After weeks of negotiations on the emergency solution that has divided opinion inside the bloc as it strives to contain the energy crisis, European Union energy ministers finally came to an agreement on a gas price ceiling on Monday.
The cap is the EU’s 27-country bloc’s most recent effort to reduce gas prices, which have increased energy costs and led to record-high inflation in 2022 after Russia stopped delivering the majority of its gas to Europe.
The Dutch Title Transfer Facility (TTF) gas hub’s front-month deal, which serves as the European benchmark, has a price cap of 180 euros ($191.11) per megawatt hour. Ministers agreed that this price cap will be triggered if it crosses that threshold for three days.
Additionally, for a period of three days, the TTF price must be 35 euros per MWh higher than prices based on current LNG price estimates.
Jozef Sikela, the Czech Republic’s industry minister, stated a crucial agreement that will protect citizens from increasing energy prices has been reached.
The Czech Republic now holds the rotational EU presidency.
The cap may be activated beginning on February 15, 2023. The agreement will need to get formal, written approval from all parties before it can go into effect.
When activated, trading on the front-month, three-month, and front-year TTF contracts would not be allowed at a price greater than 35 euros/MWh over the reference LNG price.
In order to ensure that EU countries may continue to bid at competitive rates for gas imported from global markets, this effectively caps the rate at which gas can be exchanged while allowing the capped value to fluctuate along with global LNG prices.
Three EU officials claimed Germany cast a vote in favour of the agreement despite having expressed worries about the policy’s effects on Europe’s ability to secure gas supply in price-competitive international markets.
Germany consented to the price cap, an EU official said, after nations reached an agreement on adjustments to another law on expediting renewable energy permits and tougher protections were added to the restriction.
These protections include the suspension of the cap in the event of a gas supply deficit in the EU, a decline in TTF trading, an increase in gas consumption, or a material hike in margin calls from the gas market occupants.
Europe’s energy industries have been rocked by the rising cost of gas and electricity, prompting utilities and traders to obtain additional funding from banks and governments to meet margin call obligations.
Germany’s Uniper (UN01.DE) has incurred derivative losses in the billions of euros, worsening the situation as it hurried to fill the void left by Russia’s supply disruption.
The TTF front-month contract rarely closes above 180 euros per megawatt hour, according to Jacob Mandel, a senior associate at the renowned Aurora Energy Research. He noted that this has only happened 64 times in the contract’s history. These all occurred in 2022.
Only Hungary voted against the price ceiling, based on the two EU insiders.
Netherlands and Austria didn’t participate. Both had rejected the cap during the discussions out of concern that it may disturb the energy markets in Europe and jeopardise its energy security.
Rob Jetten, the minister of energy for the Netherlands, stated that despite recent improvements, the market corrective mechanism is still potentially dangerous.
He continued that there is worry about significant disruptions in the European energy markets, about the economic ramifications, and, most importantly, about European security of supply.
Some market participants had also chosen to voice resistance to the EU plan, on the impression that it might head to financial instability.
The Intercontinental Market (ICE) (ICE.N), which hosts TTF transactions on its Amsterdam exchange, indicated last week that if the EU set price caps, it might shift TTF trading outside of the EU.
It stated on Monday that it would evaluate its ability to maintain fair and efficient markets for TTF gas hub operations. ICE TTF markets will trade normally for the time being.