EU Sets Gas-Price Cap at €180 in Effort to Stem Crisis

(Bloomberg) -- European nations reached a deal to cap natural gas prices at €180, ending months of political wrangling over whether to intervene in an energy crisis that has risked pushing the region into a recession.

The so-called gas market correction mechanism — a temporary measure designed to prevent extreme price swings — will apply for one year from Feb. 15. 

The cap is significantly lower than an earlier proposal by the European Commission, which wouldn’t have prevented the spikes that the region saw earlier this year as Russia curbed gas supplies in the wake of its war in Ukraine.

“This mechanism aims to take away the war premium” that Europe pays for its energy, EU Energy Commissioner Kadri Simson said during a press conference. The region “will be better prepared for the next winter season and for the new round of storage filling, which will be more challenging than it has been this year.”

Officials had been seeking an agreement before the arrival of severe winter weather drives up gas demand for heating and electricity. Surging energy costs have contributed to double-digit inflation across the region. With Europe hit by a cold snap this month, governments have come under increasing pressure from voters to act or risk a backlash.

The new cap requires several triggers before it can take effect: benchmark Dutch TTF gas prices must be above €180 per megawatt-hour, and they also must be at least €35 greater than global liquefied natural gas prices. 

Prices would have to stay above both ceilings for three days for the mechanism to become activated. Once triggered, it will remain in place for at least 20 working days. It will also apply to all EU gas-trading hubs, with a possibility to opt out later.

The agreement is expected to be rubber-stamped in the coming days. Benchmark gas prices fell for a second consecutive session, settling at €108.54 per megawatt-hour. However, they still remain well above average for this time of year, and officials are concerned about future price spikes.

European Rift

The deal essentially settles what has been one of the EU’s biggest disputes over energy policy since the crisis began. A group of nations led by Germany — the bloc’s largest economy — the Netherlands and Denmark were calling for a cautious approach to avoid too much market intervention. Meanwhile, a faction including Belgium, Italy, Greece and Poland, was pushing for a more aggressive tool to contain gas prices.

In the end, Germany supported the final deal, while Austria and the Netherlands abstained, according to people familiar with the matter. Hungary voted against the agreement.

“Europe has shown that it is capable of compromise,” said German Economy Minister Robert Habeck, adding that there is a test phase for observation until mid-February. “If it turns out that market intervention is not opportune, I hope that we will find the political power to question it again.”

Intercontinental Exchange Inc., which hosts the benchmark Dutch contract, said it is reviewing the details of the EU plan to assess whether it can “continue to operate fair and orderly markets for TTF from the Netherlands as per our European regulatory obligations.”

The exchange has previously voiced “concerns about the destabilizing impact” a cap would have on the market, but it said trading will continue to operate as usual for now.

Some analysts have warned that the activation of a price cap risks causing trading to move to over-the-counter markets. Under the EU’s deal, over-the-counter trades could be included at a later date, should the commission propose an amendment.

EU Gas Price Cap Would Have Been Triggered on More than 40 Days

Russia was highly critical of the deal. “This is a violation of the market pricing process, an infringement on the market process, any references to the cap cannot be acceptable,” Kremlin spokesman Dmitry Peskov told Russian news agency Interfax in Minsk. It will take “some time” to review for Russia’s response, he said.

The commission has previously said the cap should be a deterrent rather than a tool that should be actively used. It doesn’t aim to artificially set prices but to prevent extreme spikes. Germany and some other countries had voiced concerns that a price limit in Europe could make the region less attractive for sellers globally at a time when the bloc seeks alternatives to Russian supplies.

The agreement also unlocks a broader emergency package to rein in market volatility and pave the way for joint gas purchases, which had been put on hold amid a rift on the price cap. Germany was seeking simpler procedures for assessing the impact of renewable projects on the environment as an element of the broader measure.

--With assistance from , and .

(Updates with details throughout.)

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