The gas price cap agreement, which followed months of discussion about its implementation, aims to ‘limit episodes of excessive gas prices in the EU that do not reflect world market prices, while ensuring security of energy supply and the stability of financial markets’.

Under the agreement, a ‘market correction mechanism’ will be automatically activated if the month-ahead price on the Title Transfer Facility (TTF), the EU’s main trading hub, exceeds €180/MWh for three working days and if the price is €35/MWh higher than a reference price for LNG on global markets for the same three working days.

The mechanism will apply as of 15 February 2023 and will be implemented initially for a year. It could also be extended to other trading hubs via a second legislative proposal from the European Commission (EC), due by the end of March, according to Euractiv.

The Agency for the Cooperation of Energy Regulators (ACER) will monitor markets and if it observes that a market correction event has occurred it will publish a notice on its website to prevent transactions taking place above a ‘dynamic bidding limit’. This limit will be the reference price for LNG on global markets (based on an international basket of LNG transaction hubs) plus €35/MWh. There is also a price floor, under which, even if the reference price for LNG is below €145, the price cannot drop below €180/MWh.

Once activated, the dynamic bidding limit will apply for at least 20 working days. If the dynamic bidding limit is below €180/MWh for the last three consecutive working days, it will be automatically deactivated. The dynamic bidding limit can also be automatically deactivated if a regional or a EU emergency is declared by the EC according to the security of supply regulation, notably in a situation where the gas supply is insufficient to meet the gas demand (‘rationing’).

The regulation also includes a suspension mechanism, ‘if risks to security of energy supply, financial stability, intra-EU flows of gas, or risks of increased gas demand are identified’.

In addition, the regulation introduces a market correction mechanism on virtual gas trading platforms in the EU. Member states have agreed that the mechanism will apply to month-ahead, three months-ahead and a year-ahead derivative contracts. This refers to the time during which the contract can be purchased at a certain price before it expires. The ceiling will not apply to over-the-counter (OTC) trades (where participants trade directly between two parties, without being listed on an exchange), day-ahead exchanges and intra-day exchanges.

Russia bans oil exports to price cap countries
Not long after the gas price cap was agreed, Russia announced in late December that it was banning oil sales to countries and companies that implement the $60/b price cap on Russian seaborne crude oil agreed by the EU, G7 nations and Australia and that entered into force earlier that month.

The presidential decree will take effect from 1 February until 1 July, although it is understood that the ban may be lifted in individual cases on the basis of a ‘special decision’ from Russian President Vladimir Putin.

Oil prices initially jumped on the announcement, but then settled. Russia’s ban will not impact deliveries to India, China and other importers that have not joined the oil price cap.

Closing the gap
In related market news, earlier in December, the International Energy Agency (IEA) set out key actions the EU could take in order to avoid natural gas shortages in 2023, resulting from actions taken in response to the war in Ukraine.

The EU faces a potential shortfall of almost 30bn m³ of natural gas in 2023 – but this gap could be closed and the risk of shortages avoided through stronger efforts to improve energy efficiency, deploy renewables, install heat pumps, promote energy savings and increase gas supplies, according to the new IEA report.

The report sets out a suite of practical actions that Europe can take to build on the progress made in 2022 in reducing reliance on Russian gas supplies and filling gas storage ahead of winter. The report cautions that 2023 may well prove to be an even sterner test for Europe because Russian supplies could fall further, global supplies of LNG will be tight – especially if Chinese demand for LNG rebounds – and the unseasonably mild temperatures seen at the start of the European winter are not guaranteed to last.