The Kremlin condemns the European agreement on the capping of wholesale gas prices. – The Informant. 🇳🇱 #WeStandAsOne

The Kremlin condemns the European agreement on the capping of wholesale gas prices.

Published on 20.12.2022

RT reports that the Kremlin described on December 19 as “unacceptable” the cap on the wholesale price of gas, approved by the energy ministers of the EU Member States meeting in Brussels.

“It’s a violation of the market process for price formation,” Kremlin spokesman Dmitry Peskov was quoted as saying by Russian news agencies.

“Any reference to a ‘cap’ [des prix] is unacceptable,” he insisted.

EU Member States approved on December 19, after tough negotiations, a temporary mechanism to cap wholesale gas prices, an agreement that allows other emergency measures to be unblocked to carry out group purchases of gas and boosting renewable energies.

This system, adopted by the European Ministers of Energy, aims to block transactions on the wholesale gas markets beyond a certain threshold, and thus prevent, according to them, any surge in prices which would ultimately affect on businesses and consumers.

“Dynamic ceiling” or technocratic nightmare?

The mechanism will come into effect on February 15, for at least one year. It will be triggered automatically as soon as the price of the monthly contract (for delivery the following month) reaches 180 euros/megawatt-hour for three consecutive days on the TTF (Title Transfer Facility), the price index which serves as a reference for a large part of gas transactions in Europe.

But on the strict condition that it is also at least 35 euros higher than the average international price of liquefied natural gas (LNG), in order to prevent LNG suppliers from abandoning Europe in favor of Asian customers paying for their gas at more attractive prices.

The monthly contract traded on December 19 around 110 euros/MWh, after having briefly soared to around 300 euros in August.

Once the mechanism has been initiated, transactions on futures contracts on the TTF, but also on other trading platforms, will be capped for 20 days, but not over-the-counter trading (outside regulated markets).

These contracts could then no longer be traded beyond a “dynamic cap”, corresponding to the international reference price of LNG (calculated on a basket of world prices) plus a variable cap of 35 euros, making it possible to ensure that Europe remains an attractive market for suppliers compared to the prices offered in Asia.

The mechanism will be automatically deactivated as soon as the price of the monthly contract on the TTF drops below 180 euros, or if the EU declares a state of emergency for the supply of the EU.

And the mechanism as a whole may be suspended by the Commission in the event of “risks to gas supply, financial stability or gas flows within the EU”.

Disagreements between States overcome?

The Commission had initially proposed to cap certain gas contracts once they exceeded 275 euros/MWh for two consecutive weeks, among other conditions – factors never met, even at the height of the surge last August.

Several States (Spain, Poland, Greece, Italy, etc.) had called for the activation conditions to be relaxed. On the contrary, reluctant to any intervention, other States (Germany, Netherlands, etc.) demanded drastic “safeguards” to avoid threatening supplies.

While the Twenty-Seven, anxious to display a united front, sought unanimity, Berlin finally approved the compromise: “We have enough instruments to use this mechanism in an intelligent and targeted way”, judged the minister German Robert Habeck.

The agreement found makes it possible to ratify two other emergency texts, which were already the subject of an agreement between the States but whose formal adoption remained dependent on a decision on the capping of the price of gas.

The first provides for group purchases of gas, in which consortia of companies would participate, in order to obtain better prices together, and a solidarity mechanism automatically ensuring the energy supply of countries threatened with shortages.

The second simplifies the authorization procedures for renewable energy infrastructures (solar and heat pumps) for one year.

Hungary resists

Hungary has said it rejects a “harmful, dangerous and totally unnecessary” cap, according to its foreign minister Peter Szijjarto. Budapest signed a 15-year agreement with Moscow in 2021 to receive 4.5 billion cubic meters of gas per year, via Bulgaria and Serbia.

A structural reform of the European electricity market, which aims to decouple it from gas prices, will also be proposed in early 2023 by the Commission. In September 2022, at the Eastern Economic Forum, Vladimir Putin had warned: “We will not supply anything, neither gas, nor oil, nor coal, if it goes against our economic interests.”

The Russian leader had criticized the West for not honoring energy contracts.

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