Breaking Stories

European Central Bank warns that an EU gas price cap risks financial stability

The European Central Bank has raised concerns over an idea to impose a cap on gas prices in Europe.
Haussmann Visuals | Moment | Getty Images

The European Central Bank is worried about the potential risks to financial markets from an EU-wide cap on natural gas prices.

The bloc has been in intense discussions for several weeks over how to impose a limit on gas prices. The measure — designed to prevent sky-high costs for consumers — is proving controversial for Europe amid an acute energy crisis following Russia’s invasion of Ukraine.

The European Commission, the executive arm of the EU, suggested in November that the cap should sit at 275 euros ($290.33) per megawatt hour. However, several member states argued this did not go far enough and was unlikely be triggered.

The Dutch TTF, Europe’s main benchmark for natural gas prices, traded around 135.50 euros per megawatt hour Friday.

Discussions on the cap continue among the EU’s 27 member states ahead of a ministerial meeting Tuesday — as the ECB warns the cap could have repercussions for financial markets.

“The ECB acknowledges that mechanisms aimed at moderating extreme price levels and volatility in wholesale gas markets may, in principle, alleviate a number of risks to financial stability, including the risks exposed during periods of elevated and volatile gas prices in 2022,” the central bank said in a document Thursday.

“However, the ECB considers that the current design of the proposed market correction mechanism may, in some circumstances, jeopardise financial stability in the euro area,” it added.

The comments are in line with concerns raised by countries such as Germany and the Netherlands, which have asked for stronger guarantees that the cap is not going to disturb markets.

Supporters of the price cap have argued that the instrument will be monitored regularly and can be stopped if regulators, including the European Central Bank, identify any financial distress.

Some are hoping that a decision on the price cap can be reached at the meeting of EU energy ministers in Brussels, Belgium.

“We hope this will close at the ministers’ level next week. But there are still discussions on the sidelines. We will see,” an official working for the prime minister of an EU country, who did not want to be named due to the sensitivity of the talks, told CNBC Thursday.

Another official working in Brussels, who did not want to be named due to their proximity to the talks, said: “Consensus seems very much out of reach.”

The impasse over the measure highlights how sensitive — and technical — it is.

Indeed, some energy ministers have described the initial proposal to cap prices at 275 euros per megawatt hour as a “joke.”

Many nations, such as Poland, Greece, Spain and Portugal, are keen to implement the price cap. These countries are less able to mitigate the impact of the energy crisis on consumers, and have been pushing for EU-wide solutions as a result.

Kostas Skrekas, Greece’s environment and energy minister, told CNBC’s Julianna Tatelbaum last month that a cap should be below 200 euros per megawatt hour.

“[A] price cap at 275 euro is not a price cap. Nobody can … stand buying gas at this expensive price for a long time. We surely believe that the price cap below 200 euro, between 150 and 200 euro, would be more realistic,” he said.

Two European officials confirmed to CNBC that the current proposal being discussed is a cap of 220 euros per megawatt hour. However, this could change again before ministers meet on Tuesday.

Under the same proposal, the cap would only be triggered when prices are 58 euros higher than the LNG reference price for 10 consecutive trading days, and European gas prices exceeded the price cap for two weeks.

What's your reaction?

Excited
0
Happy
0
In Love
0
Not Sure
0
Silly
0

You may also like

Leave a reply

Your email address will not be published. Required fields are marked *