EU Reaches Dramatic Agreement on Gas Price Cap... "Impact Is Limited"

[Image source=AP Yonhap News]

[Asia Economy Reporter Jo Yujin] The European Union (EU) has agreed to implement a temporary gas price cap for one year starting February next year. This emergency measure aims to stabilize natural gas prices amid expectations of continued volatility in energy prices through the first half of next year due to the prolonged Ukraine war and economic recession.

On the 19th (local time), the EU Energy Ministers' Council held a meeting in Brussels, Belgium, and agreed on a price cap of 180 euros per megawatt-hour (MWh) based on the Dutch TTF futures market, the European gas price benchmark. Once the price cap is triggered, it will remain in effect for at least 20 days and will be lifted if prices stay below 180 euros for the last three days.

The 180-euro cap is lower than the 275 euros per MWh initially proposed by the European Commission but somewhat higher than the current market price of around 100 to 110 euros. This compromise was reached between member states that wanted a strong price cap at around 100 euros and those skeptical of the price cap itself. The agreement also includes a provision to immediately lift the cap if the side effects of its implementation are deemed greater.

The EU had discussed introducing a gas price cap since the outbreak of the Ukraine war in February, when prices surged due to Russia weaponizing energy, but failed to reach an agreement due to disagreements over price and application methods.

Supporters of the current agreement welcomed the outcome. Italian Prime Minister Giorgia Meloni called it a "great victory," while Polish Prime Minister Mateusz Morawiecki welcomed it as "an end to Russia and its state-owned energy company Gazprom's artificial market price manipulation."

However, skepticism remains that this compromise, reached after intense debate, will have limited effectiveness. The U.S. political media outlet Politico assessed, "This market price adjustment mechanism, compromised after serious divisions, will satisfy neither side and is merely an insufficient and temporary emergency measure."

Concerns persist that if the EU implements the gas price cap, exporting countries may hesitate to supply gas to Europe, potentially worsening supply instability. The European Central Bank (ECB) also opposed the implementation, stating that "the risks outweigh the benefits."

In response to the EU decision, the Russian government criticized it as an "attack on market prices," according to Russian Interfax news agency. Dmitry Peskov, spokesperson for the Kremlin, warned of retaliatory measures, saying, "As with the measures on oil (price cap), appropriate decisions will be made."

Meanwhile, on the same day, the January delivery gas futures price on the Dutch TTF market closed at 106.6 euros, down 7.6% from the previous day.