Energy: the European Commission proposes to cap gas prices under drastic conditions

The EU executive proposes a “market correction mechanism” which aims to prohibit transactions on the European gas market if the contract price notably exceeds 275 euros/MWh for two weeks.

European flags in front of the European Commission building in Brussels on October 21, 2022. (AFP)

The European Commission proposed on Tuesday 22 November a temporary mechanism to cap wholesale gas prices. She presented, under pressure from member states, including France, who are worried about soaring energy prices, a “market correction mechanism”.

To avoid a runaway price, this device aims to cap for one year, from January 1, the prices of monthly contracts, for delivery the following month, on the TTF Rotterdam TTF Exchange. This European “Gas Exchange” is used as a reference in the majority of transactions by operators in the EU.

This mechanism would automatically kick in as soon as monthly contract prices exceed 275 Euros/MWh for two consecutive weeks. Beyond this amount, transactions would no longer be authorized. Another condition: prices must be at least 58 euros higher than an “average world reference price” of liquefied natural gas for 10 days.

A very high threshold

Monthly contracts only exceeded 275 euros/MWh this year during a very brief period at the end of August, peaking at around 350 euros, when the Twenty-Seven were competing to fill their reserves. Prices are currently hovering around 120 euros.

“It is not about market interventions to set prices at artificially low levels: it is a mechanism of last resort.”

And to specify that the mechanism could be suspended at any time by Brussels “in the event of a risk to the security of supplies, for the stability of the market or for the efforts of Europeans to reduce their demand for gas”.

European energy ministers are due to meet on Thursday to decide on the Commission’s proposal. They could also adopt more consensual measures: an objective of joint gas purchases at EU level, rules to guarantee solidarity between States in the event of a shortage, or even a text accelerating the issuance of authorizations for renewable energy infrastructure.

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