The European Commission presented, on Tuesday 22 November, a legislative proposal to address excessive fossil gas prices by capping the settlement prices of energy derivatives traded on the Title Transfer Facility (TTF), the benchmark generally used in the EU, at €275/MWh under certain circumstances.
Scope
This cap could only apply starting from 1 January 2023 and would concern only ‘front-month’ TTF products, i.e. those with the earliest expiry date among one-month derivatives. The Commission justifies this choice by indicating that month-ahead TTF prices are those that are frequently referred to in gas supply contracts.
It would not apply to over-the-counter (OTC) transactions, as “including them would raise serious monitoring issues and may lead to problems with security of supply”.
When asked about the risk of trade shifting to the OTC market to avoid this cap, the Commission explained that it did not believe this was possible. “We don’t think there would be a structural response in that sense in reaction to the mechanism”, said an official of the institution.
A measure of last resort
The activation of this cap will only take place if the European Agency for the Cooperation of Energy Regulators (ACER) finds that two conditions are met: (1) the TTF derivatives settlement price exceeds €275 for a fortnight; (2) the TTF European Gas Spot Index published by the European Energy Exchange (EEX) is €58 higher than the benchmark liquefied natural gas (LNG) price during the last ten trading days before the end of the abovementioned two-week period.
The LNG benchmark price would be calculated on the basis of the daily average of a basket of benchmarks, consisting of the Daily Spot Mediterranean Market, the Daily Spot Northwest Europe Market and a daily price assessment to be produced by ACER.
As a result of these two conditions, the ‘market correction mechanism’ would only be triggered in case of excessive gas price peaks - such as those observed in the second half of August this year - and a significant gap between EU gas prices and LNG prices.
The second condition is thus intended to ensure that the cap only kicks in when TTF gas prices no longer reflect market fundamentals, so that the mechanism does not undermine the EU’s ability to attract LNG from the world market to Europe.
“This is not a regulatory intervention to set the price on the gas market at an artificially low level. It is a mechanism of last resort to prevent and, if necessary, address episodes of excessively high prices, which are not in line with global price trends”, stressed the Commissioner for Energy, Kadri Simson.
According to the Commission, an instrument designed to bring prices down structurally could lead to greater gas consumption.
Automatic activation
If both conditions are met, ACER would be responsible for notifying the Official Journal of the EU and informing the Commission, the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB).
Orders for front-month TTF derivatives priced above €275 would then no longer be accepted from the day following the publication of the notification.
Activation of the mechanism would therefore be automatic and would not require a prior decision by the EU Council.
For their part, Member States will be required to notify the Commission within 2 weeks of the measures they have taken to prevent an increase in gas and electricity consumption in response to the market correction.
Deactivation and suspension
The legislative proposal also provides for the automatic deactivation of the mechanism, upon notification by ACER, when the second condition mentioned above is no longer met for 10 consecutive trading days.
In addition, ESMA, the ECB, ACER, the Gas Coordination Group and ENTSOG would be required to continuously monitor the effects of the mechanism on markets and security of supply.
If this monitoring demonstrates unintended market disruption or clear risks, the Commission may issue a suspension decision.
Through these safeguards and the particularly demanding activation conditions, the institution intends to minimise the risks that such a mechanism could have on the EU’s security of supply, intra-EU gas flows or financial stability.
Following a market correction event or a suspension decision, or in the light of market and security of supply developments, the EU Council, acting on a proposal from the Commission, could decide to review the conditions for activating the mechanism.
An emergency and temporary measure
As a temporary measure, the legislative proposal would be limited to one year, with a possibility of extension on the basis of a review by the Commission by 1 November 2023.
The proposal will be the subject of a first exchange of views between the Member States’ ambassadors to the EU (Coreper) on Wednesday 23 November, before being discussed by EU energy ministers the following day (see EUROPE 13068/3).
Acknowledging that the market correction mechanism “is subject to a significant debate between Member States”, Ms Simson said the Commission’s proposal “can find common ground between diverging views”.
She added: “As in any policy decision, this proposal is a balancing act. On one hand, we have the risks. On the other, the benefits of an effective shield against excessive prices”.
MEPs, on their side, will only have a consultative role, as the procedure used is that laid down in Article 122 of the Treaty on the Functioning of the EU (TFEU). It allows the EU Council, on a proposal from the Commission, to decide on measures appropriate to the economic situation, in particular if serious difficulties arise in the supply of certain products, notably in the energy sector.
See the legislative proposal: https://aeur.eu/f/46m (Original version in French by Damien Genicot)