Europe eyes alternative natural gas benchmark to TTF - report

Quantum Commodity Intelligence - The European Commission has outlined plans to create an alternative gas benchmark, tackle energy companies' liquidity issues and use "circuit breakers" to suspend erratic trading, according to a report published on 14 September.

The Commission was critical of current European gas hub prices, which were viewed as "not truly representative of supply and demand conditions in international gas markets," following several price spikes and subsequent reversals over the past year.

To address what it sees as an unrepresentative price marker, the Commission is working to develop a "complementary transactions-based price benchmark that more accurately reflects the market for gas imports".

Benchmark Dutch TTF futures for Oct22 spiked up to €348/MWh in late August, an oil equivalent of more than $500/barrel, before retreating to under €200/MWh in the second week of September, according to Quantum records.

The potential new price marker would be based on all EU gas imports, including LNG deliveries to European terminals, and would therefore not reflect internal bottlenecks in the EU's pipeline network, the Commission said.

The report said the Commission aims to provide market participants with reference prices for gas imports that could be used instead of hub prices, but without phasing out hub pricing.

As a first step, the Commission will conduct a feasibility assessment on the entity best placed to operate a European platform for all transaction data related to gas deliveries to the EU.

The reporting hub would then establish a "price-weighted benchmark" based on either daily or weekly transaction data.

For the second step, the price-weighted benchmark would be tendered to an authorised EU-based benchmark administrator who would publish it on a daily basis.

The final step would consist of promoting a futures market settling against this new price benchmark in a bid to create the liquidity that would "initially be missing," the Commission said.

Extreme

Current European pricing methodology is based on pipeline gas traded at hubs which, while liquid, can experience sharp swings based on weather or power-plant outages, such as competing nuclear fuel.

An example of extreme price movement came on 6 October last year when TTF December futures surged from €116.50/MWh to a then record of €162.50/MWh before tumbling back to €110/MWh.

Sources told Quantum that alternative benchmark proposals might also study the Asian JKM LNG cargo marker, although JKM is far less liquid than TTF.

In Japan, the government issues a crude oil import price known as the JCC based on aggregated import prices and is also used in some gas import contracts.

However, most industry watchers see JCC as an outmoded form of energy pricing, with JCC representing historical values by the time it is published.

The NYMEX Henry Hub natural gas market is seen as the most liquid and reliable gas benchmark, and while used primarily for pricing domestic US gas, it is also used in some global contracts.

Historically, LNG has primarily priced against the Dated Brent crude oil benchmark, although there has been a move to gas indexing in recent years.

Collateral

The report noted energy firms have had to post increasing amounts of cash collateral to central clearing counterparties (CCP) as margin calls have increased in line with surging prices, resulting in liquidity problems for energy firms, the Commission said.

The Commission has tasked the European Banking Authority (EBA) with assessing bank mechanisms for companies to use collateral to get cash by 29 September.

Esma and the EBA will be invited to look at ways to increase the transparency and predictability of initial margin models, the conditions under which a CCP can call intraday margins. The bodies will also explore whether such intraday calls should be replicated for energy firms, with a view to improving the predictability of margins for non-financial firms.

The Commission has asked Esma to investigate why circuit breakers have yet to be triggered in the energy crisis and to explore whether the rules need to be aligned across the EU.

EU regulation states that trading venues "be able to temporarily halt or constrain trading if there is a significant price movement in a financial instrument on that market or a related market during a short period," requiring all EU trading venues to have circuit breakers in place.