Just 1000 percent more: As a result of Russia's war against Ukraine, there was a drastic increase in wholesale prices for natural gas in Europe last year, with consequences for consumers and the economy that are still noticeable today. The repetition of such a situation is now to be prevented by a flexible EU price cap. Since this Wednesday at midnight, the system, which was rejected by the Federal Government for months, has been activated. Can it work?

What is the gas price cap about?

The so-called market correction mechanism is intended to protect citizens and businesses from excessive prices. In concrete terms, the aim is to prevent wholesale gas prices in the EU from being significantly higher than world market prices for an extended period of time. The EU regulation on the so-called corrective mechanism entered into force on 1 February. However, activation has only been possible since this Wednesday.

How is the goal to be achieved?

The EU will now ban certain gas trading transactions if their price reaches a predetermined level and the price increase does not correspond to a similar price increase at regional level or on the world market. The correction mechanism is triggered when the price of the products exceeds 180 euros per megawatt hour for three working days and at the same time is 35 euros above an international average price for liquefied natural gas (LNG).

Does the mechanism now take effect immediately?

No. The relevant European gas price was recently between 50 and 60 euros and thus well below the limit of 180 euros per megawatt hour. This is miles away from the highs last August, which gave rise to a debate on a price cap.

At that time, according to the EU Commission, European natural gas prices reached a level that was 1000 percent above the average prices previously recorded in the Union. While prices have fluctuated between 5 and 35 euros per megawatt hour over the past ten years, they climbed to record levels of well over 300 euros per megawatt hour last summer.

How did the drastic price increase come about?

According to the analysis of the EU Commission, prices rose mainly because Russia used its gas supplies as a weapon and manipulated the market through deliberate interruptions. In August, the relationship between supply and demand was particularly tense, because a reduction in pipeline flows led to the efforts of the EU states to fill the storage facilities before the winter. In addition, according to the analysis, the fear of further supply disruptions and market manipulation by Russia played a role - and also the pricing mechanism, which was not geared to such extreme changes in demand and supply.

What is the forecast for wholesale prices?

According to gas market experts, price developments are likely to depend primarily on the weather during the rest of the heating season. If temperatures allow larger gas reserves to remain in the reservoirs, there could be a summer slump in prices.

Why was the German government strictly against the price cap for a long time?

She feared supply problems because she saw the risk that suppliers would not accept the price cap and simply stop supplying gas to Europe. In December, however, Chancellor Olaf Scholz (SPD) agreed. The background was above all strict safety rules. They provide that the market correction mechanism will only be triggered in situations where European prices are significant and higher than prices on world markets over a longer period of time. In addition, the mechanism will be deactivated if the difference with European prices decreases or disappears.

What is the difference to the German gas price brake?

The German gas price brake, which will start in March, directly affects end consumers and is intended to cushion the consequences of the rapidly rising energy prices. Households and small and medium-sized enterprises are guaranteed a gross gas price of 80 cents per kilowatt hour for 12 percent of their previous consumption. For the remaining 20 percent, the normal contract price should apply - so an incentive to save should be maintained.

How do energy companies see the European price brake?

Very critical. "At the European level, there is an illusion: we are capping the price of gas. And if the price is too high, no more business may be concluded. That will not work," said the head of the energy company RWE, Markus Krebber, recently in the podcast "Die Wirtschaftsreporter" of the "Westdeutsche Allgemeine Zeitung" (WAZ).

The Federation of German Industries (BDI) had already criticized the decision for an EU gas price cap as a risk to security of supply before Christmas. "Gas price caps do not solve a supply crisis, but fundamentally risk security of supply in Europe," said Deputy Managing Director Holger Lösch at the time. Gas goes to the regions that are willing to pay the prices caused by the gas shortage.