The Consequences of Capping the TTF Price
The President of the European Commission has made a number of statements in recent months on what might be done to limit the impact of high gas prices on EU markets. There is a belief, amongst EU political leaders, that the TTF wholesale gas price is no longer an appropriate benchmark price for EU gas, largely because it is at a higher price than other hubs and also the LNG price into Northwest Europe. The price differentials are due to congestion in the import infrastructure, so a cap on TTF will not resolve these issues, nor is a cap likely to be effective. But the focus of this Comment is to discuss the consequences of a cap on TTF if it were implemented.
The various documents from the European Commission have clearly struggled with the concept of actually capping the TTF price. The latest Communique from the Commission has rowed back somewhat on a comprehensive cap on TTF prices and appears to allow exemptions for the OTC market and wants to protect the derivative market. This does beg the question of whether the price cap could be effectively implemented.
However, if an effective cap could actually be implemented, the consequences, both financial and physical could be severe for the EU gas market. The high level of trading interdependency at TTF and other hubs would likely be severely compromised if the cap was set at levels below the price in the market. Multiple trades might then not be honoured, possibly bringing down the whole market structure at a huge cost. In addition, on the physical side, the most likely outcome of a price cap is that less gas would be delivered to the EU gas market and more gas would remain in storage and would not get withdrawn.
In summary, if a price cap on TTF cannot be effectively implemented then it is a waste of time trying to put one in place, and if it can be effectively implemented, Europe is likely to receive less gas and also precipitate a global financial crisis.