The EU’s proposed cap to rein in high gas prices will be “immediately” switched off if it leads to unforeseen and detrimental consequences for the bloc’s economy, according to senior EU officials.
There are fears that a price cap, which aims to curb market speculation, could scare away much-needed supplies of liquefied natural gas (LNG), which can be easily re-routed to Asian countries.
As private companies, LNG producers seek to maximise their profits and chose their markets accordingly.
Recent media reports suggest dozens of LNG ships have been lingering around Europe’s coast, waiting for prices to go up before unloading their supplies.
“We have put a lot of thought into what can go wrong. If something goes wrong, we will pull the plug,” said a senior EU official, speaking on the condition of anonymity. “We will push the button.”
The European Commission is still developing the price cap’s specific details, but an outline shared with the press on Thursday offered a preview of how the unprecedented instrument will work in practice.
‘Panic-driven price spikes’
The cap will apply to the Title Transfer Facility (TTF), the Dutch virtual hub where shippers and clients trade gas supplies. The TTF serves as a leading reference for Europe’s entire energy sector, with its prices having a strong influence on the bills that companies and consumers receive every month.
Since Russia launched its invasion of Ukraine, the TTF has seen abrupt ups and downs, fuelled by speculation over the Kremlin’s next move. This has led to record-breaking prices, particularly over the summer, when the TTF reached an all-time high of €349 per megawatt-hour.
Although prices have stabilised since then, there are concerns volatility could make a painful comeback in the winter as temperatures drop and demand for heating surges.
“We are exposed to a number of spikes that are not justified by market fundamentals,” said the EU official. “We have to send a signal that Europe is not willing to pay any price at any moment.”
With this in mind, the European Commission intends to create a “deterrence effect” by establishing a maximum limit for TTF transactions. In other words, a price cap.
But this extraordinary cap, officially known as a “market correction mechanism,” will only be triggered if two key conditions are met:
- If TTF prices reach or exceed the EU’s fixed limit, which is yet to be defined.
- If TTF prices do not match hikes seen in other international markets, particularly in Asia.
As soon as both conditions are in place, the cap will be activated “very swiftly,” officials said, stressing it will be a “very last-resort” option to address “panic-driven” spikes of exceptional nature and untenable scope.
“This is not a tool to regulate or administer gas prices,” the senior official said. “It’s a tool to address a specific situation of high prices not linked with market trends.”
Once activated, Brussels will carry out monthly reviews, using data from the European Central Bank and regulatory agencies. If a review proves the two conditions are no longer met, the cap will be deactivated.
‘Every LNG molecule we can secure’
Notably, the European Commission could outright suspend the price cap if it threatens the EU’s security of supplies, creates financial problems or sows market chaos.
“If we are in a situation where we see significant risks, what matters is that we take a fast decision,” said the EU official. “The risk is always there but we have safeguards to minimise them.”
An economic slowdown in China has allowed Europe to attract plenty of LNG cargoes this year and partially offset the loss of Russian gas. But this bonanza might end if the Chinese economy recovers and global competition heats up, putting the bloc in a tighter spot to capture valuable tankers.
“This winter, we will also need every molecule of LNG that we can secure,” Kadri Simson, European Commissioner for energy, said last month.
Mindful of these risks, the Commission plans to apply the cap only to long-term contracts, also known as futures contracts, that are struck at the TTF and spill over onto households and companies.
In principle, this will exclude the deals that suppliers and clients ink on a bilateral basis outside of the TTF, known as over-the-counter (OTC).
The executive believes this exception will act as a “safety valve” to help secure LNG cargoes that are at risk of being re-routed to other regions in search of higher prices.
Officials admit that, in cases of extreme weather events or global market disruptions, the cap will be rendered useless because securing supplies, rather than affordable prices, will become the EU’s utmost priority.
Any of these scenarios are, for the time being, hypothetical.
The cap is still in development and is unclear when and how it will enter into force – if it ever does.
Building on the outline presented this week, the European Commission hopes to get feedback from EU countries and use it to design a fully-fledged legislative proposal.
Ambassadors had a first chance to discuss the document on Wednesday, when cracks were laid bare, according to diplomatic sources consulted by Euronews.
On the one hand, a large group of countries, including France, Italy, Spain, Portugal and Belgium, supported the price cap and asked the European Commission to table a full proposal before next week’s meeting of energy ministers – something the executive seems unlikely to do, given the tight timeframe.
On the other hand, Germany, Austria, the Netherlands, Denmark, Estonia and Hungary voiced strong concerns over supply risks and demanded an in-depth impact assessment before any further step is taken.
Meanwhile, the source said, Finland, Bulgaria, Latvia, Luxembourg and Ireland took a rather “cautious but constructive” position, and equally emphasised the need to guarantee the security of supplies.