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EU agrees on gas price cap, but it might not be the way out of the energy crisis

After months of talks, EU energy ministers reached a political agreement on a gas price cap, to protect economies against excessively high prices. The regulation aims to limit episodes of excessive gas prices in the EU that do not reflect world market prices while ensuring the security of the energy supply and the stability of financial markets.

“We have succeeded in finding an important agreement that will shield citizens from skyrocketing energy prices,” commented Jozef Sikela, Czech minister of industry and trade. “We will set a realistic and effective mechanism, which includes the necessary safeguards that will steer us clear from risks to the security of supply and financial markets stability. Once again, we have proved that the EU is united and will not let anybody use energy as a weapon.”

The mechanism is set to come into force on 15 February and it will last for one year. How will it work? Gas will be capped if the month-ahead price on the Title Transfer Facility (TTF) exceeds 180 euros/megawatt-hours (MWh) for three working days; and if the month-ahead TTF price is 35 euros higher than a reference price for Liquified Natural Gas (LNG) on global markets for the same three working days.

The regulation includes a suspension mechanism if risks to the security of energy supply, financial stability, intra-EU flows of gas, or risks of increased gas demand are identified. The Commission, the European Securities and Markets Authority (ESMA) and the Agency for the Cooperation of Energy Regulators (ACER) will constantly monitor and review the functioning of the market correction mechanism.

The mechanism will be suspended, notably, if gas demand increases by 15 per cent in a month or 10 per cent in two months; if LNG imports decrease significantly; or if the traded volume on the TTF drops significantly compared to the same period a year ago.

Harmful, useless and dangerous: Hungary opposes the mechanism

The policy was approved by EU Member States with a qualified majority, with only Hungary opposing, while Austria and the Netherlands abstained.

The Hungarian minister of foreign affairs and trade, Péter Szijjártó said that the price cap is harmful, useless and dangerous. Useless, because it reflects a situation that was valid in August, four months ago and a solution should have been found then, not in the “middle of the heating season”, reason why is also dangerous. And it is harmful because, according to him, it will actually lead to higher prices.

For Simone Tagliapietra, Senior fellow at Brussels-based think tank Bruegel, to rebalance Europe’s energy crisis, “EU countries need to do two things: minimise energy demand and maximise energy supply alternatives. That is the only way out of the woods. Not the price cap”.

Indeed, according to the latest Eurostat data, in 2021, primary energy consumption in the EU reached 1,309 million tonnes of oil equivalent (Mtoe), a 5.9 per cent increase compared with 2020 (yet, still below the 2019 levels).

“This is no silver bullet,” continued Mr Tagliapietra. “EU countries should focus on real crisis solutions.”

This echoes the statement made by the Vice President for Strategic and International Affairs at the Hungarian Energy and Public Utility Regulatory Authority, Pál Sagvari, during the Budapest Climate Summit: measures, such as price caps, can create security of supply issues and increase energy consumption, exacerbating the energy shortages. According to him, the root cause is scarcity and the cap does not solve it.

The Commission throws in additional safeguards

On the other hand, pro-price cap countries have welcomed the agreement reached at the EU level.

price cap

“The market correction mechanism sends a clear message that when markets fail, governments will step in”, said Greece’s Prime Minister Kyriakos Mitsotakis. “This is an additional tool to help protect our economies from the extraordinary increases in gas prices.”

Also, Anna Moskwa, Poland’s Minister of Climate and Environment reiterated her country’s support for this “effective mechanism that will help stabilise gas prices.”

Responding to those that are still hesitant, the European Commission said that it has always been very clear that this mechanism brings benefits, but comes with risks. Energy Commissioner Kadri Simson mentioned the additional safeguards that have been included regarding attracting LNG supplies, liquidity in financial markets and gas consumption.

“We have also concrete safeguards to address the issues raised by market participants with regard to the functioning of the energy derivatives market,” she said, during the press conference. “If there is a significant increase in margin calls or decrease in TTF transactions, the mechanism will be suspended. There is also a clause excluding from the scope of the regulation derivative contracts concluded before its entry into force, to facilitate an orderly transition.”

However, even with the presence of some lifeboats, the mechanism still exists and for Katja Yafimava, Senior Research Fellow at the Oxford Institute for Energy Studies, it is reason enough for the EU to weaken its gas supply position: “the EU would be sending a signal to all suppliers that it is willing to tinker with the market if politically expedient.”

Fears and concerns are on the table and what the EU Ministers will do next year and how the price cap will impact the market, is yet to be seen.

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