EU is approving a step to limit natural gas prices to fight the energy crisis

December 21, 2022: -European Union energy ministers agree to a “dynamic” cap on natural gas prices Monday following two months of intense negotiations.

Introducing a limit on gas prices contains proved controversial for European officials. While multiple EU member states are arguing that the measure is essential to decrease sky-high energy costs for consumers, different have worried regarding the potential market implications of the policy.

“We did our job; we have the agreement. One more mission impossible accomplished,” Jozef Sikela, industry minister of the Czech Republic, holding the presidency of the Council of the EU, added in a press conference.

Energy ministers overcame their contrasts and agreed to what they’re calling a market correction mechanism. It will be activated under two conditions, If front-month gas contracting exceeds 180 euros ($191) for each megawatt hour on the Dutch Title Transfer Facility, Europe’s leading benchmark for natural gas prices for three working days, and the price is 35 euros higher than a reference cost for liquid natural gas on worldwide markets for the period.

The measures apply from February 15. It will set a “dynamic which bids limit” on natural gas futures money for 20 working days.

Countries, which includes Germany, are known for certain conditions to trigger a suspension of the mechanism to avoid adverse effects. These will include a reduction in the LNG reference price, plus the premium dropping, decreasing 180 euros for each megawatt hour for nearly three working days or if the European Commission states an emergency.

On Monday, the Dutch TTF traded nearly 109 euros per megawatt hour.

Kremlin spokesman Dmitry Peskov added that the measure was an attack on market pricing and “unacceptable,” Reuters stated, which cited Russia’s Interfax news agency. Russia’s invasion of Ukraine and a subsequent rush by the EU which ends its heavy reliance on Russian gas, is contributing to an energy crunch that has sharply increased prices and led to market volatility.

Sikela is stressing that it is not a strict cap, as prices could go above the limit if prices on the LNG market exceed a certain level. “In different words, it is not a fixed cap but an active one,” Sikela added.

In a press conference, Kadri Simson, the European commissioner for energy, said, “It is an instrument to prevent excessive gas prices which do not reflect world market prices. For example, we saw this happening in August this year when gas prices spiked to over 300 euros for each megawatt hour.”

“High and extremely volatile gas prices that damage our economy. They manage our households and businesses. This aims to take away the war premium, the markup compared to global LNG prices, that Europe pays because of how prices form on the TTF market,” she said.