The energy ministers of the European Union have finally reached an agreement on a gas price ceiling.

After weeks of negotiations, the energy ministers of the European Union have finally reached an agreement on a gas price ceiling, which has divided opinion inside the union as it attempts to contain the energy crisis. 

The cap is the EU's 27-nation latest attempt to reduce gas prices, which have increased energy costs and led to record-high inflation this year after Russia shut off the majority of its gas exports to Europe. 

The front-month contract for the Dutch Title Transfer Facility (TTF) gas hub, which serves as the European benchmark, must not cost more than 180 euros ($191.11) per megawatt hour for three days in order for a cap to be set.

Additionally, for a period of three days, the TTF price must be 35 euros per MWh higher than a reference price based on current LNG price estimates. 

Jozef Sikela, the industry minister for the Czech Republic, which is now in charge of rotating the EU presidency, declared that "we have succeeded in establishing an essential deal that would protect residents from soaring energy prices." 

The cap may be activated beginning on February 15, 2023. The agreement will become formal once a written approval from all parties occurs before it can go into effect.

When activated, trading on the front-month, three-month, and front-year TTF contracts will not be allowed at a price greater than 35 euros/MWh over the reference LNG price. 

This effectively sets a ceiling on the price at which gas can be exchanged while enabling the ceiling level to change in line with market LNG prices. This mechanism was created to ensure that EU countries can continue to bid at competitive prices for gas imported from international markets. 

According to three EU officials, Germany cast a vote in favour of the agreement despite having expressed worries about the policy's effects on Europe's ability to secure gas supply in price-competitive international markets.

These protections include the suspension of the cap in the event of a gas supply deficit in the EU, a decline in TTF trading, an increase in gas consumption, or a material rise in margin calls from gas market participants. 

Europe's energy industries have been rocked by the rising cost of gas and electricity, prompting utilities and traders to obtain additional funding from banks and governments to meet margin call obligations. 

Germany's Uniper, which hurried to fill the vacuum created by Russia cutting supply, has incurred derivative losses totalling billions of euros, worsening the issue.

After months of debates and meetings

Only Hungary, according to two EU sources, voted against the price cap. 

Netherlands and Austria didn't participate. Both had rejected the cap during the discussions out of concern that it may disturb the energy markets in Europe and jeopardise its energy security.

The market correction process remains potentially dangerous, according to Dutch Energy Minister Rob Jetten, despite recent improvements.

Some market participants have also voiced resistance to the EU idea, claiming it might lead to financial instability. 

The Intercontinental Platform, which hosts TTF trading on its Amsterdam exchange, stated last week that if the EU set a price restriction, it might shift TTF trade outside of the EU.

According to its president Stefano Besseghini, Italy's energy regulator ARERA expects further hikes in gas prices as the winter months approach. 

Meanwhile, Russian news agency Interfax claimed that Dmitry Peskov, the Kremlin's spokesman, called the cap an attack on market pricing and said it was unacceptable.

The decision comes after months of discussion on the topic and two prior emergency sessions that failed to reach a consensus among EU nations that divided on whether a price ceiling would assist or hamper Europe's efforts to handle the energy crisis. 

Around 15 nations, including Belgium, Greece, and Poland, have called for a restriction lower than 200 euros/MWh, which is much less than the 275 euros/MWh trigger level that the European Commission had initially suggested last month.

The price ceiling, according to the prime minister of Poland, will prevent Russia and Gazprom from distorting the market.

(Sources: investing.com, reuters.com, cnbc.com)