European energy ministers agree to cap gas prices

European energy ministers have reached a political agreement under which the price of natural gas in the European Union will be capped in case it reaches excessive levels that do not reflect world market prices.

The mechanism will be automatically activated in case the month-ahead price on the Title Transfer Facility (TTF) exceeds 180€ per MWh for three working days and the month-ahead TTF price is 35€ higher than a reference price for LNG on global markets for the same three working days.

The aim of the agreement, established in Brussels on 19 December, is also to protect the security of supply, among other things, by ensuring that tankers with liquefied gas do not sail around Europe.

The mechanism will enter into force on 15 February 2023 and will apply for one year.

The regulation also 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. When such risks or market disturbances materialize, the Commission will adopt an implementing decision to suspend the market correction mechanism.

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

“Europe continues to stand united in our shared destiny. We have created a kind of gas insurance for companies and consumers whose prices become extraordinarily high, as we experienced in August. We do not compromise on security of supply, as the agreement ensures, among other things, that the price ceiling is deactivated automatically if there is a prospect of an acute gas shortage and cold radiators,” said Danish Minister of Climate, Energy and Supply Lars Aagaard.

“It is no use promising cheap gas if there is no gas in the pipes, because no one wants to sell gas to Europe, or it is used up too quickly due to the price brake. And then everyone must continue to remember that the best insurance against high gas prices is to reduce consumption and accelerate the spread of renewable energy.”

By 1 November 2023, the European Commission will conduct a review of the regulation in view of the general situation of the gas supply, based on which it may propose to extend its validity.