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EU ministers agree EUR 180/MWh gas price cap

GasPolicy

20 Dec 2022 09:16

Photo: Shutterstock.com

Photo: Shutterstock.com

Brussels

20 Dec 2022 09:16

(Montel) EU energy ministers have agreed to a temporary price cap on forward exchange-traded gas contracts of EUR180/MWh under certain conditions to try to reduce excessive volatility, they said on Monday.

The conditions for triggering this “market correction mechanism” are that benchmark front-month Dutch TTF contract prices exceed EUR 180/MWh for three working days, and that they are at least EUR 35/MWh higher than a reference LNG price for the same three working days.

The mechanism will apply as of 15 February.

EU energy regulatory agency Acer will monitor the markets and publish a “market correction notice” on its website. This will automatically activate a “dynamic bidding limit” – the reference LNG price plus EUR 35/MWh – for front-month, quarterly and year-ahead derivatives contracts.

Bids above this dynamic bidding limit will not be allowed. Once activated, this limit will apply for at least 20 working days. This limit will be automatically deactivated if it is below EUR180/MWh for three consecutive working days once 16 of these 20 working days have passed.

If the LNG reference price is below EUR 145/MWh, however, the bidding limit will be the sum of EUR 145/MWh plus the EUR 35/MWh premium ie EUR 180/MWh.

Deactivation
The limit could also be deactivated at any time if the European Commission declares a regional or EU gas supply emergency.

In both cases Acer will publish a deactivation note on its website.

The EC can also suspend the mechanism if it sees risks to gas supply security, financial stability or gas flows between EU countries, or if gas demand rises.

Reasons for suspension include a significant drop in LNG imports, or a significant drop in TTF trading volumes year on year, or if gas demand rises by 15% in a month or 10% in two months.

The EC’s suspension decision will be published in the EU’s Official Journal and take effect the next day.

The mechanism will not apply to over-the-counter bilateral trades, or day-ahead and intraday trades on exchanges.

Limiting price extremes

The mechanism is intended to limit extreme price spikes that are unrelated to global market supply and demand conditions, such as the EU experienced in August when spot TTF prices were more than EUR 57/MWh above LNG prices.

EU countries had been strongly divided on how to approach this problem. Some, including low gas user France, wanted a weaker price cap, while others, including the bloc’s largest gas market Germany, was worried that a cap might prevent needed supplies coming to Europe.

The European Commission proposed in November setting a temporary automatic bidding limit of EUR 275/MWh for front-month TTF contracts on exchanges if certain conditions were met.

These included the front-month TTF price exceeding EUR 275/MWh for two weeks, and the European Gas Spot Index (Egsi) price being at least EUR 58/MWh higher than a reference LNG price for 10 consecutive trading days during those two weeks.

Analysts had said this price level and conditions were too high and strict to have any impact.

The cap is a temporary, emergency measure intended to help the EU mitigate the energy crisis exacerbated by the dramatic drop in Russian gas supplies as relations deteriorated over the war in Ukraine.

The Ice Exchange has reportedly warned EU countries that it may pull its gas trading market out of the Netherlands if a cap were imposed without giving time for traders to adapt and for the market operator to test resilience and risk management systems.

The ministers' agreement has to be formally adopted to become binding, which is expected in the next few days.

This is a corrected version of the story published at 18:23 CET on 19 December to clarify that the LNG reference price would need to be below EUR 145/MWh, not EUR 143/MWh, as included in the original statement from the EC.

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