EUROPEAN GAS PRICE CAP

PLATTS - 20 Dec 2022 - The EU on Dec. 20 published its new proposed regulation on a TTF gas price cap, including measures to extend the market correction mechanism to other virtual trading points from the end of March.

The text also clarifies how the LNG reference price to be used in the mechanism will be calculated.

"Delegations will find in the annex the text of the proposal for a Council Regulation establishing a market correction mechanism following the political agreement at the Energy Council on Dec. 19," it said.

EU energy ministers agreed during emergency talks in Brussels Dec. 19 to implement a new gas market correction mechanism that imposes a TTF price ceiling of Eur180/MWh.

The mechanism will apply as of Feb. 15, 2023, and will last for one year.

In the proposed regulation, it is stated that the European Commission is to define the technical details of the application of the market correction mechanism to derivatives linked to other VTPs no later than March 31, 2023.

In the event that the application of the market correction mechanism to derivatives linked to other VTPs leads to "significant negative effects" on financial or gas markets, the EC could exclude certain derivatives, it states.

The energy ministry of Greece -- which was one of the main EU backers of a price cap -- said the cap would apply from Feb. 15 for the TTF price index and from March 31 for all other indices, following an assessment by ESMA and ACER.

According to the text of the proposed regulation, the TTF hub accounted for around 80% of gas traded in the EU and the UK combined in the first eight months of 2022.

"The TTF month-ahead settlement price for derivatives is by far the most widely used benchmark in gas supply contracts across the EU, followed by maturities of two-month ahead and year ahead," it states.

"However, shifts of trade to derivatives linked to other VTPs may lead to distortions on EU energy or financial markets, for instance through arbitrage by market participants between corrected and non-corrected derivatives, to the detriment of consumers," it states.

"Derivatives linked to all VTPs in the EU should therefore, in principle, be included in the market correction mechanism."

However, it said the application of the mechanism to derivatives linked to other VTPs than TTF was "complex" and would require additional technical preparation.

LNG reference price

The Eur180/MWh cap will be activated if two market events occur simultaneously.

These are that the TTF month-ahead price exceeds Eur180/MWh for three working days and that the TTF month-ahead price is Eur35/MWh higher than a reference price for LNG on global markets for the same three working days.

The proposed regulation also clarifies how the LNG reference price will be calculated. "Appropriate benchmarks should be used to determine a reference price reflecting global LNG price trends," it states.

The reference price is a daily average of a number of price assessments comprising:

• Platts LNG Northwest Europe Marker
• Argus Northwest Europe DES half-month 2
• Platts LNG Mediterranean Marker
• Argus Iberian peninsula DES half-month 2, Italy DES half-month 2 and Greece DES half-month 2
• Platts JKM DES half-month
• Argus Northeast Asia DES half-month 2
• ICE front-month NBP derivative settlement price
• Price of the daily price assessment carried out by ACER

ACER has been tasked with coming up with its own LNG price assessment to be added to the basket of LNG prices.

The Platts Northwest Marker was assessed on Dec. 19 at $33.29/MMBtu for delivery in February compared with a TTF February assessment of $33.67/MMBtu.

Platts is part of S&P Global Commodity Insights.

The proposed regulation states that the reference price should be based on LNG price assessments representative of the European market conditions and, due to the particular importance of the UK and Asia as competitors in the global LNG market, also on an appropriate benchmark for the UK and Asian regions.

It adds that LNG prices better reflect the gas price developments at a global level.

"The sample of LNG prices taken into account should be sufficiently broad to be informative even in case a specific LNG price should not be available on a given day," the proposed regulation states.

It adds that in order to build a representative basket of European and international prices and to ensure that the entities providing the price information are subject to relevant EU regulation, price assessments should be selected by reporting agencies which are listed in the Benchmark Registry established by the Regulation (EU) 2016/1011.

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