Introduction

With the recent energy price volatility experienced across Europe, the European Union has taken dramatic steps to protect its markets and citizens from these effects and to safeguard future supply. In this article, we will explore the proposed solutions laid out by the EU to reduce the volatility of gas contracts at the TTF Hub, as well as their expected benefit for European consumers and the potential drawbacks for the wider gas market.

Background

Energy prices across Europe fluctuated wildly because of the Russian invasion of Ukraine which saw Russian gas flows first reduce from 39.7% in 2021 of EU imports to 22.9% in Q2 2022 and then cut off, a tight global market for LNG and a large and extended series of French Nuclear power outages.

The European Union agreed on a set of temporary Gas Market interventions, to help rein in extreme energy price volatility experienced over the prior 24 months across Gas Contracts at the TTF Hub. These measures focused on three key areas:

1. Joint Gas Buying.
2. A New LNG Price Index.
3. An Intraday Trading Circuit Breaker.

These gas market correction mechanisms will apply for one year from February 15^th and apply for a period of 1 year.

Interventions

1. The joint buying plan aims to stop EU companies from outbidding each other for at least a portion of their required gas supplies and to focus attention on filling gas storage facilities for winter 2023/2024. The plan would require companies to pool gas demand equal to 15% of their storage obligations next winter and seek suppliers through the new EU energy platform.

2. The new LNG price index plan aims to give buyers a stable and predictable alternative to the TTF price benchmark for pricing LNG contracts. EU energy agency ACER had to start publishing a daily LNG price assessment based on actual trading data for all LNG imports to Europe within two weeks of the new interventions becoming binding. The first published LNG gas price assessment for NWE was 56.77€/MWH. The publication was delayed due to insufficient uptake from market participants.

3. The Intraday Trading Circuit Breaker would see the TTF market be capped based on the average market price for a set number of days, rather than the current spot price, which may have spiked.

Triggers

The Market Intervention Mechanisms will be automatically triggered if two key conditions are met:

• (Price) 1-month FWD TTF Settlement price is > 180€/MWh for 3 days.

• (Spread) TTF Price is 35€ > LNG reference price during the last 3 days.

Once triggered, it will remain in place for at least 20 working days. It will also apply to all EU gas-trading hubs, with a possibility to opt out later.

Analysis of Measures

The hope is that suppliers and consumers would voluntarily start using this as a reference price in their contracts and that once established it could be used to hedge LNG prices and other gas prices through derivative contracts. However, the plans have split member states, along a North-South axis, with southern and eastern countries largely in favour of measures to curb unprecedentedly high prices.

If the cap had been introduced at the start of this year, it would have been used on more than 40 days in August and September

While intended to help Europe cope with the energy crisis it may have the inverse effect and lead to a series of unintended consequences with knock-on effects.

1. Inefficient Price Signals

Without any countermeasures to actively react to any unintended consequences of a TTF price, it is likely that the market will not provide efficient price signals that would encourage users to reduce their gas demand and incentivise producers to increase supply.

2. A shift to OTC.

The proposed cap only applies to TTF contracts with specific maturities, including the Front month contract. The cap doesn’t extend to OTC trading, carried out by brokers. This would mean that at higher prices trades could still happen in all other TTF markets, and all contracts traded OTC and in the spot market.

3. Reduced Liquidity

An inevitable consequence of implementing market interventions is that they create unintended consequences for the behaviour of market prices as they near a cap. It is hard to quantify the effect as each market participant will hold individual expectations of trading strategies and expectations of other market participants’ reactions.

4. Long-Term Gas Market Effects.

The overarching view of the EU along with many western nations is the phase-out of fossil fuel reliance and technology.  Any intervention that leads to or potentially signals lower liquidity and less efficient price signals could have spillover effects for investment signals for renewables and low-carbon investments.

Conclusion

The risk of unintended consequences and the proposals will do nothing to ease Europe’s supply crises. Instead, the rushed-through laws could exacerbate the current liquidity crises in wholesale markets, create financial instability and drive companies away from Europe. With a limit to what contracts are capped, there is the potential that if the cap was to be triggered, we would not actually see a cap in wholesale gas prices as contracts with similar characteristics could be traded OTC.

With current price levels on the retreat from 338€/Mwh in August 2022 to 53€/MWh in Mid-February 2023, gas levels in storage across Europe currently stand at over 50% full compared to 26% for the same period last year. We may not see the measures activated, but the knowledge that the market has fundamentally changed the rules of engagement will leave a subconscious bias on those who choose to participate.

ICE, which hosts the benchmark Dutch contract, said it is reviewing the details of the EU plan to assess whether it can continue to operate fair and orderly markets for TTF from the Netherlands as per our European regulatory obligations. The exchange previously voiced concerns about the destabilizing impact a cap would have on the market, but it said trading will continue to operate as usual.

Article written by John O’Brien.

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  REMIT is the Regulation (EU) 1227/2011 on wholesale energy market integrity and transparency which introduces a sector specific (power and gas) monitoring framework to detect and prevent market abuse and insider dealing. The Agency for the Cooperation of Energy Regulators (ACER), in cooperation with the National Regulatory Authorities (NRAs), has been charged with the task of monitoring the Markets. To date, REMIT has seen the registration of more than 7,000 Market Participants (MPs), the recognition of 68 Organised Market Places (OMPs), the approval of 65 Registered Reporting Mechanisms (RRMs), the reporting of more than 1 million data records and the publication of more than 600 pages of guidance. All this with the second phase yet to come into effect in just few weeks, on the 7th of April. REMIT reporting can be broken down into three data requirements: Transaction Data, Fundamental Data and Inside Information. The party responsible for ensuring reporting is fulfilled correctly and in a timely manner (deadline is the following working day for most of the contracts) depends on the type of data. The first phase of REMIT transaction reporting put the onus on the OMPs since it required the reporting of transactions concluded on such. The second phase of REMIT focuses on transactions concluded outside an OMP and Market Participants and TSOs are the protagonists this time. For power Transportation Contracts, primary explicit capacity allocation contracts and resales will be reported by the TSO. Transfers of contracts won’t be reported by the TSO and Market Participants will be required to find a way to ensure this data reaches the Agency. Some interconnectors’ operators haven’t required any action from the Market Participants, while others have requested a Data Reporting Agreement to be signed. EFETnet was the clear winner in Phase 1 since it managed to get all the brokers aligned to forward their trade data to them and offered the service to Market Participants for free; and it looks like for Phase 2 EFETnet has taken the lead again. Last week, EFETnet made two significant announcements. Firstly, it announced the launch of ‘eRR External Agent’ functionality, which will allow Market Participants to report on behalf of a third party free of charge. That is something unexpected but more than welcome since it will bring greater flexibility to the market in order to fulfil REMIT reporting obligations. It is a reality that the Agency has struggled to cope with the volume of applications submitted to become a RRM (out of 900 applications submitted, less than 70 have been approved). The Agency recently announced its plans to prioritise Third Party RRMs, TSOs, SSOs and LSOs, but not individual self-reporting Market Participants (MPs). This ‘eRR External Agent’ functionality will be of special benefit to small players for which executing the reporting obligation themselves would impose an uneconomical burden; potentially when executing bilateral trades outside an OMP, one counterparty could delegate the reporting on the other. Secondly, EFETnet achieved full ACER certification for the reporting of transactions under REMIT Phase 2, which will allow them to cover all aspect of reporting by trading organisations and storage operators. Not many RRMs have achieved this. REMIT phase 2 is looming now but there are still some unknowns, especially around Tables 3 (secondary market resale and transfer of long term transmission rights in electricity) and 4 (secondary capacity allocations for gas). We recommend Market Participants to monitor the REMIT website closely. For further information please refer to the 11th Public Workshop on REMIT Implementation (http://www.acer.europa.eu/Events/11th-Public-Workshop-on-REMIT-implementation/Documents/Presentations.pdf)

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