EU gas market correction mechanism extension to other hubs comes into force

The EU's gas market correction mechanism now applies to trading hubs other than the Dutch TTF after an implementing act adopted at the end of March came into effect on May 1.

The implementing act adopted March 31 set out the technical details regarding the application of the mechanism to derivatives linked to other virtual trading points in the EU.

Having the mechanism apply to more VTPs than just the TTF provided "an even broader shield from high and volatile gas prices," the European Commission said in March.

The original market correction mechanism came into effect on Feb. 15 after EU energy ministers agreed the new system in December last year in an effort to reduce the risk of new price spikes.

To be triggered, the mechanism requires the TTF month-ahead price to exceed Eur180/MWh for three working days and the month-ahead TTF price to be Eur35/MWh higher than a global LNG reference price at the same time.

Platts, part of S&P Global Commodity Insights, assessed the benchmark Dutch TTF month-ahead price at an all-time high of Eur319.98/MWh on Aug. 26, 2022.

Prices have weakened since on the back of healthy storage levels and demand curtailments, with the TTF month-ahead price currently well below the cap level.

Platts assessed the TTF month-ahead price at Eur38.30/MWh on April 28.

The EC said that extending the mechanism beyond the TTF enhanced protection of the single market by helping to avoid potential "distortions" to Europe's energy and financial markets.

These, it said, could occur as a result of arbitrage in a scenario where the mechanism continued to apply solely to TTF derivatives.

"With this aim in mind, the same activation parameters are maintained and the rules envisage that if/when the market correction mechanism is activated for TTF, it should also be activated at the same moment for the derivatives linked to other hubs," it said.

"It will also set the same bidding limit. This will ensure a more uniform response and avoid distortions in the internal market for gas."

TTF dominance

According to the EC, orders placed for TTF derivatives account for more than 90% of gas derivatives traded on regulated markets in the EU.

Nonetheless, it was decided that given the "volatile and unpredictable" landscape of the EU gas market, it was "imperative" that the mechanism be applied to derivatives linked to the other virtual trading hubs.

The EU energy regulatory body ACER and financial regulator ESMA in March published their assessment of the market correction mechanism to date, including views on extending it to other VTPs.

ACER said it found "valid arguments" for extending the mechanism only to VTPs where the liquidity of gas derivative trading was modest to high.

ESMA said EU gas trading activity in gas derivatives was highly concentrated on the TTF.

The German gas hub (THE), followed by the Austrian (CEGH), French (PEG) and Italian (PSV) hubs collectively represented around 90% of the volumes of non-TTF gas derivatives, ESMA said.

"The trading activity in the remaining gas derivatives linked to other VTPs is marginal," it said.

"ESMA is not convinced of the need, and added value, of extending the mechanism to other VTPs, in particular those with very marginal trading activity."

European energy traders body EFET also questioned the need to extend the mechanism to trading points other than the Dutch TTF, citing the risk of further market distortion.