Europeans agree to cap wholesale gas prices

Europeans agree to cap wholesale gas prices

EU member states on Monday approved, after a month of tough negotiations, a temporary mechanism to cap wholesale gas prices, an agreement that unlocks other emergency measures to make bulk purchases of gas and boosting renewable energies.

This device, adopted by the European Ministers of Energy, aims to block transactions on the wholesale markets beyond a certain threshold, and thus prevent any surge in prices which would affect businesses and consumers.

The objective is not to structurally reduce prices but “rather to function like the airbag of a car, to protect us in the event of an accident”, an exceptional surge in prices, insisted Belgian Minister Tinne Van der Straeten.

Combined with strict conditions, the system, which will come into force on February 15 for one year, is “realistic and effective”, estimated Czech Minister Jozef Sikela, whose country holds the rotating presidency of the EU.

The mechanism will be triggered automatically as soon as the price of the monthly contract (for delivery the following month) reaches 180 euros/megawatt-hour for three consecutive days on the Dutch electronic platform TTF, “Gas Exchange”, whose prices serve as a reference for the majority of wholesale transactions in Europe.

Another condition for activation: a price at least 35 euros higher than the international price of liquefied natural gas (LNG).

– “Not a miracle solution” –

Once the mechanism is triggered, the operator of the TTF (the Dutch GTS) will have to block transactions above a certain threshold for one-month, three-month and one-year futures contracts.

They will no longer be able to be traded beyond a “dynamic ceiling”, corresponding to the international reference price of LNG (calculated on a basket of prices) plus 35 euros. This variable cap should prevent gas suppliers from abandoning Europe in favor of Asian customers paying more attractive prices.

In addition to the TTF, the mechanism should be imposed after March on operators of other European trading platforms, but not on transactions carried out over the counter (excluding regulated markets).

The cap, activated by default for twenty days, will be automatically deactivated when the price of the monthly contract on the TTF drops below 180 euros, or if the EU declares a state of emergency for the supply of the EU. And the entire mechanism can be suspended in the event of “risks to gas supply, financial stability or intra-EU gas flows”.

The agreement “provides safeguards to preserve our security of gas supply and financial stability”, explained the French Minister for Energy Transition Agnès Pannier-Runacher.

Paris was alarmed in particular to see the rise in margin calls, amounts that buyers must block to guarantee their transactions, at the risk of having no more cash.

“Given the safeguards, it is difficult to say the real impact. This is not a miracle solution: Europeans should focus on reducing their demand and renewables”, observed Simone Tagliapietra, expert from the institute. Bruegel.

The monthly TTF contract was trading around 110 euros/MWh on Monday, after briefly soaring to around 300 euros in August.

Norway, a major supplier to the EU, recalled on Monday “the importance of choosing market-friendly measures”. Against the backdrop of the collapse of European purchases of Russian gas, Moscow condemned an “unacceptable” decision.

– Group purchases –

The Commission had initially proposed to cap certain gas contracts when they exceeded 275 euros/MWh for two consecutive weeks – factors never met, even during the surge last August.

Several States (Spain, Poland, Greece, Italy, etc.) had called for the relaxation of the conditions for activation. On the contrary, reluctant to intervene, other states (Germany, the Netherlands, etc.) demanded drastic “safeguards” to avoid threatening supplies.

Long reluctant, Berlin finally approved the compromise: “We have enough instruments to use this mechanism in an intelligent and targeted way,” said German Minister Robert Habeck.

The agreement found makes it possible to ratify two other emergency texts, already approved by the States but whose formal adoption remained dependent on a decision on the cap on the price of gas.

The first provides for group purchases of gas, in which consortia of companies may voluntarily participate in order to obtain better prices together, as well as a solidarity mechanism automatically ensuring the energy supply of countries threatened with shortages.

The second simplifies installation authorization procedures for renewable energies (particularly solar and heat pumps) for one year.

A structural reform of the European electricity market, aimed at decoupling it from gas prices, will also be proposed in early 2023 by the Commission.