The Gas Target Model (GTM) sets out a vision of a competitive European gas market, comprising entry-exit zones with liquid virtual trading points, where market integration is served by appropriate levels of infrastructure, which is utilised efficiently and enables gas to move freely between market areas to the locations where it is most highly valued by gas market participants (CEER Public Consultation Paper of 22 March 2019).





Gas market

Natural gas is a hydrocarbon gas mixture consisting largely of methane and other hydrocarbons, occurring naturally underground (often in association with petroleum). It is used as a source of energy for heating, cooking, electricity generation, fuel for vehicles and chemical feedstock in the manufacture of plastics and other organic chemicals. Natural gas is usually processed to remove impurities and meet the specifications of marketable natural gas. The resulting by-products include ethane, propane, butanes, pentanes, and higher molecular weight hydrocarbons, hydrogen sulphide, carbon dioxide, water vapour, and sometimes helium and nitrogen.

The fundamentals of the gas markets are based on the supply and demand of gas in Europe. On the supply side, the key drivers are the availability of gas production (especially those from Norway, the Netherlands, Russia, North Africa and Middle East), transportation and storage (pipelines maintenances or outages). On the demand side, the consumption is mainly driven by the weather and heating needs (see ESMA Opinion of 24 June 2021 on position limits on ICE Endex Dutch TTF gas contracts, ESMA70-155-12008).

Market participants negotiating contracts on European gas market can be classified, in particular, as:



See also: 


Hydrogen use in the energy sector


Power-to-gas (P2G) technology

- utilities, which have a gas portfolio (entry/exit capacities, storages capacities, consumption clients) and use the market for optimizing or sourcing;
- industrial consumers, which are essentially buyers in the wholesale market;
- municipalities, which aggregate final consumers and bring their needs to the wholesale market;
- operators (transport system operators, storage system operators, LNG system operators) which enter the system for their own needs or for balancing purposes; and
- trading companies which do not have a shipper or supply agreement in the market (banks, commodities traders, investment firms), etc.

The GTM guides the coherent implementation of European network codes and also specifies the steps required to achieve liquid and dynamic gas markets, thereby enabling all European consumers to benefit from secure gas supplies and effective retail competition.

According to ACER Market Monitoring Report 2019 of 23 September 2020 (Gas Wholesale Market Volume) gas accounts for more than 20% of EU’s energy fnal consumption – more than 30% at industrial level – while EU Internal Gas Market (IGM) yearly purchases are estimated in 100 billion euros. Hence, the gas sector plays a crucial role in the EU energy market "which shall last in spite of the ambitions to decarbonise it in the years to come".

European Commission’s Inception Impact Assessment of 10 February 2021 (Hydrogen and Gas markets Decarbonisation Package Ref. Ares(2021)1159348) estimates that:

  • gaseous fuels accounted for roughly 22% of total EU energy consumption as of 2021 (including around 20% of EU electricity production, and 39% of heat production);
  • according to the relevant scenarios used by the Climate Target Plan Impact Assessment, the share of gaseous fuels to total EU energy consumption in 2050 would be about 20%;
  • biogas, bio-methane, renewable and decarbonised hydrogen as well as synthetic methane would represent some 2/3 of the gaseous fuels in the 2050 energy mix, with fossil gas with CCS/U representing the remainder.


TTF's role


According to the said Report of 23 September 2020 the TTF in the Netherlands and NBP in the UK have kept their place as the two most liquid and competitive trading hubs, accounting in the 2019 for the bulk of forward gas trading activity in Europe (level below were other hubs where spot markets are liquid and competitive but forward liquidity is limited compared to TTF and NBP). Title Transfer Facility or TTF is the Dutch wholesale market for natural gas and a virtual market place operated by Gasunie Transport Services (GTS).

The TTF was established in 2003 to promote the trading of natural gas thereby enhancing the liquidity of the Dutch natural gas market. Since then gas trading on the TTF has increased significantly to around 2,000 terawatt hours (TWh) per month, making the Dutch hub the largest natural gas market in continental Europe. As of July 2021, 157 companies were registered for trading on TTF with 53 active participants. 

“Derivative contracts on gas for the Dutch transmission system are the most liquid gas contracts in Europe. These contracts are not only used for hedging activities in the Netherlands but serve as benchmark contracts for other European gas markets as well. Market participants hedge their activities with TTF contracts even if their underlying businesses have no direct links to the Netherlands. This is mainly due to the fact that the Netherlands are still the most important producer of gas in Europe. A reduction of the domestic gas production has been compensated by increased imports. Furthermore, the Netherlands have well-established interconnection capacities to the neighbouring grids of Belgium, Germany and the UK. As a consequence, a high number of market participants is active in TTF contracts. According to the Herfindahl-Hirschman-Index there is no evidence of a dominant position in the Dutch gas market” (ESMA Opinion of 24 June 2021 on position limits on EEX TTF gas contracts, ESMA70-155-12003).

The TTF's role as the standard pricing proxy on European gas markets has been clearly underlined in the recitals to the Proposal of 19 December 2022 for a Council Regulation establishing a market correction mechanism to protect citizens and the economy against excessively high prices, which reads:

“While derivatives relating to other virtual trading point (VTPs) exist, the Title Transfer Facility (‘TTF’) in the Netherlands is commonly seen as the ‘standard’ pricing proxy on European gas markets. This is because of its typically high liquidity, which is due to several factors, including its geographical location, which allowed the TTF in a pre-war environment to receive natural gas from several sources, including significant volumes from Russia. As such, it is widely used as a reference price in pricing formulas of gas supply contracts, as well as a price basis in hedging / derivatives operations across the Union, including in hubs not directly linked to the TTF. According to market data, the TTF hub accounted for around 80% of natural gas traded in the European Union and the United Kingdom combined in the first eight months of 2022” (Recital 4).

Nevertheless, as of April 2022 market conditions in this regard have changed, and the reflection thereof we can find in Recital 5 of the said document:

"However, the disruptive changes in EU energy markets since February 2022 had an influence on the functioning and effectiveness of the traditional price formation mechanisms in gas wholesale market, notably on the TTF benchmark. Whilst the TTF was a good proxy for gas prices in other regions of Europe in the past, as of April 2022 it has become detached from prices at other hubs and trading places in Europe, as well as from the price assessments made for LNG imports by price reporting agencies. This is largely because the gas system of North- Western Europe presents particular infrastructural limitations both in terms of pipeline transmission (West-East) and in terms of LNG regasification capacity. Such limitations were partly responsible for the general increase of gas prices since the beginning of the crisis in Europe following Russia’s weaponisation of energy. The abnormal spread between the TTF and other regional hubs in August 2022 indicates that, under the current specific market circumstances, the TTF may not be a good proxy of the market situation outside North- Western Europe, where markets are facing infrastructure constraints. During scarcity episodes in the North-Western Europe market, other regional markets outside North-Western Europe may experience more favourable market conditions and are therefore unduly impacted through contract indexation to TTF. Hence, whilst the TTF still accomplishes its objective of balancing supply and demand in North-Western Europe, action is required to limit the effect any abnormal episodes of excessive prices of the TTF have for other regional markets in the EU. Deficits in the price formation, to a lesser extent, may also exist with other hubs".

When it comes to the characteristics of the TTF’s products they are futures contracts that are for physical delivery through the transfer of rights in respect of TTF. Trading will cease, at the close of business, two business days prior to the first calendar day of the delivery month, quarter, season, or calendar. Delivery is made equally each hour throughout the delivery period. The TTF futures contract is available for trading in different amounts of monthly strips, up to eight consecutive years. One futures contract sharing the same Venue Product Code TFM (Dutch TTF Gas Futures) has 107 monthly, 11 quarters, 11 seasons and up to 8 consecutive years listed for trading. ICE also offers trading in options on these futures contracts, also booked as monthly strips. It is worth noting that around 50% of all TTF-gas future contracts is being held until maturity, which results in physical gas delivery (ESMA Opinion of 20 December 2022 on position limits on ICE Endex Dutch TTF Gas contracts, ESMA70-55-12400).


Target model for the European gas market


The main principles that govern the internal European gas market are unbundling, third-party access, non-discrimination, absence of cross-subsidies and a clear separation between regulated network activities and market-based production and supply activities (Market Monitoring Report (Gas Wholesale Market Volume) of 14 July 2021). However, the European regulatory agency ACER in the document of January 2015 formulated some more specific directions for target model for the European gas market - see box below.







European Gas Target Model review and update, ACER, January 2015, p. 14, 42, 43


Gas market vision

It is crucial that the right structural framework exists to allow functioning gas markets to emerge. The European gas market will consist of interconnected entry-exit zones with virtual trading points (virtual hubs). Shippers should be able to trade gas freely within each entry-exit zone, with the size of each zone being as large as the existing infrastructure allows (i.e. such that internal physical congestion does not unduly restrict gas trading within zones). As a general rule, entry-exit zones should not be defined on the basis of national boundaries, but based on physical realities and market needs. Achieving the single gas market requires sufficient interconnection between markets, so the regulatory regime should include mechanisms that allow the market to signal where investment is needed and provide Transmission System Operators (TSOs) with a predictable framework for generating sufficient revenues to cover the costs of infrastructure. Once built, interconnection capacity needs to be easily accessible to shippers on a non-discriminatory basis, and at a transparent and fair price. The capacity offered to the market needs to be maximised and contractual congestion should be mitigated, in order to deter capacity hoarding. Shippers need both long-term and short-term capacity as gas may be traded both long- and short-term. Sufficient and accessible interconnection will promote liquidity in hub-based trading, which in turn will assist with the development of market-based balancing.
In addition, the European gas market will provide Europe-wide principles for running auctions and open season procedures. This will facilitate cross-border, market-based investment procedures for offering incremental and new capacity, as well as common rules to ensure that TSOs operate their businesses and communicate with one another in a manner that does not restrict cross-border gas trading.




Best practice in gas market design


Regulators consider that all wholesale gas markets should ensure the following characteristics are met as a matter of best practice: adequate level of liquidity (spot and forward), wide accessibility and connection to a gas exchange.

Measures that can help to improve liquidity (spot and forward) in a wholesale market are:
a) Regulators should guarantee that the hub is operated (by the TSO or by an ad hoc Hub Operator) in a fair and non-discriminatory manner. To allow this, a Code of Conduct or Guidelines for Good Practices for Hub Operator could be developed.

b) Regulators and/or Governments could impose ad hoc regulatory measures on incumbents. For example, regulators can ask the incumbent to become market maker or to follow gas release programs. This measure can be beneficial especially where the gas offer is highly concentrated and where a new wholesale market is still under development.
c) Another way to increase liquidity is to have only one natural gas hub on the same balancing zone/entry-exit system. This solution is preferable to prevent fragmentation of liquidity in the market and to enhance competition, wherever the physical conditions allow.


The second characteristic is to make the wholesale market accessible. For this purpose, regulatory oversight is important to guarantee fair and continuous functioning of the hub and the delivery of information. Furthermore, it is essential to set up non-discriminatory access conditions to all market places. This means that the requirements applied to shippers and traders should be aimed at facilitating national and cross-border trading and they should take advantage of the experience gained by the more efficient and liquid markets in Europe. Therefore special attention should be given to the following requirements:

a. Licensing (including the access to the transmission network), the process of licensing companies should be made as easy and low-cost as possible. The possibility of acknowledging licenses issued by other EU countries could be even investigated in the future if deemed helpful and workable by governments/regulators and market participants.
b. Admitting physical and non-physical traders. In particular, non-physical traders/financial parties can have a different appetite for risk and profile compared to physical players. Their participation increases competition, liquidity and supports the development of forward markets. National network codes should foresee a different set of obligations in relation to the different market participants in order to facilitate the participation of non-physical traders.
c. Fees, by setting up a transparent and cost-reflective fees regime which does not discourage market entry and trading, and which are tailored to local market conditions.
d. Transparency, by reducing barriers and information asymmetries and publishing all the information relevant to market participants to enable them to take commercial decisions in a standardised format across Europe.


A final characteristic is the establishment of a central counterpart and, consequently, a gas exchange. This can be seen as the final step in the evolution of the wholesale market. The main advantage is that the gas exchange is operated by a body acting as central counterparty to the transactions concluded by all market participants. This will facilitate transactions which are more transparent, the provision of more reliable price signals and alternative ways of managing credit risks. In order to fully exploit these benefits, a clear set of rules shall be defined. In particular, a fair financial collateral system is crucial to protect TSOs/shippers from the risks of actions carried out by less creditworthy users. At the same time, market participants should be asked to present a collateral proportional to their exposure, otherwise collaterals which are too high will probably result in barriers to entry for new participants. Therefore, the dual aim to pursue should be minimising the credit risk to participants resulting from a payment default and reducing barriers to entry for new participants. A possible way to achieve these aims is the presence of a clearing house (CH) acting as a central counterpart and providing clearing services for several gas and power exchanges. In order to efficiently manage the risk, this CH could record the assets and positions held by each market participants and ask for collateral proportional to the real position (so called “netting”) covered by the market participant in the system.



Temporary mechanisms - gas market correction mechanism (MCM) 


On 1 February 2023, the ACER published its first daily gas market correction mechanism (MCM) reference price, as required by theCouncil Regulation (EU) 2022/2578 of 22 December 2022 establishing a market correction mechanism to protect Union citizens and the economy against excessively high prices. The said Regulation established a gas MCM to protect against excessively high prices.

This MCM reference price is an average of several indexes and marker prices related to Liquefied Natural Gas (LNG) price trends. Starting from 1 February 2023, ACER is tasked to:

• calculate and monitor this MCM reference price for the activating the MCM; and

• publish the MCM reference price on its website every weekday by 23.59 CET.

Prices on 1 February 2023 are well under the MCM activation levels.

According to the said Regulation, the MCM can only be activated as of 15 February 2023. The MCM is activated if the front-month TTF derivative settlement price:

• exceeds 180 EUR/MWh for three consecutive working days, and

• is at least €35 above the MCM reference price for the same period of time.

In the event that the MCM is activated, a notice stating that a market correction event has occurred is published on the ACER website no later than 23:59 CET on the day of event. Upon activation, orders on TTF derivatives (front-month to front-year) €35 above the MCM reference price cannot be accepted. Should the MCM reference price be lower than 145 EUR/MWh, the MCM bidding limit is set at 180 EUR/MWh. The MCM bidding limit applies until:

• ACER publishes a deactivation notice 20 working days from the market correction event if the MCM reference price is below 145 EUR/MWh for three consecutive working days; or

• the European Commission suspends the MCM in case of significant deterioration of the gas supply situation in the EU.


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