ICE warns of risk to TTF gas market viability if price cap imposed: report

Commodity exchange operator ICE has warned of a risk to the viability of the TTF gas market if the EU goes ahead with a price cap, according to a memo sent to member states seen by the Financial Times Dec. 15.

EU energy ministers are due to meet again on Dec. 19 in an attempt to hammer out an agreement on a market correction mechanism, which would see a cap imposed on the TTF gas price if it exceeded a certain level.

According to the memo, ICE -- which hosts gas trading on its ICE ENDEX exchange -- said that if agreed, the mechanism would be imposed on customers and market infrastructure "with no time for resilient testing and thorough risk management."

"It is the responsibility of ICE as the market operator to consider all options if this mechanism is agreed, up to and including whether an effective market in the Netherlands is still viable," it said.

ICE had no immediate additional comment when contacted by S&P Global Commodity Insights Dec. 15 and could not be reached for comment Dec. 16.

The European Commission could not be reached for comment Dec. 16.

European energy trader association EFET has also questioned the effectiveness of a price cap. "A price cap risks increasing demand, reducing supply and reopening contracts," EFET said in a Dec. 2 position paper.

It said that Europe could struggle to attract supply if a capped price was below the global price. "A cap weakens our negotiating hand, undermines the trust in European gas markets which sellers have relied upon for decades and could weaken our security of supply," it said.

EFET said markets were good at directing gas to where it is most needed, with gas flowing from lower to higher priced areas. "If prices are at a cap, this signal disappears," it said.

It added that price caps had been attempted in other sectors of the economy and that history suggested the presence of a cap could have a "magnetic" effect.

"The risk and uncertainty it introduces creates an incentive to price at the cap. This is clearly the opposite outcome to that which the policy is intended to achieve and is bad for customers."

EFET said that once the cap exists, behavior will change. "Even if the cap were removed at a later date, the market would not return to what it was before."

No agreement

EU energy ministers failed to reach an agreement on the gas price cap at an emergency council on Dec. 13 in Brussels, with views still differing on the threshold for triggering the market correction mechanism.

The European Commission last month proposed the new mechanism that would trigger a cap on the benchmark TTF month-ahead price if a number of conditions were met.

However, EU energy ministers have now twice failed to agree on the proposals, having already disagreed over the terms of the cap at a summit Nov. 24.

The EC had first proposed a cap of Eur275/MWh on the Dutch TTF month-ahead contract, but this was rejected as being too high and ineffective, leading to a revised cap proposal of Eur220/MWh.

Czech industry minister Jozef Sikela said following the Dec. 13 council that the main outstanding element was the price level that would trigger the mechanism.

Sikela said there had been a number of discussions about the range of where the cap could land, including a final potential range of between Eur160/MWh and Eur220/MWh.

In the end, he said, it was agreed to keep the range open ahead of discussions at the next meeting on Dec. 19.

New package

Sikela said the Czech presidency had proposed a new package at the council Dec. 13 with revised terms for the mechanism that would not include over-the-counter contracts under the cap; include other regional hubs beside the TTF; assess the impact of the mechanism by the end of February; and strengthen the automatic deactivation of the cap.

EU officials have said in recent months the TTF was no longer fit for purpose and did not reflect the new reality in Europe where LNG is a more dominant supply source.

Platts, part of S&P Global Commodity Insights, assessed the Dutch TTF month-ahead price at an all-time high Eur319.98/MWh in late August.

Prices have weakened since on the back of healthy storage and demand curtailments, though they remain historically high with Platts assessing the TTF month-ahead price Dec. 15 at Eur134.68/MWh.

The conditions for a price cap were first proposed by the EC as being that the front-month TTF settlement price had to exceed Eur275/MWh for two weeks and that the TTF price was Eur58/MWh higher than an LNG reference price for 10 consecutive trading days.

The amended proposal included reducing the cap to Eur220/MWh and cutting the duration that the price would have to exceed that level to five trading days.

In addition, the spread between the TTF month-ahead price and the LNG reference price would be only Eur35/MWh, down from Eur58/MWh.

Cap 'safeguards'

EU energy commissioner Kadri Simson also said at the end of November that the EC had introduced safeguards in its price cap proposal to protect against any threat to gas supply security.

"We all know that introducing this kind of ceiling for the first time ever might entail several risks, and we have acknowledged this and reflected this in a set of safeguards," she said.

Simson said that if triggering the market correction mechanism created any issues with security of supply, there was the option to suspend the cap immediately.

Simson also stressed that the market correction mechanism was designed to be temporary. "It is not meant to be an instrument to structurally reduce gas prices to pre-war levels," she said.