ICE to set up London gas contract as ‘insurance’ against EU price cap

Intercontinental Exchange has unveiled plans to launch a London natural gas benchmark after warning the upcoming EU price cap could disrupt trading on its main hub in continental Europe.

The exchanges operator said on Friday it will debut the London-based gas contract on February 20, five days after the controversial EU cap comes into force.

The move comes after ICE warned last year that energy traders would have to stump up billions of dollars in extra margin payments when the cap comes into place. EU energy ministers agreed on the price limit on the derivatives price of gas traded in Amsterdam before Christmas, at a time when the bloc was reeling from a historic surge in energy costs.

“ICE’s purpose is to create markets to allow our customers to manage their risk and we have a duty to our customers to provide solutions to the problems they face,” said Trabue Bland, senior vice-president of futures exchanges at ICE.

The continental European market, known as the Dutch Title Transfer Facility (TTF), is the region’s main centre for trading and setting the price of gas, but became a totemic issue as politicians tried to find ways to insulate consumers from a repeat of soaring energy prices.

Bland said the exchange would aim to preserve the market structure as best as possible while it implements the cap on TTF in Amsterdam.

“Simultaneously, we are preparing an alternative venue in London to act as an insurance option for customers if the [cap] prevents them from trading and adequately managing their risk exposure,” he added. ICE said that gas traded in London would still ultimately be delivered to the existing Dutch facility.

EU ministers settled on a cap of €180 per megawatt hour on prices of wholesale gas, which will only come into action when prices hit that level for three consecutive days. Prices must also be €35/MWh above an average of global liquefied natural gas prices for three days in order for the cap to be triggered. It will cover gas trades for one month, three months and one year ahead.

Prices of gas in Europe spiked to record levels last summer after the market struggled to price the impact of Russia’s invasion of Ukraine and scorching temperatures. Several large energy companies were forced to seek billions of euros from their governments in emergency funds.

Brussels has said it could consider including off-exchange trades within the scope of the cap at a later date, but several analysts have warned this would be nearly impossible to police.

Henning Gloystein, director of energy, climate and resources at Eurasia Group, said that creating a shadow exchange was an “obvious” move for ICE as a “price cap is inherently against the DNA of an exchange”.

But, he added, the new contract could struggle to attract sufficient trading volumes and it risked a further rush of traders into the unregulated over-the-counter market. “You can’t just move an exchange and ignore the physical reality of where you trade.”

Several EU lawmakers have said that they are hopeful that, with gas prices now lower than they were before the start of the war in Ukraine, the price cap will never have to be used. TTF traded at €53.13/MWH on Friday.

The EU’s gas storage is currently about 74 per cent full, according to Gas Infrastructure Europe, unusually high for the time of year due to the warmer weather.