Meeting in Brussels, EU energy ministers finally agreed, on Monday 19 December, on a legislative proposal to cap the price of gas traded on the TTF derivatives market - the benchmark for gas prices generally used in the EU - in the event of sharp rises (‘market correction mechanism’, or MCM), setting the price level triggering the cap at €180/MWh.
“The negotiations were not easy and it took us a long time, (but) we managed to find an important agreement that will protect citizens from soaring energy prices”, the Czech Minister of Industry and Trade, Jozef Síkela (whose country currently holds the rotating presidency of the EU Council), said after the meeting.
The Commissioner for Energy, Kadri Simson, added: “Today’s agreement clearly signals that Europe is not prepared to pay any price for gas and that it is able to act united to ensure its energy security”.
She also said that the agreement had obtained “the widest possible majority”. According to our information, all Member States supported the general approach except Hungary (which voted against), Austria and the Netherlands (which abstained).
According to this agreement, the market correction mechanism will be automatically activated if two conditions are met simultaneously: - the price of month-ahead TTF derivatives exceeds €180/MWh for three working days; - this same price is €35 higher than a reference price for liquefied natural gas (LNG) on world markets during the same period.
This is not only a significant reduction compared to the levels initially proposed by the European Commission (€275 and €58) on 22 November (see EUROPE 13068/2), but also a clear shortening of the observation period foreseen by the institution.
A dynamic cap
Once the mechanism is activated, transactions in natural gas futures contracts that are within the scope of the MCM will no longer be allowed above a ‘dynamic bidding limit’.
This dynamic cap will correspond to the reference price of LNG on the world markets plus €35/MWh. It could therefore potentially be more than €180. However, if the reference price of LNG is below €145, the dynamic bidding limit will remain equal to the sum of €145 and €35, i.e. €180.
“It is not only a ceiling, but also a floor”, commented the Belgian Minister, Tinne Van der Straeten.
OTC market kept out of the mechanism
While the Commission suggested limiting the mechanism to one-month TTF derivatives contracts, Member States agreed to extend it to three-month-ahead and year-ahead TTF derivatives contracts.
However, the mechanism will not apply to over-the-counter (OTC) trading, as foreseen in the Commission’s original proposal.
“It will include all trading hubs in the EU but the Commission will have a chance to opt out some of these hubs at a later stage”, Mr Síkela said.
Specifically, the European Securities and Markets Authority (ESMA) and the Agency for the Cooperation of Energy Regulators (ACER) will be required to publish a preliminary report on the data relating to the introduction of the MCM by 23 January 2023, verifying that the key elements and scope of the market correction mechanism are still appropriate in the light of developments in the financial and energy markets and security of supply.
They will then submit reports to the Commission, which can propose amendments, by 31 March 2023 at the latest, to exclude trading platforms other than the TTF from the regulation, should their inclusion have negative effects on the functioning of the mechanism.
Deactivation of the mechanism
The ‘dynamic bidding limit’ will apply for at least 20 working days. It will be automatically deactivated, if it is below €180/MWh during the last three working days or if the Commission declares a regional or EU emergency, in accordance with the Security of Energy Supply Regulation. This is to avoid further restricting gas supply in situations where it would already be insufficient to meet demand.
Suspension of the mechanism
The general approach also provides for a suspension mechanism, if the Commission, ESMA or ACER identify risks to security of energy supply, financial stability, intra-EU gas flows or risks of increased demand.
The market correction mechanism will be suspended if gas demand increases by 15% in 1 month or by 10% in 2 months, if LNG imports decrease significantly or if the volume traded on the TTF decreases significantly compared to the same period of the previous year.
Monitoring of the operation of the MCM will start from the day of entry into force of the EU Council Regulation establishing the mechanism on1 February 2023, while the mechanism as such can only be applied from 15 February 2023.
The suspension of the mechanism will require the adoption of an implementing decision by the Commission. The decision will be published in the Official Journal of the EU and will enter into force the following day.
Unblocking of two more pieces of legislation
The agreement on the MCM has enabled the unblocking of two other proposals for EU Council Regulations on: - gas solidarity, joint gas purchases and the creation of a benchmark for liquefied natural gas (LNG) transaction prices; - accelerated permitting procedures for certain renewable energy projects. The content of these proposals had already been agreed by ministers, but were frozen pending agreement on the MCM (see EUROPE 13070/1, 13071/2).
While the first text was formally adopted, the second had to be reopened for amendments to secure German support for the MCM (EUROPE will come back on this). It will therefore be formally adopted by written procedure in the coming days.
Background and next steps
The regulation will now be formally adopted by the EU Council by written procedure and published in the Official Journal of the EU.
It will enter then into force on 15 February 2023 for a period of one year, with the possibility of prolongation. (Original version in French by Damien Genicot)