24 Jan 2023 5:38 pm
According to experts, the gas price cap will have an impact on market stability. While undecided as to whether the impact will be positive or negative, they warn market participants’ behavior will change.
The new EU gas market correction mechanism, the price cap, which comes into effect next month, is likely to affect the functioning of gas exchanges in the Union, European Union financial and energy market regulators said in a report on Monday.
According to the European Securities and Markets Authority (ESMA), market participants could change their behavior to avoid the activation of the mechanism or to adapt to it. This is what ESMA says:
“Because the mechanism constrains the regulated markets’ central price discovery function, it will impact the trading behavior of market participants and may affect the ability of all market participants to effectively manage their risks.”
Traders could then be forced to switch to contracts and marketplaces that are not affected by the price cap.
“Such adjustments could be achieved through various means, notably by moving trading to over-the-counter (OTC) or trading venues outside the EU,” it said. The cap does not apply to over-the-counter trading. The agency warned that this could trigger “significant and abrupt changes in the general market environment” that could affect the “orderly functioning of markets and ultimately financial stability”. At the same time, the EU agency underlined that this could also reduce existing interest and undermine liquidity in the regulated markets for the EU benchmark gas contracts TTF.
The EU Agency for the Cooperation of Energy Regulators (ACER) echoed this view in a separate report, warning that the measure could lead to a shift in trading volume from the EU to external gas exchanges. ACER also indicated that the mechanism could jeopardize energy supplies if the price level introduced by the activated cap reduces the attractiveness of EU markets for global LNG suppliers. The EU agency further explained:
“The mechanism could reduce the level of market-based gas flows between the different market areas of the EU, leading to a less integrated internal gas market.”
EU countries agreed in December 2022 to set a price cap for natural gas to prevent energy costs from rising. The price cap is to take effect if spot prices at the Dutch TTF gas hub exceed the mark of 180 euros per megawatt hour (196 US dollars) for three consecutive days.
The mechanism is scheduled to go into effect on February 15. The measure was introduced to avoid price explosions like the recent one in August 2022, when EU natural gas prices hit an all-time high of 345 euros ($375) per megawatt-hour amid concerns over Russian energy supplies.
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