Will Beacham
20-Dec-2022
Updated to add graph comparing new EU price caps to gas prices.
The EU is playing a central role in coordinating Europe’s energy response to Russia’s invasion of Ukraine.
The push to move EU member states away from Russian energy dependency has contributed to high prices and concerns over supply.
EU political intervention covers a variety of areas including price and revenue caps and controls, demand management, gas storage mandates and potential market liquidity measures.
This topic page provides latest updates on the progress of these measures. .
EU energy ministers agree gas price cap mechanism
By Gretchen Ransow 19-Dec-22 20:33 LONDON (ICIS)–EU energy ministers agreed a temporary gas price cap mechanism on 19 December. It could apply to all hubs across the EU unless the European Commission decides to opt-out certain hubs.
The ceiling will apply to front-month, month+2, month+3 and front-year contracts traded on exchanges, but will not cover over-the-counter trade or spot transactions.
The market correction mechanism, agreed after months of negotiation, will be triggered if the front-month TTF price exceeds €180/MWh for three consecutive working days and this price is more than €35 above a reference LNG price over the same period.
Once activated the cap will turn dynamic and apply for at least 20 days, with transactions above a “dynamic bidding limit” not allowed.
This limit will be €35 above the LNG reference price. However, if the LNG price falls below €143, the limit will remain at €178/MWh.
Applying the agreement to all EU gas hubs is a change from drafts previously seen by ICIS.
However, the European Commission will have the chance to opt-out certain hubs at a later stage, Czech industry and trade minister Jozef Sikela said.
The Czech Republic currently holds the EU’s rotating presidency.
EU energy commissioner Kadri Simson confirmed “derivatives contracts concluded before its entry in to force” were excluded from the regulation “to facilitate an orderly transition”.
SUSPENSION
The regulation includes means to automatically suspend the cap, if it risks security of supply, financial stability, intra-EU gas flows or a significant increase in gas demand.
The commission, in partnership with the EU Agency for the Cooperation of Energy Regulators (ACER) and the European Securities and Markets Authority (ESMA) will constantly monitor markets from when the regulation enters into force on 1 February.
A rise in gas demand by 15% in one month or 10% in two months would trigger the mechanism’s suspension.
It would also be suspended if LNG imports or TTF liquidity were to drop “significantly”.
ASSESSEMENT
ESMA and ACER are to publish a preliminary impact assessment by 23 January 2023, on the effects of the mechanism on markets and security of supply.
The commission will then propose amendments to exclude regional hubs, if they would negatively impact the mechanism’s functioning, no later than 31 March.
ADOPTION
The mechanism was passed using qualified majority voting, with only one country voting against adopting the proposal at the final stage, Simson said.
The method requires at least 15 of 27 EU countries to vote in favour, and for those countries to represent 65% of the EU’s population.
INITIAL REACTION
The Intercontinental Exchange (ICE) has said it could relocate operations from the Netherlands to a jurisdiction outside the EU, and reiterated its concerns that a TTF price cap could destabilise the market and risk financial stability.
“We are reviewing the details of the announced market correction mechanism, its technical feasibility, the impact on financial stability, and whether ICE can continue to operate fair and orderly markets for TTF from the Netherlands as per our European regulatory obligations,” the exchange said in a statement.
“This will involve undertaking technical due diligence, engagement with the market, fulfilling governance and regulatory obligations, as well as considering our options.
“This will take time. In the meantime, ICE TTF markets will continue to be open for trading as usual.”
ICIS gas pricing methodology unaffected by price cap
By Jamie Stewart 19-Dec-22 19:30 LONDON (ICIS)–The stated aim of ICIS gas price assessments is to provide a reliable and accurate measure of physical market value, as specified in the ESGM methodology .
The wholesale gas price cap, or market correction mechanism, confirmed on 19 December by the European Commission, is a temporary measure that may be applied only to a limited number of TTF derivative futures traded and cleared on an exchange, and only if strict criteria are met.
In the event of the cap being triggered, ICIS will continue to reflect physical market value by taking into account over-the-counter (OTC) transactions unaffected by the price cap. This means the ICIS approach to assessing the TTF forward curve will not change.
Heren Indices, as per our methodology, only include OTC transactions and will also be unaffected by any price cap.
LATEST NEWS AND ANALYSIS
ICE relocation reports shake markets as price cap talks continue
By Aura Sabadus 16-Dec-22 18:08 LONDON (ICIS)–A decision to adopt a cap on the European benchmark TTF price would trigger an earthquake across markets, leading to a breakdown in liquidity, the relocation of operators and rocketing margin calls, traders told ICIS,
As the issue is set to be discussed by another Energy Council on 19 December, traders are concerned the Intercontinental Exchange (ICE), where TTF products are traded, could relocate operations from the Netherlands to a jurisdiction outside the EU if the cap on the derivatives price is approved. ICE did not rule out such a possibility in its response to ICIS.
The outcome of the discussions will depend on France, which may accept to reject the cap, several traders told ICIS. At stake is a whether a request by France to have pink hydrogen, or hydrogen generated using nuclear capacity, is accepted as green technology.
Additional reporting by Daniela Miccoli.
EU energy price caps – Short-term gain, long-term pain
Aura Sabadus 21-Nov-2022 ICIS (LONDON)–EU leaders are pushing for a cap on ‘excessive and volatile’ gas prices to shield consumers ahead of winter. Although details are starting to emerge, it is still unclear whether a cap will be implemented and, if so, exactly how.
Whilst serving a clear purpose as a palatable solution to extreme price increases for many, price caps can and do have unintended negative consequences. They can increase demand precisely at the time when prices should be signalling that consumers use less. They can turn the distribution of a commodity, from a place of excess supply to one of high demand, from a simple operation to a highly inefficient, expensive and complex one. And they generally have to be paid for in the future, passing on costs that still have to be borne another day and denting long-term economic growth.
This paper reviews the risks and shows how market interventions lifted gas demand at a time when it should have been reduced in Spain, affected domestic gas production in Romania and led to significant economic imbalances in Turkey.
PODCAST: High gas prices, shortages here to stay, Europe chemicals must adapt
Will Beacham 29-Nov-2022 BARCELONA (ICIS)–Europe gas prices will remain high and shortages will persist for 2-3 years with major risks for winter 2023, according to a scenario analysis by ICIS.
- Winter 2023 supply risk more severe than this winter
- Mild weather gives false sense of security over gas supplies, prices
- Europe will have to maintain existing demand cuts throughout 2023
- Worse supply threat for peak demand winter 2023 than this year
- China revival would threaten Europe liquefied natural gas (LNG) supplies
- Europe receives +50 bcm LNG, -63 bcm Russian gas January-October 2022 year-on-year
- Planned projects for 2023 could add 16 bcm to Europe LNG supply
- More LNG investment needed to fully replace Russian gas
- Gas prices forecast to remain above €100/MWh for 2-3 years
- Long-term Germany loses cheap Russian gas, exposed to global prices
- Brenntag’s proposed merger with Univar highlights change in chemical distribution
In this Think Tank podcast, Will Beacham interviews ICIS gas analyst Paula Di Mattia, ICIS insight editor Nigel Davis, and Paul Hodges, chairman of New Normal Consulting.
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TOPIC PAGE: EU market intervention in Europe's energy crisis - ICIS
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