(Bloomberg) -- Europe’s leading energy exchanges warned that a planned cap on natural gas prices poses a serious threat to the region’s security of supply and financial stability, and will do little to achieve its goal of lowering energy costs.
The European Commission’s plan to propose a limit on benchmark gas prices this week will have “potentially irrevocable negative effects” on the functioning of the region’s energy markets lasting well beyond the current crisis, the Association of European Energy Exchanges wrote in joint letter. The commission hasn’t yet unveiled the exact parameters for the last-resort mechanism.
Currently, the gas cap outline fails to take into account the risk of pushing participants from exchanges to the private, over-the-counter market, where there’s less price transparency and a higher risk of default, said the association known as Europex. The mechanism is likely to “significantly” increase the collateral, or margin, requirements, it said, a situation that severely reduced liquidity during the height of the energy crisis.
One limit will be triggered when month-ahead futures on the Dutch Title Transfer Facility gas trading hub are above a certain level for a yet-to-be-defined number of weeks. When the market correction mechanism is activated, orders for front-month TTF derivatives with prices above the pre-defined level wouldn’t be allowed to be executed.
“We are concerned that this proposal has the opposite effect and would lead to a deterioration of security of supply,” Tobias Paulun, the chief strategy officer at the European Energy Exchange AG, said in an interview. “No matter whether it’s a hard or soft one -- a cap restricts the ability of market participants to enter into a transaction at the price that they both would be willing to accept.”
No Security
Traders and utilities may decide not to hedge their production or consumption in the TTF front-month contract, and instead balance their positions by trading in the spot market, Europex said. This would put considerable pressure on spot prices, with no certainty that it would leave security of supply unaffected.
As well as the threat of reduced liquidity, exchanges stand to lose revenue if traders move to OTC markets. Trading in Dutch gas futures on Intercontinental Exchange Inc. has declined over the past year as the energy crisis deepened.
The EU promised safeguards to ensure the temporary instrument can be quickly suspended if it becomes a risk to the security of supply. However, such a measure would never be quick enough to prevent these risks, Paulun said.
EEX, a member of Europex, proposes other measures to rein in high gas prices, such as liquidity support programs or state-backed guarantees to secure collateral requirements, or even direct support for consumers.
The EU’s executive plans to propose a regulation to limit gas prices before a key meeting of energy ministers on Nov. 24 as a majority of member states urge more action to rein in soaring prices of the fuel.