Setting a ceiling on the price of European gas would do more harm than good. European Union energy ministers will meet on Monday to try and agree on the cap, which backers believe will prevent gas prices from spiralling out of control.

The reality looks different. Under the latest proposal, the cap may be set at 220 euros per megawatt hour for the most liquid future contracts exchanged at the Dutch Title Transfer Facility, Europe’s gas benchmark. This is well below the 275 euro per MWh ceiling which the European Commission initially proposed. One-month future prices currently trade at 116 euros per MWh.

The level the EU may agree on increases the risk of triggering the cap. Furthermore, capped contracts may be considered more risky, and thus require a larger amount of collateral for gas to be bought and sold. The Intercontinental Exchange, which handles the majority of TTF future contracts, believes the additional cost would be $47 billion.

The biggest risk, however, is that players would simply leave the EU. ICE could move trading to London, while leaving the physical delivery in the Netherlands. It already operates a similar dual arrangement for diesel contracts. Traders could even opt to buy TTF contracts on the Chicago Mercantile Exchange. The EU may still go ahead and impose its cap. But locking the stable door after the horse has bolted would look futile.
Source: Reuters (By Lisa Jucca)