Italian energy minister proposes gas price cap

Italian Energy Minister Gilberto Pichetto Fratin has called for an extension of the gas price cap and proposed lowering it to EUR 50–60 per megawatt-hour. He made the proposal in response to growing uncertainty in the gas market following the halt to Russian gas flows through Ukraine. Cold weather and the loss of around 5% of gas imports after transit through Ukraine ended are leading to increased withdrawals from underground gas storage and rising prices, Reuters reports.

European natural gas prices rose to their highest level since October 2023 after Russian gas flows through Ukraine stopped on New Year’s Day, with the price at the Title Transfer Facility (TTF) trading hub in the Netherlands rising by more than 4% to EUR 51 per MWh. It then edged down again.

With Russian gas flows through Ukraine halted, Europe will have to replace supplies amounting to around 5% of its gas, and will therefore have to rely more heavily on storage, whose filling level has fallen below the average for this time of year.

Europe’s gas stocks are being depleted at their fastest rate since 2021, with storage levels falling to around 75%. According to Gas Infrastructure Europe, the volume of gas in storage fell by approximately 19% between the end of September, when the refill season ends, and mid-December.

In response to these developments, Italian Energy Minister Gilberto Pichetto Fratin proposed capping gas prices. He wants to use the mechanism agreed by the European Union back in December 2022, but proposes lowering the cap to EUR 60 per MWh from the current EUR 180 per MWh.

The measure should prevent a potential price shock, while a lower cap would limit speculation, Fratin said on Friday, 3 January.

Market correction mechanism

The gas price cap, known as the “market correction mechanism”, has been in effect since January 2023. Its aim is to protect industry and households from excessive increases in gas and electricity prices following the record highs recorded in the summer of 2022, when gas prices exceeded EUR 300 per MWh.

The current EU price cap expires at the end of January 2025. The cap on exchange gas prices is set to be activated automatically if the price of gas at the virtual Title Transfer Facility (TTF) trading hub exceeds EUR 180 per MWh for three consecutive days.

At the same time, the difference between this price and the average global price of liquefied natural gas (LNG) must be at least EUR 35. The market correction mechanism was originally intended to last one year, but was extended in December 2023 until 31 January 2025, although the price has never reached the cap since the mechanism was introduced.

"I think the EU should reinstate the price cap at this point, but not at EUR 180; it should now be set at EUR 50 or 60," the Italian minister said in an interview with Italy’s Radio Radicale.

Fratin said Italy has sufficient gas supplies to get through the next two months without disruption.

"I want to reassure everyone: we have no problems. The country’s gas storage system is almost 80% full," he said.

Although Europe is not facing an immediate energy crisis or supply disruptions, the EU has warned of growing vulnerability to market fluctuations as it seeks to replace the missing supplies.

Gas prices are up 50% year on year, which could undermine the competitiveness of industry and raise the cost of living.