What does price cap mean? Here’s the gas price corridor: the historic deal

A gas price corridor (with a ceiling and a floor), increasing savings, simplifying authorization procedures for renewable plants, and a reform of the electricity market. These are some of the pillars of the measures envisaged by the European Council, essentially focused on “common solutions” to protect families and companies from the high costs of energy bills.

The most anticipated measure was the gas price ceiling; arrived, but not in its initial form. A dynamic price ceiling was decided. Basically a price corridor within which it moves: with an interval that marks the minimum value on one side and the maximum value on the other. A proposal that, in itself, irrespective of the result, has led to a fall in the European price of gas on the Dutch market in Amsterdam: in fact, in the last days of discussion, the TTF quotation has moved to around 110 -120 euros per megawatt-hour (MWh), after reaching levels that reached 300 euros per MWh in recent months.

It is therefore not a question of a gas price ceiling beyond which it is not possible to sell or buy, but with the dynamic price cap it is possible to limit gas price fluctuations, of course excessive price increases and, consequently, also the possible speculations in the market. Ideally, the central line for defining the price corridor is given by a gas price index (currently the TTF market in Amsterdam, but a more reliable index is being evaluated); based on that, the gap is then constructed, with the minimum price and the maximum price.

Suppliers will have to stay within the price corridor. This system must guarantee the functionality and survival of all providers in the market. There may now be two dangers: on the one hand, a possible blockade of exports to Europe, on the other hand, the critical issues of the Dutch TTF market.

The European Council conclusions speak of a “temporary dynamic price corridor in natural gas transactions to immediately limit episodes of excessive gas prices”. The dynamic price cap was also the way to bring together (not without difficulty, Germany and the Netherlands in particular) all the EU states. Instead, the European Council looks to the “immediate priority” of “protecting families and businesses” as well as “preserving the EU’s global competitiveness”.

The instruments available to reduce energy costs include both the dynamic price cap and the proposal to “improve the functioning of energy markets” by increasing their transparency, eliminating factors of volatility in gas prices, ensuring financial stability , accelerating the simplification of authorization procedures for renewable energies, increasing energy savings and providing for energy solidarity measures in the event of a gas supply interruption.

Source: IL Tempo