To combat soaring energy prices and ensure the EU’s energy security amid uncertainty due to the Russian invasion of Ukraine, the European Commission unveiled a communication on Wednesday 23 March outlining new energy options, including the possibility of joint gas purchases, accompanied by a proposal for a regulation on gas storage, on the eve of a European Council meeting to discuss the issue.
“Global and European energy markets are going through turbulent times, particularly since the Russian invasion of Ukraine. Europe needs to take swift action to ensure our energy supply for next winter and to alleviate the pressure of high energy bills on our citizens and businesses”, said EU Energy Commissioner Kadri Simson.
Strengthening the EU’s leverage through joint procurement
For the European Commission, “using the collective leverage of the Union to help secure gas imports in the best possible conditions is essential to avoid Member States bidding against each other for the same supplies”.
The Communication underlines the institution’s readiness to create a Task Force on Joint Gas Procurement at EU level, in order to pool demand and thus strengthen the EU’s bargaining power with suppliers of liquefied natural gas (LNG) and gas.
Inspired by what was set up for the purchase of Covid-19 vaccines, this Task Force would aim to secure cheap imports of LNG and gas for the next winter, notably by making long-term commitments to the main suppliers through energy partnerships.
“The Task Force will prepare the ground for energy partnerships with key suppliers of LNG, gas and hydrogen in the Mediterranean region, with our partners in Africa, but also in the Middle East and the United States”, the document states.
As anticipated by EUROPE (see EUROPE 12916/2), the Task Force will be supported by representatives of the Member States on a Steering Board. A joint negotiating team led by the European Commission would hold talks with gas suppliers.
It remains to be seen whether this idea will be supported by the Member States. The need to “collaborate on joint gas purchases” is in any case reflected in the European Council’s draft conclusions of Monday 21 March (https://aeur.eu/f/vu ). This issue will therefore be among the topics discussed by the EU27 on Thursday 24 and Friday 25 March (see EUROPE 12917/2).
In addition to the idea of establishing a Task Force, the European Commission’s Communication presents a series of measures available to Member States that can help mitigate rising energy prices in the short term, highlighting the advantages and disadvantages of each option (see EUROPE 12916/2).
These include a temporary strike price or clawback mechanism to limit excessive returns to non-fossil fuel based electricity generators.
Currently, the latter “earn additional returns well beyond their expectations when they decide to invest”, the European Commission believes, because the price on wholesale electricity markets is set by the last source needed to meet all demand (which creates a coupling between the gas price and the electricity price).
The Communication points out that Member States could thus introduce two-way contracts for difference. If the market price is higher than the strike price, electricity producers would have to pay back the difference to the governments, and vice versa.
The Communication also mentions the possibility of capping or moderating gas prices by regulatory means as a “last resort” (see EUROPE 12916/2).
Ensuring a minimum level of gas reserves
While EU gas reserves usually cover 25-30% of the gas consumed in the EU during the winter, the level of storage filling this year has been much lower than in previous years (-10% lower in percentage points in January, according to the proposed regulation), especially for storage sites owned by the Russian company Gazprom.
This exceptionally low level, in addition to contributing to market uncertainty and thus to energy price volatility, could, if it were to persist, pose a risk to the security of the EU’s energy supply next winter.
The European Commission therefore wants to require Member States to take the necessary measures to ensure sufficient reserves before next winter.
Under its proposed regulation, officially unveiled on Wednesday, EU countries would have to ensure that underground gas storage facilities on their territory are filled to at least 80% of their capacity by 1 November 2022, and to 90% in subsequent years.
This is a change from a draft version of the text, which stated 90% for each year including 2022 (see EUROPE 12915/5).
This is because “we are in a difficult year” and “we don’t know exactly when this proposal for a regulation would enter into force” (depending on the legislative process, editor’s note), according to a senior European official. Adding: “The idea is to encourage the Member States to start filling storage already, regardless of the entry into force of the proposal”.
In addition, each Member State would be assigned a “filling trajectory”, i.e. intermediate targets set in August, September and October for the year 2022, and in February, May, July and September from 2023.
In order to ensure that these trajectories are respected, the proposed regulation provides for a monitoring procedure (for more details, see EUROPE 12915/5).
Promoting storage and ensuring European solidarity
In order to promote the use of gas storage despite a potential price decrease in the year 2022 (storage is not attractive for market participants if they expect higher gas prices in summer than in winter), the European Commission proposes to apply a 100% discount to entry and exit tariffs for transport capacity to and from storage facilities.
It also invites Member States to devise other measures to encourage gas storage, such as financial support or compensation to market players, which may constitute State aid.
However, the EU budget will not finance storage incentives or gas purchases.
The proposed regulation also includes provisions to ensure a level of solidarity between Member States that have storage capacity and those that do not.
According to the European Commission, the total underground storage capacity in the EU is 1100 TWh (about 100 billion m3). Although distributed among 160 installations in 18 Member States, 73% of this total capacity is concentrated in five Member States: Germany, Italy, France, the Netherlands and Austria.
The legislation therefore will require Member States without storage facilities to ensure that at least 15% of their annual gas consumption is stored in other EU countries by 1 November.
Alternatively, these Member States would have the possibility to jointly develop a load sharing mechanism with one or more Member States with storage facilities.
The proposed regulation further specifies that no restrictions on cross-border access to and use of storage facilities or liquefied natural gas may be imposed.
Certifying storage facilities
As stated in the draft proposal (see EUROPE 12915/5), the European Commission also wants Member States to certify all companies that own a storage system operator, including transport system operators. The aim is to ensure that the owner of the storage system operator does not jeopardise the security of energy supply of the EU or of a Member State, and thus to reduce the influence of third party operators on critical storage infrastructure.
Installations with a significant size, i.e. above 3.5 TWh, and which have always had low storage levels at the end of the winter, will have to be certified within 100 days of the regulation coming into force. The remaining installations will have to be certified within 18 months of the entry into force of the regulation.
If the assessment conducted by the competent national authorities concludes that risks to the security of energy supply exist, the regulation provides for the possibility of requiring the handover of the storage facility, with fair compensation for the value of the asset. If necessary, interim measures could be introduced to protect control of the site until the change of ownership.
Next steps
The Communication and the proposal for a Regulation follow on from the draft ‘REPowerEU’ plan presented on 8 March (see EUROPE 12906/4) and from the informal meeting of the EU27 in Versailles, which called on the European Commission to present the final version of the plan by the end of May, in order to “progressively move away from our dependence on Russian gas, oil and coal imports as soon as possible”.
While some Member States, such as Spain and France, want to review the functioning of the EU electricity market in order to decouple the price of gas from the price of electricity, the European Commission expects the final report of the European Agency for the Cooperation of Energy Regulators (ACER) on the advantages and disadvantages of the current electricity market design by the end of April.
It should also be noted that the proposed regulation is intended to be temporary, pending the entry into force of the future regulation on the internal markets for renewable and natural gases and hydrogen, based on the European Commission’s proposal of 15 December 2021 (see EUROPE 12854/11).
See the communication: https://aeur.eu/f/wz
See its annexes: https://aeur.eu/f/x0
See the proposal for a regulation: https://aeur.eu/f/x1 (Original version in French by Damien Genicot)