European Union countries agreed on Monday to set a ceiling on gas prices, after they discussed for months the feasibility of the measure in supporting Europe's efforts to deal with the energy crisis.
What are the reasons for this step and how will it be implemented?
What is the purpose of the agreement?
The goal of setting a ceiling on the price of gas is to protect European households and companies from the high gas prices that Europe has suffered since the start of the Russian war on Ukraine.
Higher energy prices in Europe have fueled inflation, which has reached its highest level in decades.
But the idea has divided the 27-country bloc, with some countries - including Germany, Europe's largest economy and largest consumer of its gas - concerned that the price cap would make it more difficult to obtain supplies in competitive global markets.
Yesterday, the bloc's energy ministers agreed on a compromise proposal, according to which the maximum price would be applied if the prices of the nearest-month contracts on the Dutch Gas Contracts Trading Platform (TTF) exceeded 180 euros per megawatt hour for a period of 3 days.
Why put a ceiling on gas prices?
Russia reduced gas shipments to Europe after its war on Ukraine last February.
In an attempt to limit the impact of the price hike resulting from this step, about 15 European Union countries - including Belgium, Italy, Greece and Poland - called for setting a ceiling on the price of gas at the level of Europe.
Gas prices have fallen in the past few months as the bloc agreed to some emergency measures, including a commitment to fill gas tanks, but prices remain high.
Closest-month contracts on Dutch Gas Futures (TTF) trading platform were at 107 euros per megawatt-hour on Monday.
This compares to €95 per megawatt-hour a year ago, and €14.20 per megawatt-hour two years ago.
How will the EU price ceiling be applied?
Under the plan agreed on Monday, the price cap will start to apply from February 15, 2023 if prices exceed 180 euros per megawatt hour for a period of 3 days.
To trigger the cap, TTF contracts to nearest maturity must be more than €35 per MWh above the reference level derived from the three-day LNG price assessments.
Once implemented, the price cap prevents deals from being concluded in the Dutch gas contract trading platform for the month, three months, and the nearest maturity year at a price of more than 35 euros per megawatt hour over the reference price for LNG, and this puts a de facto ceiling on the price at which gas can be traded.
The bloc's price ceiling will not fall below €180 per megawatt-hour, even if the price of LNG falls to much lower levels.
But if the reference price for LNG rises to higher levels, the EU cap will move with it, keeping it in the range of €35 per MWh over the LNG price.
This is a system designed to ensure that the cartel can bid above market prices to attract scarce fuels.
With the start of implementation, the price cap will be applied for at least 20 working days, after which it can be deactivated if prices fall below €180 per MWh for 3 days.
The cap applies to all virtual gas trading platforms in the European Union.
At least initially, this will not affect private gas trading outside energy exchanges, which the European Commission said constitutes a safety valve for critical deliveries that are unlikely to account for a significant share of the trade.
What do European Union countries think?
The European Union has long been divided over a price cap.
The Commission's original proposal last month - which aimed to impose a ceiling if the price reached 275 euros per megawatt hour - was widely criticized among countries.
This proposal included conditions so stringent that even a record rise in European gas prices above 340 euros per megawatt hour - as happened in August - would not lead to its activation.
Meanwhile, Germany—along with the Netherlands and Austria—resisted any cap, lest it disrupt Europe's energy market and divert gas shipments to regions accepting higher prices.
But an EU official told Reuters that Germany eventually agreed to the price cap, after Berlin secured stricter rules for suspending the policy if it had unintended consequences and amended another EU law on renewable energy permits.
While the Netherlands and Austria abstained, EU officials said Hungary was the only EU country to oppose the proposal.
The safeguards obtained by the skeptical countries include suspending the cap if the bloc encounters a gas supply shortage, or if the cap causes a drop in trading on the Dutch Gas Contracts (TTF) platform, a jump in gas consumption, or a significant increase in gas supply. Coverage requests for gas market participants.
European Energy Commissioner Kadri Simson said the European Commission could also stop the cap if an analysis of the bloc's regulators, due by March 2023, finds that the risks of this policy outweigh the benefits.
What do participants think of the gas market?
Market players including the Intercontinental Exchange, which hosts trading for Gas Contracts Trading Platform (TTF) in Amsterdam, have warned the Commission not to go ahead with its proposal.
In a note sent to the Commission and seen by Reuters, the Intercontinental Exchange said the proposal could cause liquidity providers to stop selling gas futures contracts on the TTF gas futures trading platform, which could push prices higher.
The Federation of European Energy Exchanges said the bloc's plan could pose a significant risk to financial stability in European energy markets, and could push dealers into riskier private deals to avoid the cap.
What does Russia think?
Russia's Interfax news agency reported, quoting Kremlin spokesman Dmitry Peskov, on Monday, as saying that the European Union's decision to set a ceiling for gas prices is an attack on the market's price-determining mechanism, which is unacceptable.
Temporary or long-term solution?
The European bloc wanted to set a price ceiling as a temporary solution, to be applied for one year.
As a long-term solution, the Commission wants to establish a new benchmark for the price of LNG in Europe, since the price of the Dutch gas contract trading platform (TTF) is largely guided by gas supplies through pipelines.
Brussels has asked the bloc's energy regulators to launch such an index by the end of March.
For her part, the French Minister for Energy Transition, Agnès Pannier-Ronascher, indicated that after an agreement was reached on the price ceiling, focus should be placed on a longer-term reform of the energy market in the European Union, especially the separation of the price of gas from the price of electricity.
As for Simone Tagliapietra, an analyst at the Bruegel Center for Studies and Research in Brussels, an expert on energy affairs in the European Union, he said, "It is not easy to understand the final impact (of the decision), given all the guarantees included in it."
He warned that EU countries still need to reduce public sector and corporate demand for energy generated from gas, and focus on shifting to green energy sources.