Europeans agree to cap wholesale gas prices, says Russia ‘unacceptable’

SEBASTIEN BOZON / AFP A picture taken on November 28, 2022, shows a GRTgaz compressor station, in Morelmaison, eastern France. – A compressor station is a facility which helps the transportation process of natural gas from one location to another. Natural gas, while being transported through a gas pipeline, needs to be constantly pressurized in certain distance intervals (around 200km). GRTgaz owns and operates the longest high-pressure natural gas transmission network in Europe (Photo by SEBASTIEN BOZON / AFP)


Gas prices have skyrocketed since the start of the war in Ukraine.

ENERGIES – EU Member States approved on Monday 19 December, after tough negotiations, a temporary mechanism to cap wholesale gas pricesan agreement which makes it possible to release other emergency measures to carry out group purchases of gas and boost the renewable energies.

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

The objective is not to structurally reduce prices but “ rather to work like the airbag of a car, to protect us in the event of an accident”, that is to say an exceptional surge in prices, insisted Belgian Minister Tinne Van der Straeten. Subject to strict conditions, this mechanism is “ realistic and effectivesaid Czech Minister Jozef Sikela, whose country holds the rotating presidency of the EU.

Strict conditions

The mechanism will come into effect on February 15, for at least one year. In practice, it 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 TTF, which serves as a reference for a large part of gas transactions in Europe.

But on the strict condition that it is also higher by at least 35 euros than the average international price of the liquefied natural gas (LNG), in order to prevent LNG suppliers from abandoning Europe in favor of Asian customers paying for their gas at more attractive prices.

The monthly contract was trading there on Monday around 110 euros/MWh, after having briefly soared to around 300 euros in August. Once the mechanism has been initiated, transactions on futures contracts on the TTF, but also on other trading platforms, will be capped for 20 days – but not over-the-counter trading (outside regulated markets).

These contracts could then no longer be exchanged beyond a “ dynamic ceiling »corresponding to the international LNG reference price (calculated on a basket of world prices) plus 35 euros – a variable cap, ensuring that Europe remains an attractive market for suppliers compared to the prices offered in Asia .

“Violation of market process”

The mechanism will be automatically deactivated as soon as 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 mechanism as a whole may be suspended by the Commission in the event of “ risks to gas supply, financial stability or gas flows within the EU”.

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

“Given the safeguards, difficult to say the real impact. This is not a miracle solution: Europeans should focus on the real solutions: reduction of their demand and green transition”observed Simone Tagliapietra, an expert from the Bruegel Institute.

As Europeans struggle to break away from Russian gas, Moscow immediately condemned a decision “ unacceptable”. “It is a violation of the market process for price formation”, said Kremlin spokesman Dmitry Peskov, quoted by Russian news agencies. “ Any reference to a “cap” (of prices) is unacceptable”he insisted.

A hard-won unanimity

The Commission had initially proposed to cap certain gas contracts once they exceeded 275 euros/MWh for two consecutive weeks, among other conditions – factors never met, even at the height of the surge last August.

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

While the Twenty-Seven, anxious to display a united front, sought unanimity, Berlin finally approved the compromise: “ We have enough instruments to use this mechanism in an intelligent and targeted way”judged the German Minister Robert Habeck.

The agreement found makes it possible to ratify two other emergency texts, which were already the subject of an agreement between the States but whose formal adoption remained dependent on a decision on the capping of the price of gas.

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

The second simplifies the authorization procedures for renewable energy infrastructures (solar and heat pumps) for one year. A structural reform of the European electricity market, which aims to decouple it from gas prices, will also be proposed in early 2023 by the Commission.

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Europeans agree to cap wholesale gas prices, says Russia ‘unacceptable’