The regulator responsible for building a planned new EU benchmark for imported gas has admitted that implementing the ambitious project will be difficult.
Acer, the EU’s energy regulator, joined traders and analysts casting doubt on a plan from Brussels for a new regional standard that would more accurately track the price of liquefied natural gas shipped into the bloc.
The European Commission wants to create an alternative to the benchmark established by the Dutch-based Title Transfer Facility run by the US Intercontinental Exchange. Trades on this virtual hub for European gas buyers underpin the region’s benchmark, which has been volatile this year.
Dwindling Russian supplies have dampened inflation and threaten to drag down the eurozone economy. The war in Ukraine and Europe’s record summer temperatures pushed TTF prices to €349 per megawatt hour in late August, although prices have fallen to around €100 MWh in recent days.
But the Commission says TTF does not truly reflect supply and demand in international gas markets. In proposals published last month, it proposed a “more representative” alternative that included the extra LNG being sent into the bloc to help replace the 155bn cubic meters it previously received via pipelines from Russia.
Unlike TTF, which is based entirely on real transactions, its price would be assessed by an administrator. “The new benchmark will provide for stable and predictable pricing for LNG,” the Commission said last week. It would work “by collecting real-time information on all daily LNG transactions”.
But Acer, tasked with creating the new benchmark, admits it is difficult because many LNG deals are customized and privately negotiated. That means data from LNG contracts is more difficult to monitor and quantify than spot market prices for piped gas, according to the regulator.
“We are analyzing all kinds of possibilities to come up with methodologies,” said Iztok Zlatar, head of Acer’s market data analytics. He added that the creation of the new benchmark was outside the scope of Acer’s normal terms of reference and was an “operationally demanding task”.
“It’s quite a task [and] so far we have not been given any additional resources for this activity. It’s quite an undertaking,” he said.
He added that Acer “can’t say” whether the market would accept the new benchmark. “It depends on the LNG market as it develops in Europe.”
Traders and analysts say TTF reflects the reality of buying and selling gas on the open market.
“The physical LNG market is extremely illiquid; you’re lucky if you have a handful of trades in a week,” said Neil Fleming, head of global pricing and analysis at data company Argus.
“In contrast, there are thousands of trades per day in TTF. There is nothing structural to suggest that a new LNG benchmark is cheaper or better for pricing gas,” he said.
Even then, industry benchmarks and the futures contracts that are pegged to them usually take years to attract the depth and reliability that make them indispensable to the market.
Acer can only start collecting data after the proposal has been approved by the 27 EU member states, which will not happen until November 24. Despite this, preparatory work has already begun, given the tight deadline set by the Commission for the new benchmark to be in place. by March 31st.
However, the energy industry is concerned that a new pricing measure would fragment already fragile liquidity and do little to address the underlying issues of tight supply and rising demand that have forced record price increases .
The price of TTF has differed from spot LNG this year as the ability to hold and process the coolant changes.
“In such a thin market, you don’t want to share more liquidity by creating a new benchmark,” said James Waddell, head of European gas and global LNG at Energy Aspects. “It’s not clear what the purpose of that would be.”
Adding to the complexity, there is no single LNG price. ICE said last week it would launch two new LNG contracts to help users hedge the price difference in north-west and south-west Europe. The two regions have different infrastructure to handle LNG, and the northern price was $1.73 higher, at $18.562 per million British thermal units, on Thursday.
“The development of a complementary LNG benchmark has been proposed but it remains to be seen whether it is actually a solution,” said Ben Wetherall, director of energy market development at research company ICIS.