The gas price cap: five minutes to understand a highly symbolic measure

The signing of the agreement was announced with great fanfare. After weeks of negotiations, the 27 member states agreed on Monday to cap the wholesale price of gas at 180 euros per megawatt hour in a bid to protect European households from the rising cost of fossil fuels.

Gas price explosion

Because companies like Engie or Total buy their gas “wholesale” from Russian, Qatari or Norwegian producers before selling it to French households. However, wholesale prices have seen an increase since the fall of 2021 and the post-pandemic economic recovery, which has led to a sudden burst of demand, without production following. “From January 2021 to January 2022, the price of gas has increased six times,” recalls Paris-based Jean-Pierre Favennec, an expert in the energy sector and a consultant at WDCooperation.

The war in Ukraine didn’t help matters, as Russia, which until then supplied more than 40% of Europe’s gas imports, skillfully used that dependence to put pressure on the Old Continent, playing with the tap before cutting off supplies almost entirely this summer. According to Swiss radio and television (RTS), only two billion m3 of Russian gas per month is transported to the EU compared to 14 billion m3 before the invasion of Ukraine.

Europe’s response

Each Member State has so far chosen its own parade to protect its citizens. In France, the tariff shield has been frozen since the fall of 2021 and for a few more days, the prices of gas and electricity for households. Elsewhere in Europe, Belgium and the Netherlands have decided to lower VAT on energy, while Poland has abolished it purely and simply for gas. Germany, for its part, chose to allocate state aid for heating through this energy.

The agreement signed on Monday is therefore the EU’s first overall response. If the wholesale price of gas exceeds 180 euros/MW for three consecutive days, all member states will stop buying gas.

Supply concerns

Other Member States, led by Germany and the Netherlands, worried that a ceiling would threaten the Old Continent’s supply if Southern countries envisioned an ambitious deal that shielded citizens from rising prices. Because if Europe refuses to buy, “there is nothing stopping the producing countries from selling their gas to other countries,” explains Olivier Appert, adviser to the Center for Energy and Climate at ifri.

The EU, which relies heavily on liquefied natural gas (LNG) produced in the US or Qatar for its supply, fears that all LNG carriers will take the route to Asia, and especially China, where demand is growing.

Too many safeguards to be effective?

Olivier Appert continues: “27 therefore cut the pear in half,” setting the threshold at €180/MW, an already extremely high price that has only been reached once in the past twelve months. LNG) will be launched at a price at least 35 euros above the international average price.The “security measures” are “aimed at protecting our gas supply security and financial stability,” according to French Energy Transition Minister Agnès Pannier-Runacher.

The goal is not to structurally lower prices, but to “work like a car’s airbag, protecting us in the event of an accident.” Therefore, the measure should not have a significant impact on the portfolio of the French, who will have to cash out due to the end of the tariff shield in 2023. However, Elisabeth Borne promised in September that the increase in gas and electricity prices would be limited to 15 years. % in January and February.

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