EU proposes gas price cap ahead of winter

The European Commission on Tuesday proposed a temporary cap on natural gas prices, with the goal of taming energy costs and safeguarding supplies ahead of winter.

The so-called Market Correction Mechanism” would serve “to protect EU businesses and households from episodes of excessively high gas prices in the EU,” while reducing volatility on European gas markets, according to the Commission.

“Following the Russian invasion of Ukraine and weaponization of energy supplies, natural gas prices have seen unprecedented price peaks across the EU,” a statement from the Commission said.

At the end of August, Russian state-run energy company Gazprom shut down its main gas pipeline to Europe for what it said would be three days of maintenance, but then never resumed operations.

Natural gas prices reached all-time highs in Europe during the second half of August — a situation that the Commission described as “highly damaging for the European economy, with contagion effects on electricity prices and an increase in overall inflation.”

On Tuesday, Gazprom threatened to cut off its last running gas pipeline to Europe, which runs through Ukraine, next week. The company accused Kyiv of diverting gas supplies intended for Moldova and creating a “transit imbalance.”

The Gas Transmission System Operator of Ukraine denied the accusations, asserting that all volumes of gas destined for Moldovan customers were being transferred “in full.”

With an uncertain winter ahead, the European Commission stressed that it intends “to prevent the repetition” of August’s price surges by proposing a “temporary and well-targeted instrument.”

“Gas prices in the EU have fallen since August thanks to demand reduction, mandatory storage filling, diversification of supplies and other measures,” Kadri Simson, EU’s commissioner for energy, said in a statement.

“But we have been missing in our toolkit a way to prevent and address episodes of excessively high prices,” Simson added.

In the case of extreme gas price hikes, the instrument would automatically intervene — setting a safety price ceiling of 275 euros ($282) per megawatt-hour on month-ahead title transfer facility (TTF) derivatives.

The EU defines the TTF, which is based in the Netherlands, as a “hub” or “virtual trading point” where network users transfer gas among each other. The TTF has been widely used as a price reference due to its geographical proximity to many gas resources.

The proposed price ceiling would be limited to month-ahead products, enabling market operators to meet demand requests and acquire gas on the spot market and over-the-counter, according to the Commission.

The price cap can be activated as of Jan. 1 and is designed to be in force for one year, but could be prolonged following a November 2023 review, the Commission stated.

“The mechanism is carefully designed to be effective, while not jeopardizing our security of supply, the functioning of EU energy markets and financial stability,” Simson said.