Why Europe's gas price cap plan will backfire

Brussels is again considering a cap on gas prices to shield consumers from soaring energy costs, but the policy risks weakening Europe’s ability to attract LNG cargoes just as the bloc faces a difficult storage refill ahead of next winter.

WHAT:  The European Commission is exploring a new cap on natural gas prices after the Hormuz crisis pushed European benchmarks sharply higher, with the front-month TTF contract trading around €51/MWh following a spike earlier in March.

WHY: Officials want to limit the impact of gas prices on electricity costs and household bills, but critics warn that suppressing prices could make Europe less competitive with Asian buyers for LNG cargoes, particularly as Qatari supply disruptions tighten global markets.

WHAT NEXT: With EU storage levels unusually low after a cold winter and a legal requirement to reach 90% capacity by November, policymakers must balance consumer protection against the need to keep prices high enough to attract the LNG imports required to secure supply for next winter.

The European Commission has proposed once more slapping a price cap on natural gas futures to contain energy costs, although the move could backfire by preventing the EU from attracting needed LNG cargoes from Asia.

Iran’s blockade of the Hormuz Strait and Qatar’s subsequent shutdown of LNG production has dealt a major blow to Europe’s energy security, which was already at risk after a cold winter depleted its storage facilities. The front-month TTF contract is trading at around €51 per MWh ($621 per 1,000 cubic metres), down from a day-average spike of €56.4 per MWh on March 9 but still significantly higher than the pre-war level of €32 per MWh.

To manage soaring energy costs for European households and business, European Commission President Ursula von der Leyen proposed a set of measures to the European Parliament on March 11. Since the crisis began, higher oil and gas prices had already cost European taxpayers some €3bn ($3.4bn) in extra costs.

“It is crucial that we reduce the cost impact when gas sets the electricity price,” she said.

With the surge in renewables deployment in recent years, the role of gas in setting power prices in Europe has diminished, although it still represents a significant input cost. For the first time ever, combined wind and solar produced more electricity in the EU than fossil fuels in 2025, with a share of 30%, versus 29% for oil, gas and coal. Yet gas still accounts alone for 17%, and more of this supply is imported versus five years ago, as a result of decline in domestic production – accelerated by the closure of the giant Groningen field in the Netherlands in late 2024. This makes Europe all the more vulnerable to global market volatility caused by the Hormuz crisis.

“We are preparing different options: better use of power purchase agreements and contracts for difference, state aid measures, and we are exploring subsidising or even capping the gas price,” von der Leyen said.

Brussels has capped gas prices before. In February 2023, when Europe was struggling with the supply shock caused by Russia’s significant cuts in pipeline gas supply, trades of front-month TTF contracts were not allowed beyond a price of €180 per MWh, if that level is exceeded for three consecutive days and the contracts are priced higher than a global LNG reference price by over €35 per MWh.

The cap was set so high that the trigger was never pulled, and ended in January 2025. Yet it still drew harsh criticism from industry, who argued that it would prevent European buyers from outcompeting their rivals in Asia for desperately-needed LNG cargoes.

Why a cap could backfire

The disruption in Qatari LNG cargoes, which account for around a fifth of global supply, primarily affects Asia as most of the country’s exports are contracted to buyers there. But those buyers will now be scrambling to find replacement cargoes from elsewhere – namely the US, which is currently Europe’s top LNG supplier. If the EU introduces a gas cap that is too high, it once again be meaningless. But if the gas price is set sufficiently low to try and contain energy costs, it could hamper Europe’s importers from attracting cargoes away from Asia. 

Even if Brussels were to organise a price cap in a way that buyers could still import above the price but the difference would be covered with subsidies, this still passes on the cost to consumers through the back door.  A cap on gas prices could also create risks for financial stability. Clearing houses might respond by increasing collateral requirements for traders, placing additional strain on available credit. Market participants could shift activity toward less regulated and more opaque trading venues, weakening transparency and potentially amplifying volatility. At the same time, uncertainty over how such a cap would be implemented could discourage trading activity and reduce overall market liquidity.

The refill challenge

Europe also faces an urgent need to rebuild gas inventories ahead of next winter, a task that will depend heavily on its ability to attract LNG cargoes in a highly competitive global market. After an unusually cold winter led to heavy withdrawals, storage levels have fallen well below their position at the same time in recent years, leaving the bloc with a steeper refill challenge during the summer injection season.

As of March 14, storage facilities were filled to only 29% of capacity, 

Under existing EU rules, member states are required to ensure that storage facilities are at least 90% full by November 1. Achieving that target will require sustained LNG inflows at a time when Asian buyers are also seeking additional supplies to replace disrupted Qatari cargoes. If European prices are artificially suppressed by a cap, the region risks becoming a less attractive destination for flexible LNG shipments, which traders can redirect to whichever market offers the highest netback.

In that scenario, a policy designed to contain energy costs could ultimately undermine Europe’s ability to secure the very gas volumes needed to guarantee supply security next winter. With storage refill already shaping up to be one of the most challenging since the 2022 energy crisis, maintaining strong price signals to attract LNG cargoes may prove just as important as shielding consumers from high energy bills.