The European Commission sent Member States, on Tuesday 15 November, a document outlining its future legislative proposal for a cap on fossil gas prices.
Called the ‘market correction mechanism’, the envisaged instrument would consist of a cap on the settlement prices of energy derivatives traded on the Title Transfer Facility (TTF) - the price index established on the main European gas exchange in the Netherlands - starting from the 1st January 2023.
It would concern ‘front-month’ TTF products, i.e. those with the earliest expiry date among one-month derivatives, and would aim to “limit temporary episodes of excessive (gas) prices”, the document obtained by EUROPE points out.
The mechanism is thus part of the EU’s efforts to mitigate soaring energy prices. However, it is not certain that it will convince EU countries that support a cap on gas prices, such as Italy, Belgium, Poland and Greece (see EUROPE 13031/8).
At the end of October during the European Council, EU leaders unanimously asked the Commission to come forward with additional measures as a matter of urgency, including “a temporary dynamic price corridor for natural gas transactions” and “a temporary EU framework for capping the price of gas used in electricity generation” (see EUROPE 13047/1).
A mechanism subject to certain conditions
Activation of the mechanism would be automatic (it would not require a decision by the EU Council) and would occur when prices reach exceptional levels in relation to world markets.
Two conditions should thus be met to automatically trigger the mechanism, in order to “avoid significant market disturbances and disruptions of supply contracts”.
First, the settlement price of the month-ahead TTF derivative would have to exceed a predefined level (expressed in euros) for a number of weeks.
While the Commission does not specify these parameters at this stage, leaving ‘Xs’ in square brackets in the text, the document indicates that they would be set in advance, so as to avoid lengthy decision-making procedures “which could significantly delay its activation and the intended price-dampening effect”.
The second condition is that the increase in the TTF price does not correspond to a similar increase at the world market level. The spread between the TTF index and the liquefied natural gas (LNG) benchmark is thus expected to exceed ‘XXX’ euros for ‘X’ days, according to the Commission document.
Safeguards
The EU institution also intends to include safeguards in its legislative proposal, so that the mechanism can be suspended at any time should it lead to serious market disruptions affecting the security of supply and intra-EU flows.
The document states that the cap would be automatically deactivated, simply by the publication of a ‘notice’ by the Commission, if a monthly review - carried out by the Agency for the Cooperation of Energy Regulators (ACER) - shows that the conditions for its activation are no longer met.
The Commission could, in addition, suspend the mechanism through a decision, if unintended market disturbances occur.
A risky measure
The paper also lists a number of disadvantages associated with the proposed mechanism.
One of them is the risk of negatively impacting on LNG imports to the EU, “if the condition that the cap must be higher than world LNG prices is not met”.
The mechanism could also lead to security of supply problems, the Commission warns, if gas suppliers decide to withhold deliveries when the cap is triggered in order to maximise their profits by selling just after the mechanism is deactivated.
As regards the duration of the measure, the document provides for the legislative proposal establishing the mechanism to be limited to one year, with a possibility of extension on the basis of an evaluation report by the Commission.
While the institution has not yet communicated a date for the presentation of its proposal, some Member States are impatient and hope to have a legislative text before the next extraordinary meeting of EU energy ministers on Thursday 24 November.
See the document: https://aeur.eu/f/43c (Original version in French by Damien Genicot)