Europeans agree to cap wholesale gas prices

EU member states on Monday approved a deal after tough negotiations that opens up a temporary mechanism to cap wholesale gas prices, bulk gas purchases and other emergency measures to boost renewables.

Adopted by Europe’s energy ministers, the system aims to block transactions in wholesale gas markets that exceed certain thresholds and thus prevent any price increases that would affect companies and consumers.

The aim is not to structurally lower prices, but to “work like an airbag for a car, to protect us in the event of an accident”, i.e. an exceptional increase in prices, insisted Belgian Minister Tinne Van der Straeten.

With strict conditions, this system is “realistic and effective”, says Josef Sikela, the minister of the Czech Republic, whose country holds the EU presidency.

The mechanism will take effect on February 15 for at least one year. In practice, the TTF, which acts as a reference for a large part of gas, will be automatically triggered as soon as the price of the monthly contract (for delivery in the next month) reaches 180 euros/megawatt-hour for three consecutive days. Operations in Europe.

But with the strict condition that it is also at least 35 euros higher than the average international price of liquefied natural gas (LNG), to prevent LNG suppliers from leaving Europe to make Asian customers pay for their gas at more attractive prices.

The monthly contract was trading around €110/MWh there on Monday after briefly rising to around €300 in August.

– “Not a miracle solution” –

Once the mechanism is activated, futures contracts transactions on TTF will be restricted for 20 days as well as on other trading platforms, but not over-the-counter (outside regulated markets).

These contracts cannot then be taken outside the framework of the “dynamic ceiling” corresponding to the international reference price of LNG (calculated on the basis of a basket of world prices) plus 35 euros – a variable ceiling that allows to ensure that it remains an attractive market for Europe. compared to prices offered by suppliers in Asia.

The mechanism will be automatically canceled when the monthly TTF contract price falls below €180 or the EU declares an emergency for EU supplies. And the mechanism as a whole can be suspended by the Commission if there are “risks to gas supply, financial stability or gas flows within the EU”.

The agreement “provides guarantees to protect our security of gas supply and the financial stability of market players,” French Energy Transition Minister Agnes Pannier-Runacher said.

Simone Tagliapietra, an expert at the Bruegel Institute, notes that “Given the security measures, the real impact is hard to say. This is not a miracle solution: Europeans should focus on real solutions: reducing their demand and the green transition.”

As the Europeans tried to cut off Russian gas, Moscow immediately condemned the decision as “unacceptable”.

– Group gas purchase –

The commission had originally proposed capping some gas contracts after they exceeded the 275 euro/MW threshold for two weeks in a row, factors that, among other conditions, never materialized even at the peak of the surge last August.

A number of states (Spain, Poland, Greece, Italy, etc.) called for a relaxation of the activation conditions. On the contrary, other states that did not want to intervene (Germany, Holland, etc.) demanded drastic “protective measures” in order not to threaten supplies.

Although the Twenty-Seven, eager to present a united front, sought unanimity, Berlin finally compromised: “We have enough tools to use this mechanism intelligently and purposefully,” judged Minister German Robert Habeck.

The revealed agreement allows for the ratification of two more emergency texts, which are already the subject of an agreement between the States, but whose official adoption remains dependent on the decision to limit gas prices.

The first involves the group purchase of gas in which consortia of companies will participate in order to obtain better prices together, and a solidarity mechanism that automatically ensures the energy supply of countries threatened by shortages.

Second, it simplifies permit procedures for one year for renewable energy infrastructures (solar and heat pumps).

The Commission will also propose a structural reform aimed at decoupling Europe’s electricity market from gas prices in early 2023.

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