Germany backed the deal after initial opposition
The price cap can be activated from February 15
The upper limit starts to apply if prices exceed 180 euros
European Union energy ministers agreed on a cap on gas prices on Monday, after weeks of talks on an emergency measure that has divided opinion in the bloc in its bid to tame the energy crisis.
The cap is the latest attempt by 27 EU countries to lower gas prices that have pushed up energy bills and led to record high inflation this year after Russia cut off most of its gas supplies to Europe.
Ministers agreed to introduce a cap if prices exceed 180 euros per megawatt hour for three days based on the contract at the TTF gas hub, which is the benchmark for Europe.
The price on the TTF must also be EUR 35 per MWh higher than the reference price based on the existing three-day liquefied natural gas (LNG) price estimates.
“We managed to find an important agreement that will protect citizens from skyrocketing energy prices,” said Jozef Sikela, industry minister of the Czech Republic, which holds the EU presidency.
The price cap can be activated from February 15, 2023. The agreement will be officially approved by the countries in writing, after which it can enter into force.
When it is launched, trade for the month ahead, for the next quarter and the next year on the TTF will be allowed at a price higher by a maximum of 35 euros per MWh compared to the LNG reference prices.
This effectively caps the price at which the gas can be traded, while allowing the capped level to fluctuate alongside global LNG prices. The system is designed to ensure that EU countries can still offer competitive prices for gas from global markets.
Germany voted to back the deal, despite expressing concerns about the policy’s impact on Europe’s ability to attract gas supplies from global markets at competitive prices, three EU officials said.
An EU official told Reuters that Germany had agreed to the price cap after the countries agreed on changes to another regulation to speed up the issuance of renewable energy permits, adding tougher safeguards to the cap.
Those safeguards include a provision that the cap will be suspended if the EU faces a gas shortage, or if the cap causes a drop in trade on the TTF, a spike in gas use or a significant increase in gas market participants’ “margin calls”.
Rising electricity and gas prices have rattled energy companies across Europe, forcing utilities and traders to secure additional funding from governments and banks to cover margin calls.
Germany’s Uniper posted billions of euros in losses on derivatives, exacerbating the crisis as it scrambled to fill the gap left after Russia cut off supplies.
Jacob Mandel, senior associate at Aurora Energy Research, said the month-ahead TTF contract rarely closes above €180 per MWh, noting that this has happened on 64 days in its history – all in 2022.