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EU Proposes Gas Price Cap of €275/MWh

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The EU has bitten the bullet and proposed a cap on European wholesale gas prices of €275 per megawatt hour (about $83/MMBtu), but it's far from certain that EU energy ministers will approve it when they meet to consider the divisive issue on Thursday.

The proposed price cap is perhaps the most controversial of the EU's various policy responses to a surge in gas and electricity prices this year, triggered by a sharp fall in Russian gas supplies against the backdrop of the war in Ukraine.

The EU's 27 member nations have been deeply divided over the idea of a price cap and businesses that are active in the gas market have been more or less unanimous in resisting regulatory intervention in the market.

Nations such as France, Italy and Spain view a price cap as an essential measure to offer much-needed relief to European industry and to households who have been struggling to pay their energy bills.

But others such as Germany and the Netherlands have warned that placing an upper limit on prices could drive up consumption of gas and prevent Europe from competing in the global marketplace for LNG imports.

In the end, by setting the proposed price cap at such a high level, the European Commission may have opted for a compromise that will leave both camps dissatisfied.

To be adopted a price cap would require the support of a qualified majority of at least 15 countries representing 65% of the EU's population.

"Mechanism of Last Resort"

EU Energy Commissioner Kadri Simson, presenting the proposal on Tuesday, described it as "a mechanism of last resort to prevent and, if necessary, address episodes of excessively high prices, which are not in line with global price trends."

She emphasized that it is "not a regulatory intervention to set the price on the gas market at an artificially low level."

The mechanism would initially be put in place for one year from Jan. 1, 2023 and it would be triggered if the settlement price of the front-month Dutch TTF gas futures contract — Europe's de facto benchmark gas price — hit €275/MWh.

But two additional conditions would also have to be met: the front-month TTF price would have to remain above that level for two weeks; and it would also have to remain €58 higher than an international LNG reference price for 10 consecutive trading days.

Those conditions would not have been satisfied at the height of the surge in European gas prices in August of this year, when the front-month TTF contract peaked at around €350/MWh but only exceeded €275/MWh for half a dozen days.

Importantly, the measure would apply only to the front-month TTF futures contract and would not include spot and over-the-counter (OTC) transactions. Some commentators have argued that this would limit its impact on European gas prices.

Despite the sharp drop in gas supplies from Russia this year, Europe stepped up its imports of LNG and has done a good job of filling up its gas storage facilities ahead of the winter heating season. Mild autumn weather also lent a helping hand.

As a result, the region's gas prices have fallen considerably from their summer peak, with the front-month TTF contract closing at €124.5/MWh on Tuesday.

Nevertheless, prices remain well above historical levels and there are concerns that Europe could find itself short of gas again heading into the winter of 2023-24 and may find it more difficult then to fill up its storage facilities again.

Topics:
Gas Prices, Trade, LNG Supply, Policy and Regulation
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