Market ponders EU price cap basket

Market: Natural gas
21/12/22

Questions still remain after the publication of the final text of the EU's proposed gas price cap regulation, which was agreed by the European Council on Monday.

The so-called market correction mechanism caps TTF front-month, three-month ahead and year-ahead transactions on exchanges if the front-month TTF contract on the Ice Endex exchange settles at above €180/MWh for three working days, and is also €35/MWh above a reference price basket.

Once the mechanism is activated, month-ahead, three-month ahead and year-ahead transactions at all EU gas hubs will not be allowed to go above a "dynamic bidding limit" set €35/MWh above the reference price basket.

If the reference price basket falls below €145/MWh, the bidding limit remains at €180/MWh. The mechanism will remain active for at least 20 working days, after which it is automatically deactivated if the reference price is below €145/MWh for at least three working days.

The basket is the average of:

The average of Argus' Northwest Europe des half-month 2 assessment and Platts Daily Spot Northwest Europe Marker
The average of Argus' Iberian peninsula des half-month 2, Italy des half-month 2 and Greece des half-month 2 assessments and of Platts' Daily Spot Mediterranean Marker
The average of Argus Northeast Asia des half-month 2 and Platts' JKM half-month
The front-month NBP contract settlement on the ICE exchange
Acer's daily LNG price assessment

Prices are converted from US dollars or pounds sterling into euros using the European Central Bank's official exchange rates, while the energy conversion is 29.3071 kilowatt hours per therm.

Uncertainty persists

Market participants still have questions about how the regulation will be applied, and how it will interact with other initiatives intended to address Europe's energy crisis.

The ICE and EEX, which both opposed the proposal to cap prices, are studying the regulation and have yet to offer detailed comments.

Market participants have questioned whether futures trade could migrate to exchange venues outside the EU so as to avoid the correction mechanism. And there are also unresolved questions about how the cap might affect trade in options and in structured products, which are frequently used as hedging tools.

Traders have also questioned the role of Acer's assessment of the price of LNG delivered to Europe, which is still under development. The assessment is only one component of the reference basket, whose price Acer will publish every night. But the commission has also proposed that Acer's assessment should set the price of transactions on its joint purchasing platform, raising the prospect that the official numbers used on the purchasing platform and in the market correction mechanism could diverge — potentially substantially, if NBP prices disconnect from continental European gas prices as they did over the summer.

By Rachael Frost and Matt Drinkwater

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