The European Commission proposed on Tuesday a temporary mechanism to cap wholesale prices on the EU’s benchmark gas market, accompanied by drastic conditions in order to convince member states reluctant to such a device.
The leaders of the Twenty-Seven agreed at the end of October on a roadmap to stem the rise in energy prices in the wake of the war in Ukraine. In particular, they asked the European Union to prepare a “temporary” mechanism to cap gas prices – despite the strong reservations of certain countries, including Germany, which fear disruptions in European supplies.
The “market correction mechanism” established by the Commission will be discussed by EU energy ministers meeting in Brussels on Thursday, but according to a senior diplomat, no agreement to approve it is expected at this stage – some states claiming a detailed impact study.
The device aims to cap for one year, from January 1, the prices of monthly contracts (for delivery the following month) on the Dutch gas market TTF, the European “Gas Exchange”, used as a reference in the majority of transactions operators in the EU.
Two consecutive weeks
It would be put in place automatically as soon as these prices exceed 275 euros/MWh for two consecutive weeks, and provided that they are at least 58 euros higher than the average world price of liquefied natural gas (LNG) for ten days – in order to continue to attract LNG ships to Europe that can easily find other customers in Asia.
Therefore, transactions above 275 euros would no longer be authorized. The mechanism would be deactivated as soon as the conditions were no longer met.
However, monthly contracts only exceeded 275 euros/MWh this year during a very brief period at the end of August, with a peak of around 350 euros, when the Twenty-Seven were competing to fill their reserves.
“It is not about market interventions to set prices at artificially low levels: it is a mechanism of last resort to prevent episodes of excessive prices that are not in line with global trends” and the reality of the market, explained Energy Commissioner Kadri Simson.
And “robust safeguards” have been introduced, she insisted to the press in Strasbourg: the mechanism could be suspended at any time by the European Union “in the event of a risk to the security of supplies, for the market stability, or for the efforts of Europeans to reduce their demand for gas”.
Daily spot prices on the TTF and over-the-counter transactions between operators outside regulated markets would not be affected, providing an additional safety valve to maintain European supplies.