The EU's new gas market correction mechanism has "significant drawbacks that need thorough assessment" given the risk that the tool could lead to adverse impacts on price and gas flows, European trader association EFET said Jan. 26.
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EU energy ministers agreed on the market correction mechanism Dec. 19 after several rounds of talks, with the new regulation formally adopted Dec. 22. The mechanism comes into effect on Feb. 15.
As part of EU efforts to track the impact of the mechanism, the European Securities and Markets Authority (ESMA) and regulatory body ACER were tasked with producing preliminary reports on its impact to date by Jan. 23.
Both agencies concluded in separate reports Jan. 23 that no "significant" impacts had been identified since the mechanism was adopted last month, but it could have an impact on financial and energy markets in the future.
Responding to the reports, EFET said the mechanism could have serious market implications.
"We agree that supply shortages and physical constraints are the key reasons for high energy prices that cannot be fixed by mechanism or any other form of a market cap," EFET said.
"Risks of the market correction mechanism include adverse impact on prices, gas flows, clearing and the reduced ability to trade," it said.
Both ESMA and ACER said in their reports that there could be a shift to more over-the-counter trading, which was likely to further lower open interest and ultimately reduce available liquidity on regulated markets for TTF contracts.
There has been opposition to the mechanism also from exchange operators ICE and EEX, while analysts have also questioned its effectiveness.
Hans van Cleef, head of energy and climate research at PZ Energy Research and Strategy (PZ ERS), said Jan. 26 that the price cap was "no solution."
"They're trying to fix something that wasn't broken," van Cleef said during an industry webinar organized by the International Energy Forum (IEF).
Van Cleef said the problem was the scarcity of gas, and the new tool was "trying to fight something that is not a problem."
The mechanism, he said, comes with a risk of lower liquidity and higher volatility. "It also pushes people away to more OTC trading," he said.
Price levels
For the mechanism to be triggered, the TTF month-ahead price would need 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 TTF month-ahead price at an all-time high of Eur319.98/MWh on Aug. 26.
Prices have weakened since on the back of healthy storage and demand curtailments, with Platts assessing the TTF month-ahead price on Jan. 26 at Eur54.18/MWh.
This -- and the fact that LNG prices have also moved closer to the TTF price -- has reduced the likelihood that the cap will be triggered.
Analysts at S&P Global Commodity Insights have pointed out that the mechanism represents a cap on the premium of European hub gas prices above LNG prices, which effectively allows for the pass-through of the cost of LNG.
New LNG import terminals in Germany and the Netherlands will likely temper any gas hub premium above LNG prices.
Europe has looked increasingly to LNG to offset sharply lower Russian gas imports, with a number of countries moving to develop floating LNG import infrastructure, including two FSRUs in the Netherlands and no less than six in Germany.
LNG imports into Europe have also been strong, with supplies rising again at the end of 2022. This, coupled with mild weather, has helped keep European gas prices down.
Saad Rahim, Chief Economist at trader Trafigura, said Jan. 26 that gas demand curtailments and the weather had helped Europe through the current winter.
Speaking during the IEF webinar, Rahim said, however, that there had been a structural under-investment in new production capacity.
This, he said, had meant there was a lack of "reliable and realistic" alternatives to Russian gas, leading to no buffer in the European gas system.
Van Cleef said Europe had been lucky that the winter had been mild so far, with gas stocks still healthy for the time of year.
"When winter is over in April, we'll be at 50% or higher, depending on how February will be," he said.
"Luck is the key word so far," he said, adding that price spikes in 2023 were less likely than those seen in 2022.
Price spikes last year were driven in part, he said, by decisions in Europe to buy gas "at any cost" to make sure storage sites were filled ahead of winter. "For sure, we won't return to the price spikes we saw last year," he said.