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EU green lights first-ever cap for gas prices in bid to tackle energy crisis

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The European Union on Monday agreed the first-ever cap on gas prices after months of political wrangling that included an absurdly rapid series of draft proposals, joint letters, emergency meetings, and more irritated declarations. During the final Energy Council of the year in Brussels, EU ministers worked out a deal on the cap. Jozef Skela, the minister of trade for the Czech Republic, told reporters, “Another task impossible done.” He explained, “To agree today was not only our duty. Most importantly, we owed it to the businesses and individuals who were waiting on us to take action. The unusual move aims to lower energy costs as the EU struggles to deal with a crisis that has been made worse by Russia’s decision to stop providing it with fossil fuels in retaliation for sanctions over its war in Ukraine.

The cap will be activated in accordance with ministerial approval when gas prices exceed €180 per megawatt-hour for at least three straight trading days. This represents a substantial change from the European Commission’s first proposal, which called for the cap to go into effect when gas prices hit €275/MWh for 10 straight days. Last week, prices were trading at about €135 per megawatt-hour. The gas cap will have strict conditions attached and a suspension provision in case it backfires, however it will be introduced on February 1 and go into effect on February 15. It was originally regarded as a “deterrence” tool by EU authorities intended to stop the most extreme periods of volatility and speculation.

The Title Transfer Facility (TTF), Europe’s top gas trading hub, as well as other venues of a similar nature, will be subject to the cap. The monthly bills that businesses and consumers get are heavily influenced by the prices that are established each day at the TTF. If two essential conditions are met, it will immediately activate; If TTF prices are at least €35 above the market reference price for liquefied natural gas (LNG) for at least three consecutive trading days; If TTF prices reach or exceed €180 per megawatt-hour for at least 3 days. The EU wants to stop the TTF from experiencing the record-breaking rise that occurred during the summer when countries hurried to fill their underground storage facilities with gas.

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Since that time, prices have stabilized but are still expensive. It will be in effect for 20 days after activation, but the European Commission has the authority to immediately suspend it if the cap causes a decline in gas supplies, compels rationing, feeds financial instability, jeopardizes current contracts, or encourages excessive power usage. The one-month, three-month, and one-year contracts made at the TTF—which account for more than a fifth of the hub’s transactions but have a significant impact on all gas transactions—will be the only ones to be subject to the cap. Such safeguards were especially important to nations like Germany, the Netherlands, Austria, Denmark, and Estonia because they have long expressed significant skepticism about the price cap, arguing that dependable supply should take precedence over reasonable pricing.

On the other side, nations like Belgium, Poland, Italy, Greece, Spain, and Portugal have argued that the price ceiling is a crucial instrument for addressing the energy crisis and safeguarding customers and businesses from exorbitant costs. On Monday, Germany voted in favor of the cap, while the Netherlands and Austria both stayed silent. Hungary abstained from voting. Budapest criticized the fact that the cap needed a qualified majority rather than unanimity to be enacted, calling it a “harmful, hazardous, and absolutely unneeded” measure. Foreign Minister Péter Szijjártó remarked that everyone should be held accountable if it turns out to have been an entirely unneeded, risky, and detrimental step for all of Europe. Energy ministers appeared to dismiss the Intercontinental Exchange (ICE), an American company that runs financial exchanges and clearing houses, when it recently threatened to leave the TTF if the cap was implemented. The market correction mechanism, according to an argument made by ICE in a statement obtained by Reuters, would be foisted on clients and market infrastructure without adequate time for thorough testing and risk management. On Monday, the Kremlin referred to the cap as “unacceptable,” asserting that it was a “violation” of the system by which prices are set in the market.

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