ICE Warns That The TTF Gas Market May Not Be Viable

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Credits: Alvarez/Unsplash

According to a memo given to member states and obtained by the Financial Times on December 15, commodity exchange operator ICE warned of a risk to the TTF gas market’s viability if the EU moves forward with a price cap.

Risk management

The EU energy ministers will get together once more on December 19 to work out an agreement on a market correction mechanism that would control the price of TTF gas if it rose above a certain threshold.

The technique would be placed on consumers and the market infrastructure “without any time for resilience testing and comprehensive risk management,” according to the memo from ICE, which hosts gas trading on its ICE ENDEX exchange.

If this method is approved, “it is the obligation of ICE as the market operator to assess all options, up to and including whether an efficient market in the Netherlands is still viable,” the statement read.

Reopening contracts

S&P Global Commodity Insights contacted ICE on December 15 but received no fast follow-up comments, and on December 16 it was impossible to reach ICE.

On December 16, no one at the European Commission could be reached for comment.

The effectiveness of a price cap has also been questioned by the European Energy Trade Association (EFET). In a position paper released on December 2, EFET stated that a price cap “risks boosting demand, decreasing supply, and reopening contracts.”

It stated that if a price cap was set below the market price, Europe might have trouble attracting supplies. “A cap diminishes our negotiating position, undermines the confidence that sellers have placed in European gas markets over many years, and could weaken our security of supply,” it stated.

Magnetic impact

According to EFET, markets are effective at directing gas from lower to higher-priced areas, where it is most needed. This indication vanishes once prices reach a cap, it stated.

It also noted that price caps had been established in other economic sectors and that precedent suggested a cap’s existence would have a “magnetic” impact.

There is an incentive to price near the cap because of the risk and uncertainty it brings. This plainly results in the reverse of what the policy was meant to do, which is bad for customers.

As soon as the cap is in place, the behaviour will alter, according to EFET. “Even if the cap were lifted later, the market would not revert to its previous state.”

No agreement

At an extraordinary session on December 13 in Brussels, EU energy ministers were unable to come to a consensus on the gas price cap due to continuing disagreements about the threshold for activating the market correction mechanism.

The benchmark TTF month-ahead price would be capped if a number of criteria were met, according to a new mechanism proposed by the European Commission last month.

However, following their earlier disagreement over the details of the cap at a summit on November 24, EU energy ministers have now diverged twice on the plans.

On the Dutch TTF month-ahead contract, the EC initially recommended a cap of Eur275/MWh, but this was rejected as being too expensive and ineffective, leading to a revised cap proposal of Eur220/MWh.

Following the Dec. 13 council, Czech Industry Minister Jozef Sikela stated that the primary unresolved issue was the price threshold that would activate the mechanism.

According to Sikela, there have been several conversations about the prospective cap’s range, with a final potential range of between Eur160/MWh and Eur220/MWh.

He claimed that in the end, a decision was made to maintain the range open until talks at the Dec. 19 meeting.

New package

Sikela stated that the revised terms for the mechanism, which would not include over-the-counter contracts under the cap, include other regional hubs besides the TTF, assess the impact of the mechanism by the end of February, and strengthen the automatic deactivation of the cap, had been proposed at the council on December 13 by the Czech presidency.

The TTF, according to EU authorities, is no longer appropriate for its intended use and does not adequately reflect the changing reality in Europe, where LNG is a more predominant supply source.

The Dutch TTF month-ahead price was evaluated by Platts, a division of S&P Global Commodity Insights, at an all-time high of Eur319.98/MWh in late August.

Prices have dropped recently due to robust storage levels and demand restraints, but they remain historically high, with Platts estimating the TTF month-ahead price at Eur134.68/MWh on December 15.

The EC first suggested that the front-month TTF settlement price have to surpass Eur275/MWh for two weeks and that the TTF price had to be Eur58/MWh higher than an LNG reference price for 10 consecutive trading days in order to qualify for a price cap.

The revised proposal reduced the cap to Eur220/MWh and shortened the time period during which the price had to exceed that mark to five trading days.

In addition, the difference between the LNG reference price and the TTF month-ahead price would now only be Eur35/MWh rather than Eur58/MWh.

Cap ‘safeguards’

Kadri Simson, the EU’s energy commissioner, added that the EC has included protections in its price cap plan to defend against any dangers to the security of the gas supply.

“We have recognised this and incorporated this in a series of protections,” she added. “We all realise that introducing this kind of ceiling for the first time ever can imply various hazards.”

According to Simson, the cap could be quickly suspended if initiating the market correction mechanism caused any problems with the security of supply.

Simson emphasised the fact that the market correction mechanism was intended to be a transient one. She remarked, “It is not intended to be a tool to structurally bring down gas costs to pre-war levels.”

 

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Source: S&P Global

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