EU Gas Price Control Scheme Had No Market Impact, Say Reviews

A one-year European Union mechanism to reign in natural gas prices had no observable market impact since being adopted December, the two agencies tasked with assessment reported separately on Monday, indicating however the industry may yet to feel the need to adjust.

The Market Correction Mechanism (MCM) caps natural gas prices “when front-month TTF derivative settlement prices reach a pre-defined exceptionally high level, so as to ensure that the MCM corrects market deficiencies and does not significantly interfere with demand and supply and normal price setting”, the regulation adopted December 22 stated.

The MCM threshold is when the front-month TTF derivative settlement price on ICE Endex BV exceeds $199 (EUR180) per megawatt-hours (MWh) for three working days and stands $39 (EUR35) higher than the reference price set by the EU Agency for the Cooperation of Energy Regulators (ACER) based on the three days.

The MCM took effect February 1 and lasts till yearend 2023.

The ACER concluded in its evaluation covering the period from the week of the adoption of the MCM to the end of February that market dynamics continued to dictate prices.

“Gas prices have continued to fall further from the end of January 2023 (following the publication of the preliminary report) and remain significantly lower compared to the months prior to the adoption of the MCM Regulation”, it wrote. “ACER links the fall of prices to the favorable gas market fundamentals (e.g. warmer weather, continued reduction of gas consumption, above average LNG supply, above average gas in storage, etc.) during the last months of 2022 and the first months of 2023”.

Front-month TTF gas prices stood above 180 EUR/MWh for several weeks during the 2022 summer and peaked in August, during the gas storage filling season. But gas prices have stayed below the MCM threshold since September, it noted.

“For example, between end-December 2022 and midFebruary 2023 front-month TTF prices have dropped by circa 50% to current levels of around 50 EUR/MWh”, the ACER said.

The agency also observed no demand increase attributable to the MCM during the 10-week review period, December 20 to February 28. “On the contrary, gas demand has kept decreasing consistently, here assisted by milder and windier winter weather. Therefore, despite lower prices perhaps suggesting otherwise, demand reductions have remained in line with Member States’ gas saving objectives”, the ACER said.

EU gas consumption dipped 17.6 percent from December 20 to February 21 against the same period a year ago, it noted.

Meanwhile the European Securities and Markets Authority (ESMA), whose analysis focused on MCM impacts on the derivatives market and hedging, similarly concluded “to date no measurable impact of the MCM can be identified”.

Its review period was limited to the first two weeks of the MCM’s effectivity, the first half of February.

“The MCM does not appear to have so far had any significant effect on the prices, trading activity, liquidity and execution of gas trading”, it said. “In a similar fashion and based on the available information, the analysis performed did not result at this stage in the identification of noticeable changes in CCP [central clearing counterparties] risk management or in margin requirements that could be attributed to the MCM”.

The ESMA used trends on the European Energy Exchange and the ICE Futures Europe.

But the MCM did prompt the two exchange platforms to take “measures to facilitate the use of alternative venues for TTF trading outside the MCM”.

The ESMA added: “As of the date of writing, the percentage of trading activity covered by the MCM scope in early 2023 is similar to the one observed in 2022. Therefore, there is no evidence of an arbitrage between maturities covered and maturities not covered by the MCM at this stage”.

However, it said “the absence of a significant impact of the MCM on the trading and clearing environment at this stage should not be understood as the MCM not having any impact. It is entirely possible that some of the potential effects will only unfold once the activation of the MCM is a less remote prospect.

“The closer the settlement price and the spread to the reference get to the thresholds triggering the application of the MCM, the more likely it appears that potential effects materialize”.

The ACER also said of its separate results “one should not infer from this outcome that the MCM might not have any impacts on financial and energy markets or on security of supply in the future”.

The two agencies’ reports affirm their preliminary findings earlier published, which the European Federation of Energy Traders welcomed.

“The main events that may give rise to the MCM being triggered are likely to be infrastructure outages and congestion in LNG importation and onward transportation”, the group said in a statement. “The mechanism was not designed with these in mind and may exacerbate any gas shortages arising”.

To contact the author, email jov.onsat@rigzone.com