EC proposes TTF month-ahead gas price ceiling of Eur275/MWh

The European Commission on Nov. 22 proposed a price ceiling of Eur275/MWh for the TTF month-ahead contract as part of a market correction mechanism to offset the risk of excessively high prices.

EU energy ministers are due to meet on Nov. 24 for an emergency summit to discuss the EC's proposals and other measures to offset high prices, including the development of an alternative LNG benchmark price.

The new market correction mechanism would be triggered automatically when two conditions are met, the EC said in a statement.

They are that the front-month TTF settlement price exceeds Eur275/MWh for two weeks and that TTF prices are Eur58/MWh higher than an LNG reference price for 10 consecutive trading days within the two weeks.

The TTF month-ahead price hit a record high of Eur319.98/MWh on Aug. 26, according to Platts price assessments by S&P Global Commodity Insights. That is almost Eur45/MWh higher than the proposed price ceiling.

Prices have weakened in recent months on high storage levels, mild weather and demand curtailments, but prices are still historically high, with Platts assessing the TTF month-ahead price on Nov. 21 at Eur114.23/MWh.

The EU's energy commissioner Kadri Simson said that while EU gas prices had fallen since August, Europe was still missing a way to prevent and address episodes of "excessively high prices."

"Today, we propose to put a ceiling on the TTF gas price to protect our people and businesses from extreme price hikes," Simson said.

"The mechanism is carefully designed to be effective, while not jeopardizing our security of supply, the functioning of EU energy markets and financial stability."

Correction mechanism

The EC said that when the two conditions were met triggering the market correction mechanism, EU regulator group ACER would immediately publish a market correction notice in the EU's Official Journal.

It would also inform the EC, the European Securities and Markets Authority and the European Central Bank.

The following day, the price correction mechanism would enter into force and orders for front-month TTF derivatives exceeding the safety price ceiling would not be accepted, the EC said.

The mechanism can be activated as of Jan. 1, 2023.

There has been some uncertainty over what the LNG reference price might be, though the proposed regulation mentions a daily average of the price of the Platts Mediterranean LNG Marker and Northwest European LNG Marker.

TTF front-month prices have been at a premium over the Platts-assessed NWE DES LNG price since the start of 2022, with the spread last assessed Nov. 21 at $9.75/MMBtu.

The premium soared to $29.55/MMBtu on Oct. 3, which would be above the Eur58/MWh cap proposed by the EC, which roughly converts into $17/MMBtu assuming parity euro/dollar parity.

Daily assessments between mid-August and mid-October of the TTF versus the NWE DES LNG marker would have fallen within the scope.

An Italy-based trader said the cap appeared to apply only to cleared transactions, with over-the-counter trade excluded. "So basically they are adding an extra problem -- credit -- instead of solving one."

Regulatory safeguards

The EC stressed that the proposed new regulation contained safeguards to avoid disruption to the energy and financial markets.

"To help avoid security of supply problems, the price ceiling is limited to only one futures product -- the TTF month-ahead -- so that market operators will still be able to meet demand requests and procure gas on the spot market and over-the-counter," it said.

"To ensure gas demand does not increase, the proposal requires member states to notify within two weeks from the activation of the mechanism which measures they have taken to reduce gas and electricity consumption."

The EC said that once the proposal is adopted by member states, it would also propose to declare an EU-alert, triggering mandatory gas savings to ensure demand reduction.

To react to possible unintended negative consequences of the price limit, the proposal foresees that the mechanism can be suspended immediately at any time, it added.

There is also a possibility for the EC to prevent the activation of the mechanism in case relevant authorities, including the ECB, warn of such risks materializing.

In essence, however, the EC said the new mechanism was needed given the unprecedented price peaks across the EU following the Russian invasion of Ukraine and "weaponization" of energy supplies.

"The extreme price spike over almost two weeks in August was highly damaging for the European economy, with contagion effects on electricity prices and an increase in overall inflation," it said.

"The EC is proposing to prevent the repetition of such episodes with a temporary and well-targeted instrument to automatically intervene on the gas markets in case of extreme gas price hikes."