180 EUR per MWh! EU agrees on gas price cap

The energy ministers of EU member states held a meeting on the 19th to reach an agreement on setting a ceiling on natural gas prices to protect the European economy from the impact of excessively high natural gas prices.

The European Council announced on the same day that EU member states agreed to establish a temporary "market correction mechanism."If the Dutch Title Transfer Center (TTF) natural gas futures price, which is the benchmark price for natural gas in Europe, exceeds EUR 180 per MWh for three consecutive business days, and the TTF price exceeds the global LNG price by more than EUR 35 during these three business days, triggering the “market correction mechanism”.

Last month, the European Commission proposed to set the trigger limit of the price-limiting mechanism at 275 euros per megawatt-hour, but the energy ministers of the member states failed to reach an agreement on this.

According to the latest announcement, once the "market correction mechanism" is triggered, the EU will add 35 euros to the global liquefied natural gas market reference price based on the trading prices of major exchanges as the upper limit price, prohibiting EU natural gas transactions from exceeding the limit price level.Once the price limit is activated, it needs to be implemented for 20 consecutive working days; if the maximum price is lower than 180 euros per MWh for three consecutive working days, the price limit mechanism will be automatically lifted.If the European Commission declares a state of emergency when the supply of natural gas is insufficient, the price limit mechanism will be automatically lifted.

The EU has also added a stop mechanism.If it is found that there is a gap between supply and demand or financial risks, such as a 15% increase in natural gas demand within a month, a sharp drop in LNG imports, or a sharp decline in TTF natural gas trading volume, the price limit can be suspended.

Once this temporary "market correction mechanism" is approved by EU member states, it will come into force on February 15, 2023 and will be valid for one year.The European Securities and Markets Authority and the EU Energy Regulatory Cooperation Agency are responsible for monitoring and evaluating the operation of the mechanism.

Regarding the EU's approach to natural gas price caps, Russian President's Press Secretary Peskov said on the 19th that the EU price cap is a challenge to the market price generation mechanism and is unacceptable.

Within the EU, countries have also been arguing endlessly over the issue of natural gas price limits.Some countries hope to attack Russia through this move; the Netherlands and Austria are worried that the price limit will disrupt the European energy market and threaten the security of energy supply; Germany is worried that this will make energy suppliers turn to the Asian market, and Europe will further lose its competitiveness.

Analysts believe that the EU reached an agreement on the price limit of 180 euros per MWh this time, first of all because it adopted the "simple majority" voting principle, that is, the proposal was supported by more than 55% of member states and more than 65% of the total population of the EU, is passed.

Many people in the industry have reservations about the prospects for the implementation of this price-limiting mechanism.Intercontinental Exchange Group, which has threatened to move out of the EU, said on the 19th that it will conduct a strict assessment of whether the EU can manage the TTF trading market in a fair and orderly manner.

The Association of European Energy Exchanges previously stated that the price limit on natural gas may lead to an increase in over-the-counter transactions. Such transactions are not within the applicable scope of the price cap and are difficult to track. They may pose a major risk to the supply and financial stability of the European energy market.

Jacob Mandel, an analyst at the British "Aurora" energy research company, believes that the shift of natural gas futures trading to the off-site market may make consumers as vulnerable to price increases as before.