A new European index for liquefied natural gas (LNG) prices, a mechanism to limit prices for fossil gas transactions, a cap on intraday price peaks... These are some of the emergency measures that the European Commission is preparing to propose to help Member States cope with rising energy prices, on Tuesday 18 October, according to two provisional documents obtained by EUROPE.
These documents consist of a draft Communication and a proposal for a regulation from the Council of the European Union (Article 122 of the Treaty on the Functioning of the EU).
Dynamic market correction mechanism
In particular, they state that the Commission intends to mandate the European Agency for the Cooperation of Energy Regulators (ACER) to publish a new benchmark for EU LNG import prices, as an alternative to the Dutch TTF (the current benchmark used in the European gas market), by the 1 March 2023.
This will provide a more accurate baseline for LNG transactions, ‘not influenced by Russia’s manipulation”, which will contribute to market transparency and, indirectly, to lower wholesale gas prices, the institution states.
Pending its development, the Commission intends to propose the possibility of limiting episodes of extraordinarily high gas prices through the activation of a “dynamic market correction mechanism”.
This would be a temporary instrument setting a dynamic price limit for fossil gas transactions on the TTF Spot market. The mechanism would be triggered by the adoption of an EU Council decision, on a proposal from the Commission. It would be suspended via a similar procedure, “if the reasons for the introduction are no longer valid (...) or if unintended market disturbances occur”.
The price limit should be determined in such a way that it does not jeopardise the security of gas supply in the Union and does not lead to an increase in gas consumption, the draft regulation stresses.
It also states that other EU gas trading hubs should be linked to this maximum price by a dynamic price corridor so as not to affect market-based intra-EU gas flows.
Both measures - an alternative benchmark and a temporary dynamic price cap mechanism - are among the instruments called for in a new draft of the European Council conclusions of 20-21 October.
Capping of intraday price peaks
According to the draft regulation, the Commission also intends to propose a temporary mechanism for capping intraday price peaks in order to limit extreme variations in a short period of time (during the same trading day) on energy derivatives markets.
This would require trading venues to put in place, by 31 January 2023, a mechanism based on an upper and a lower price limit defining the prices above and below which intraday transactions cannot be executed, under the supervision of the European Securities and Markets Authority (ESMA).
These price limits should be expressed either in absolute terms or in relative terms as a percentage change from the reference price (the latest market prices observed at regular intervals).
Mandatory joint gas purchases
Through this future regulation, the Commission also wants to strengthen solidarity between Member States and the EU’s bargaining power on international gas markets, in particular by stimulating joint purchases.
To this end, the Commission proposes that gas buyers pool their demand for gas through a service provider contracted by the Commission for this purpose.
Although voluntary, the text provides for an obligation on Member States to ensure that fossil gas companies under their jurisdiction take part in the aggregation of demand for a certain quantity of gas.
This minimum quantity should be equivalent to at least 15% of the total volume needed to reach the stock filling target set for next year (i.e. a 90% stock filling rate by winter 2023/2024 - see EUROPE 12980/3), or around 13.5 billion m3 for the EU as a whole.
In a second step, the Commission encourages companies that have participated in the demand aggregation process to form a gas purchasing consortium to coordinate elements of their positions such as volumes, prices, delivery points and timing of delivery.
“A single gas purchasing consortium with strong buying power increases the likelihood of achieving better prices, but more than one gas purchasing consortium should be allowed to operate, given the very different demand pattern of undertakings across the EU”, the draft regulation says.
Solidarity mechanisms between Member States
The draft also sets out the rules and procedures that will automatically apply between Member States that have not agreed on bilateral solidarity agreements, in case of gas shortages.
The introduction of a default mutual assistance mechanism is considered necessary by the Commission, given the low appetite of Member States for bilateral solidarity agreements.
Five years after the adoption of the EU Security of Gas Supply Regulation (2017/1938), EU countries have signed only six such agreements out of a possible 40.
Price cap on gas used for electricity put on hold?
While the Commission’s package of measures should therefore contain various instruments to limit gas prices, Member States such as France, which are calling for a generalisation of the Iberian system (see EUROPE 12968/4) to the whole of the EU, will probably have to wait.
“Introducing a price cap for gas that is used for electricity generation has brought down prices in Spain and Portugal, but it bears some risks if introduced across the EU”, the draft communication says.
The Commission therefore seems to prefer to stall, using vague wording that it will “develop with Member States ways to limit the impact of high gas prices on electricity prices”. It will have to be a solution that works for each of the Member States and that “is in line with our wider goals: not increasing gas consumption and managing flows beyond the EU’s borders”, the draft communication goes on to say.
Some of the Member States in favour of this measure are expected to use the European Council of 20-21 October to try to push their demand. The new draft conclusions also call on the Commission to “explore a temporary EU framework to cap the price of gas in electricity generation at a level that helps bring down electricity prices without modifying the merit order and without leading to overall increased gas consumption”.
Other measures envisaged
According to the Commission’s draft communication, further measures are being prepared.
The Commission thus plans to amend the State aid Temporary Crisis Framework before the end of October.
It also wants to propose two delegated acts to ease the pressure on liquidity in derivatives markets.
It will present as well a proposal for an EU Council recommendation on strengthening the resilience of EU critical infrastructure following the Nord Stream 1 and 2 gas pipeline leaks.
See the draft EU Council Regulation: https://aeur.eu/f/3ne
The communication project: https://aeur.eu/f/3nk
The draft conclusions of the European Council: https://aeur.eu/f/3mz (Original version in French by Damien Genicot)