EU Regulator Warns Gas Price Cap May Not Work As Intended

Authored by Tsvetana Paraskova via OilPrice.com,

The EU’s price cap on natural gas is an untested tool that may not work as intended to prevent gas price spikes for European households and businesses, the head of the European Union Agency for the Cooperation of Energy Regulators (ACER) told the Financial Times. 

The gas price cap is “a difficult creature. It’s unprecedented, it’s untested,” ACER’s director Christian Zinglersen told FT after the EU energy ministers agreed to set a cap on the benchmark EU gas price as of the middle of February 2023.    

Zinglersen also noted that he would be “reluctant to rely on this gas price cap” to protect EU consumers from price spikes. 

After months of negotiations, the EU finally agreed on Monday to set a price cap on natural gas to protect consumers from excessive price spikes and limit inflationary pressure and industrial damage to European economies.

On Monday, EU energy ministers reached a political agreement on a regulation that sets a so-called “market correction mechanism”, which would come into force on February 15, 2023.  

The market correction mechanism will be triggered if the month-ahead price on the Title Transfer Facility (TTF), Europe’s key benchmark, exceeds $191 (180 euros) per MWh for three working days, and the month-ahead TTF price is $37 (35 euros) higher than a reference price for LNG on global markets for the same three working days.

However, if risks to the security of supply occur, the European Commission will suspend the price cap rule, the EU agreed.  

The price cap could limit Europe’s capacity to continue to draw most of the global spot LNG supply, analysts say.

Some EU member states such as Germany and the Netherlands had reservations about a price cap, concerned that a market intervention and a ceiling on prices would take away Europe’s key advantage in attracting LNG supply—higher prices than in Asia. Germany agreed to back the price cap only after the EU also agreed to accelerate permitting rules for renewable energy projects, according to EU officials.