Brussels The price of gas in Europe should not rise as high as it did this summer, when a megawatt hour cost more than 340 euros. The EU energy ministers agreed on this on Monday. After a month-long dispute, they agreed on a “market correction mechanism” that prohibits trading in gas above 180 euros per megawatt hour in special market conditions.
The price is lower than originally proposed by the EU Commission. In a first draft, it was set at 275 euros per megawatt hour. That was too high for many EU countries.
The agreement now stipulates that the price will be reduced if it has been above the value of 180 euros per megawatt hour for three working days and at the same time is 35 euros above what is paid for liquid gas on the world markets. These values have also been tightened, which means that the probability that the mechanism will also be activated is now significantly greater compared to the original Commission proposal.
The decisive factor for market intervention is the price on the Dutch gas exchange Title Transfer Facility (TTF). This also plays a role as a benchmark in many long-term supply contracts, but reflects the European gas market more and more poorly since significantly less gas has been coming from Russia to Europe. Only trading via stock exchanges is restricted. Bilaterally agreed transactions between buyers and sellers (over-the-counter, OTC) remain unaffected.
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The German government actually rejected the instrument, but has now voted in favor of the compromise. At the EU summit at the end of last week, Chancellor Olaf Scholz (SPD) said the cap would be so high “that I hope it never becomes relevant”. At the meeting of energy ministers on Monday, Economics Minister Robert Habeck (Greens) warned of a “careless mistake” to which the markets could react with rising prices.
Germany accepted majority for gas price cap
However, Habeck also expressed understanding for the needs of other European countries that are committed to the gas price cap. He made it clear that Germany would have to accept if there was a majority for the lid.
The energy regulator Acer is responsible for activating the mechanism. If the EU Commission observes undesirable market reactions, it can suspend it at any time. “We have now defined a large number of instruments that significantly reduce the risk of a thoughtless effect,” said Habeck after the decision had been made.
According to EU diplomats, only Hungary voted against the cap. Austria and the Netherlands abstained.
German economists and business representatives had strongly advised against the instrument. “A gas price cap tends to reduce the incentives to bring gas to Europe,” said Ifo President Clemens Fuest in the Handelsblatt Today podcast. “It’s a real risk. If it goes wrong, it could even put us in a gas shortage situation.”
Unlike the gas price brake, the EU wants to cap gas prices for companies and not for end consumers.
(Photo: dpa)
The deputy general manager of the BDI, Holger Loesch, said last week: “In contrast to the German gas price brake, the concepts for an EU gas price cap are not based on the costs for the end consumer, but directly on the wholesale level. This programs far-reaching market distortions, but in particular physical natural gas bottlenecks for filling the gas storage facilities in 2023/24 because important energy-saving incentives are lost.”
According to the Financial Times, the leading energy exchange Intercontinental Exchange (ICE) had threatened to relocate its business from the Netherlands to a country outside the EU. However, a majority of the EU states had stuck to the cap requirement and even blocked other laws in order to build up further pressure.
Joint procurement of gas can start
One of these laws is intended to regulate solidarity among EU countries in the event that gas becomes scarce. Many states are dependent either on the storage facilities in other countries or on their import infrastructure to supply themselves with gas. Should individual states impose export restrictions during a worsening crisis, gas flows through Europe could quickly come to a standstill. This is to be prevented with the new law.
Another law regulates the joint procurement of gas. The states undertake to procure at least 15 percent of the gas that they store for the winter via a joint purchasing platform. This is intended to prevent the EU states from outbidding each other and thereby driving up prices on the market. In the summer of 2022, this had contributed to a massive increase in gas prices. A third law is intended to shorten the approval periods for the expansion of renewable energies.
>> Read also: Whether Europe gets enough gas depends on these points
In order to make it clear that it is not about a permanent reduction in gas prices, the EU Commission did not speak of a “gas price cap” in its proposal, but of a “market correction mechanism”. Now that it is no longer entirely unrealistic that prices will be capped, at least temporarily, with this instrument, participants in the negotiations again spoke of a “gas price cap”.
Gas price cap: there is hardly any discussion about other variants
A gas price cap based on the Iberian model seems to be off the table for the time being: Spain and Portugal are subsidizing the gas used to generate electricity, thereby lowering the electricity price. Many countries had asked for this model to be applied across Europe. Commission President Ursula von der Leyen had joined this demand in the meantime.
However, EU Commission officials warned against such a measure. In Spain it has been shown that this increases gas consumption and subsidized electricity flows abroad.
This price cap is also becoming less likely because Sweden will take over the Council Presidency from January 1st and will therefore be responsible for the agendas of the ministerial meetings. The Scandinavians are among the critics of market interventions, while the previously incumbent Czechs advocated an effective price cap and were not afraid to repeatedly schedule special meetings.
More: Why Europe’s new gas price cap isn’t one