• EU energy ministers agreed a "dynamic" gas price cap that is triggered when European front-month gas contracts surpass 180 euros per megawatt hour for three days.
• Germany voted in favor of the measure despite previous criticisms, but Austria and the Netherlands abstained, citing risks to financial stability and security of supply.
• Analysts told CNBC that conditions inserted to allow the European Commission to suspend the cap in an emergency may be quickly turned to if the EU faces a gas supply crunch in 2023.

The European Union Monday concluded two months of heated talks over how to protect households from rising energy prices — but some analysts argue the bloc's solution is unsustainable and might not withstand the realities of a 2023 gas supply crunch.

EU members compromised by adopting a "dynamic" cap on the price that can be bid for front-month gas contracts on Europe's benchmark trading facility.

The level at which the cap is triggered was lowered to 180 euros per megawatt hour, after an initial proposal of 275 euros per megawatt hour was criticized as far too high by countries including Poland, Spain and Greece.

The 180 euro limit must be surpassed for three working days on the Dutch Title Transfer Facility (TTF), and it must be 35 euros per megawatt above the global reference price for liquefied natural gas over the same period.

Several conditions were inserted to allay the concerns of members such as Germany, which had argued that the scheme could result in gas shortages next year. These clauses prompt an automatic suspension of the cap and include the dynamic bidding rate dropping below 180 euros per megawatt hour for three consecutive working days, or the European Commission declaring an emergency.

Germany eventually voted in favor of the so-called "market correction mechanism," but the Netherlands and Austria abstained.

Austria's ministry for climate action said in a Tuesday statement that while it was "confident that the market correction mechanism can play an important role to avoid extreme spikes in European gas prices, the last minute extension of the mechanism on more gas hubs than the TTF does issue some concerns."

The ministry noted that "there are some risks that the necessary safeguards are undermined by this extension." Austria depends on Russian gas.

Rob Jetten, Dutch energy minister, said that the mechanism remained "unsafe" despite the latest improvements. He flagged that it could disrupt the European energy market, risk security of supply and have wider financial implications.

"From its inception, we have been very clear about this mechanism: it does not solve the core problem," he said, adding that the Netherlands' concerns were shared by the European Central Bank and by ICE (Intercontinental Exchange), the operator of the key natural-gas market in Europe.

The ECB earlier this month said "the current design of the proposed market correction mechanism may, in some circumstances, jeopardize financial stability in the euro area." It declined to provide further comment to CNBC following the EU announcement.

ICE said in a statement it had "consistently voiced concerns" about the destabilizing impact of a price cap. It added that it would now review the details of the EU announcement to see whether it "can continue to operate fair and orderly markets for TTF from the Netherlands as per our European regulatory obligations."

Easy to overturn?

The EU argued the mechanism will be monitored regularly and can be stopped if financial stressors or supply challenges are raised, in response to concerns flagged by the likes of the ECB.

Analysts told CNBC that these conditions called into question the ability of the mechanism to limit energy price rises.

"It reflects the challenge between strong rhetoric and the realities of the security of supply," Nathan Piper, head of oil and gas research at Investec, said by phone. "It's a cap, but allows them to operate above the cap if they really need the gas. The fact on the ground is, if you need the gas, you will pay any price, which is what Europe did in 2022."

Piper listed two possible areas of additional upcoming demand: China and Europe. Beijing this month abruptly relaxed the zero-Covid policy it pursued this year. Europe has meanwhile managed to get its gas stores near-full for this winter by continuing to import Russian gas supplies — but plans to drop this intake drastically in 2023.

Europe and Asia remain net oil and gas importers, Piper continued, which means that intense competition for spot cargoes lies ahead. Around 70% of liquefied natural gas (LNG) is tied up in long-term contracts, leaving 30% available on a spot basis.

In a Tuesday interview with Reuters, Norway's prime minister Jonas Gahr Støre said he did not expect more Norwegian LNG to be exported outside of Europe as a result of the new EU measure.

But Piper said, "There is no motivation for spot LNG carriers [other] than the highest price. So volumes could go up elsewhere, and [European] security would be jeopardized."

Janko Lukac, senior analyst at Moody's Investors Service, echoed this sentiment to CNBC: "The efficiency of an unilateral cap on purchase prices from the EU is highly uncertain."

"LNG markets globally and structurally will be short for the next couple of years. Hence, if an international buyer is willing to pay a higher price, Europe runs the risk that the respective volumes will go to another buyer," he said.

Long-term measures

Energy Minister Rob Jetten said it was more important for the EU to focus on its electricity savings targets, on joint gas purchasing agreements and on issuing faster permits for renewable energy schemes.

Ending energy dependency was the key reason why Pavel Molchanov, managing director for renewable energy at wealth management firm Raymond James, said the mechanism was a "stop-gap measure."

"The solution for Europe will be to diversify its energy mix away from fossil fuels entirely," Molchanov told CNBC's "Squawk Box Asia" Tuesday.

"As it stands, about 20% of Europe's electricity comes from natural gas, 10% comes from coal. Both of these commodities are up dramatically as a result of the war, and the Kremlin's weaponization of energy exports."

Energy transition solutions — such as wind, solar and green hydrogen, as well as increasing energy efficiency and removing coal from the electricity mix — could be put on an accelerated timetable to rid Europe of natural gas concerns within five years, he said.

Ending the war premium

EU ministers in favor of the mechanism were upbeat about its impact.

Kadri Simson, European commissioner for energy, said the initiative would "take away the war premium, the mark-up compared to global LNG prices, that Europe pays" due to pricing on the Dutch TTF.

Tinne Van der Straeten, Belgium's energy minister, said the move would ensure security of supply while protecting citizens and the economy from higher prices.

Investec's Nathan Piper also said that there were strong reasons why Europe needed to bring down gas prices beyond the strain on households.

"Very high gas prices for multiple years will have major impacts on the competitiveness of European industry. The U.S. gas price is a fraction of Europe's because they are self-sufficient, so industry could move to where input costs are lower," he said. "That means a long-term risk for Europe and the U.K. if energy costs can't come down."