EU to Cap Natural Gas Prices in Blow to Russia, Energy Traders

The tentative deal would cap prices in the event of a spike in prices

Man turning a crank at an oil and gas facility.

Olga Rolenko / Getty Images

EU countries agreed on a cap for natural gas prices Monday as part of the European effort to end dependence on Russian energy and alleviate the high energy prices.

Key Takeaways

  • EU countries have agreed to cap natural gas prices in the event of a spike from Feb 15, 2023.
  • Prices of natural gas futures traded in Amsterdam will be capped if they exceed both 180 euros ($191) per megawatt hour and a 35 euro premium to global liquified natural gas (LNG) futures for three days.
  • The EU could suspend the cap if it resulted in energy shortages, diminished futures trading, or significantly increased margin requirement.
  • Dutch TTF Exchange owner Intercontinental Exchange has threatened to move gas trading out of the EU if the cap is adopted.

Under the compromise agreement, expected to come into effect by Feb. 15, natural gas prices will be capped if month-ahead contracts trading on the Dutch Title Transfer Facility (TTF) in Amsterdam exceed 180 euros ($191) per megawatt hour, as well as the global price of LNG by more than 35 euros, for more than three days. Once in effect, the cap would last for at least twenty days unless the prices fall below 180 euros for three days.

Jozef Sikela, minister of trade and industry for the Czech Republic, which currently holds the presidency of the Council of the European Union, praised the deal, saying it "succeeded in finding an important agreement that will shield citizens from skyrocketing energy prices." He added, "Once again, we have proved that the EU is united and will not let anybody use energy as a weapon."

Dealmakers, engaged in discussion for months, overcame the opposition of countries skeptical of the intervention by adding clauses that allow the EU to suspend the cap if it causes an energy shortage, diminishes futures trading, or sets off significant margin increase requirements. Hungary, which has maintained a close relationship with Russia, voted against the compromise, while the Netherlands and Austria abstained. Germany swung in favor of the deal after securing clauses allowing it to be suspended and speeding the permitting of renewable energy projects, Reuters reported.

Intercontinental Exchange (ICE), the owner of the Dutch TTF exchange, has previously said it may move gas trading out of the EU if the price cap were approved. On Monday, the company was reviewing "the details of the announced market correction mechanism, its technical feasibility, the impact on financial stability, and whether ICE can continue to operate fair and orderly markets from the Netherlands," a representative told The Wall Street Journal.

Europe's dependence on Russian natural gas has exposed it to supply cuts by Russia in retaliation for economic sanctions punishing its invasion of Ukraine. Higher natural gas prices have translated into soaring electricity rates. Electricity prices averaged 0.25 euros per kilowatt hour in the EU and 0.33 euros per kilowatt hour in Germany in the first half of 2022, much more than the U.S. average of $0.16 per kilowatt hour as of November.

The deal between the EU countries' energy ministers, the European Commission, and the European Parliament will also add 25.4 billion euros to the 225 billion euros of financing already approved for member countries' energy independence projects.

Article Sources
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  1. European Council. "Council agrees on temporary mechanism to limit excessive gas prices."

  2. Reuters. "EU Countries Agree Gas Price Cap to Contain Energy Crisis."

  3. Financial Times. "ICE Warns It May Pull Gas Market From EU Over Brussels Price Cap."

  4. The Wall Street Journal. "European Energy Ministers Agree to Emergency Natural-Gas Price Cap."

  5. Eurostat. "Electricity Price Statistics."

  6. U.S. Bureau of Labor Statistics. "Average Energy Prices for the United States, Regions, Census Divisions, and Selected Metropolitan Areas."

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