EU Explores Natural Gas Price Cap Amid Soaring Energy Costs
The European Union (EU) is considering implementing a cap on natural gas prices, according to a Financial Times report. This comes amidst recent price surges, with the Dutch Title Transfer Facility (TTF), Europe’s benchmark, reaching a two-year high of €59 ($61) per megawatt-hour on Tuesday.
Several factors have contributed to this sharp increase, including cold weather, reduced renewable energy output, and supply concerns. In response to these escalating prices, EU leaders are deliberating the introduction of a price cap mechanism. However, industry groups warn that such a measure could potentially disrupt market stability and jeopardize the security of supply.
In 2022, the EU introduced a price cap mechanism with a TTF target of €180 per megawatt-hour. Although it expired this year without being triggered, former European Central Bank President Mario Draghi proposed a “dynamic cap” in an EU competitiveness report last September. Draghi suggested that such a mechanism could deter speculation in the spot market and be activated when EU energy prices deviate significantly from global rates.
An anonymous EU official confirmed to FT that they are studying Draghi’s recommendations on this issue. While discussions are still at an early stage, sources indicate that a positive decision could be announced next month as part of Brussels’ strategy to fortify the EU’s heavy industries.
Gas traders have expressed opposition to the proposal in a letter to European Commission President Ursula von der Leyen. They cautioned that a price cap “could have far-reaching negative consequences for the stability of European energy markets,” potentially driving suppliers to reference prices outside the EU’s reach.
The establishment of the gas spot market in the EU was designed to create a more responsive pricing system based on supply and demand fluctuations. However, supplier countries have long warned that replacing long-term contracts with variable pricing could increase volatility. Russia, historically a significant gas supplier to the EU, has been a notable critic of this policy.