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Mind the Cap

Brussels has proposed a cap on the price of gas when it exceeds a maximum level, though that price has not been set. The plan is intended to be effective for a year and will try to curb the impact of the price of gas in the reference market, the Dutch TTF. The European Commission has advanced some details of its proposal to establish a gas price cap to mitigate the impact that the cost of the hydrocarbon has on the markets. For the time being, this tool, which would be in place for a year, has not been officially presented.

According to a document released to the press, maximum levels will be set in advance, one month to be exact, so that the measure can have an immediate effect. The reference market will be the Dutch TTF (Title Transfer Facility), which is the one used to set prices in the European Union. In order to activate this cap, the increase in TTF cannot reflect a similar increase in the world market (i.e., it cannot be a “natural” increase), and, in any case, the mechanism can be deactivated if it is detected that it causes “major disturbances” in the market. It will also be stopped automatically if, during a monthly review, it is detected that the conditions for applying it no longer exist.

Up in the Air

The idea, therefore, is that when it exceeds a maximum – it bears repeating that we still do not know what the maximum price is – the price correction system will come into operation and the gas will be “capped”. In other words, it will be paid at the price set by the Commission and not at the price it reaches on the Dutch futures market. This market is, precisely, in the sights of several governments, which are looking for an alternative to a TTF that in recent months has been affected by speculation and supply problems – also due to the oversupply of liquefied natural gas – and is no longer considered a true reflection of the gas market.

In any case, the negotiation is proving complex, as the energy systems of the EU’s 27 nations are very diverse. France, for example, has a large nuclear fleet and is much less dependent on gas than Germany. Berlin, therefore, is generally more reluctant to impose price caps on gas for power generation. The popularity of the European Commission’s measure will likely be dependent on the price caps.