplies through pipelines.

Brussels has asked the bloc’s energy regulators to launch such an index by the end of March.