Europe has agreed to a cap on natural gas prices after months of debate over whether the measure will protect European households and businesses from extreme price spikes as temperatures plummet.
At a meeting on Monday, EU energy ministers agreed activate a limit if the price of month-ahead natural gas futures contracts on the Dutch Title Transfer Facility (TTF) – the bloc’s benchmark gas exchange – exceeds €180 ($191) per megawatt-hour for more than three consecutive business days.
The month-advanced TTF price must also be €35 ($37) higher than a liquefied natural gas (LNG) reference price for the same period to trigger the cap. Prices for LNG – a refrigerated, liquefied form of gas that can be transported via sea tankers – are closely linked to the prices for European natural gas, which is supplied via pipelines.
The cap applies to gas contracts traded on all European trading hubs for deliveries one month, three months and one year ahead. Once activated, prices that are €35 above a reference price for LNG, based on transactions on world markets, are not allowed. The cap can be activated from February 15 next year.
“We have the deal,” Jozef Síkela, deputy prime minister of the Czech Republic, said at a press conference on Monday. The Czech Republic currently holds the Presidency of the EU Council.
The price cap is much lower than the €275 ($292) per megawatt-hour limit originally proposed by the European Commission last month.
Síkela described the cap as a “temporary, effective one [and] realistic mechanism that will protect citizens and businesses from the excessive gas prices we have seen this summer.”
“This is not a fixed limit, but rather a dynamic one,” he added.
The limit is the latest in a series of measures the European Union agreed this year to end an energy crisis sparked by Russia’s invasion of Ukraine, which has driven up prices and the highest inflation in decades. has fueled.
Gas prices rose to a record high of about €345 ($367) per megawatt-hour in August after Moscow cut gas supplies to the continent. TTF gas futures fell 5% on Monday to €107 ($114) per megawatt-hour.
Other EU measures included gas storage requirements and a price cap of $60 per barrel of Russian oil by sea.
Despite Monday’s political agreement, analysts and traders remain concerned that the mechanism could backfire, driving up prices and exacerbating potential supply shocks.
Germany, the bloc’s largest economy and one of the largest importers of natural gas, was the most notable opponent before Monday’s announcement.
“Gas traders are likely to liquidate short positions and stop selling futures if they fear the break is imminent, fearing ensuing losses,” Eurasia Group analysts said in a Monday note.
Following the announcement, a spokesperson for the Intercontinental Exchange, which operates the TTF, said it had “consistently expressed our concerns about the destabilizing impact of a [price cap] will have on the market.”
The spokesperson said the exchange was reviewing details of the new proposal and “whether [it could] continue to serve fair and orderly markets for TTF from the Netherlands.”
Trading on the TTF will continue to operate normally for the foreseeable future, she added.
In light of concerns, Síkela said the cap could be “automatically deactivated” in several cases, including when gas consumption is high across the block, if trading on TTF decreases or if quarterly LNG imports fall.
The proposal still requires a “qualified majority” to be implemented, meaning 15 countries representing at least 65% of Europe’s population must agree.