EU energy ministers today agreed on the content of the proposal for a Council regulation on further temporary emergency measures to contain high energy prices and improve security of supply. The new measures will improve solidarity in case of a real emergency and gas supply shortage, ensure a better coordination of joint gas purchases, limit volatility of gas and electricity prices, and set reliable gas price benchmarks.
“The EU has already managed to fill up the gas storages to secure supplies for this winter. Today we have made an important step to secure supplies for next winter as well. The emergency measures will help us use the power and benefits of our common market and jointly secure enough gas supplies for next year. This sends the right signal to the market and fortifies our solidarity mechanisms in case of a genuine emergency.”
– Jozef Síkela, Czech minister of industry and trade
The new rules will make it possible for member states and energy companies to purchase gas jointly on global markets. Pooling demand at EU level will ensure that EU countries have better leverage when it comes to buying gas on global markets and that member states don’t outbid each other in the process.
In practice, member states agreed that gas companies and companies consuming gas in EU and the Energy Community countries will submit their gas import needs. The EU will hire a service provider to calculate the aggregated demand and seek for offers on the global markets to meet the total demand. Member States will require domestic undertakings to use the service provider to aggregate demand for volumes of gas equivalent to 15% of their respective gas storage filling obligations for 2023 (around 13.5 billion cubic metres for the EU as a whole). Beyond the 15%, aggregation will be voluntary but based on the same mechanism.
In a second step, gas companies and companies consuming gas may choose to purchase gas through the platform, individually or in a consortium with others, from natural gas producers or suppliers that have matched the aggregated demand.
The regulation also includes provisions to increase transparency of intended and concluded tenders and gas supply purchases, with an obligation for companies to notify the Commission and member states in advance if they plan to purchase more than 5TWh/year (just over 500 million cubic meters).
Member states made it explicit that Russian gas will be excluded from joint purchasing.
They clarified the rules on the organisation of the joint purchasing, selection of the service provider and participation in joint purchasing. Notably, they clarified that the tasks of the service provider include a clause of proportionality to ensure equality of treatment between larger and small companies. They also specified how underutilised capacity in the infrastructure would be used more efficiently.
Member states also elaborated on the transparency measures to protect confidential commercial information.
New benchmark for gas prices
The regulation tasks the Agency for the Cooperation of Energy Regulators (ACER) to develop a new complementary price benchmark, that will provide for stable and predictable pricing for LNG transactions. The new benchmark will be available by 31 March 2023. The reason is that many gas contracts in Europe are indexed to the main European gas exchange, the Title Transfer Facility (TTF), which is a virtual gas-trading platform that is widely used for gas transactions in the EU. The TTF serves as the main benchmark to define the price of gas in wholesale contracts that in turn define prices on retail markets. The TTF does however no longer accurately reflect the price of LNG transactions in the EU.
The regulation will also introduce a price limit for transactions done within the same day on TTF. This intra-day volatility management mechanism will prevent excessive movements of prices during a trading day. This will prevent derivative prices from soaring and plummeting beyond the upper and lower limits of the intraday price spike corridor. European Securities and Markets Authority (ESMA) will be tasked to help implement circuit breakers for intra-day derivatives trading.
In this regard, member states made it clear that the intra-day volatility management mechanism will be set up for all energy-related commodity derivatives.
Market correction mechanism
The proposal for a regulation initially included a general framework for the introduction of a possible temporary ‘market correction mechanism’ to limit gas prices on TTF. The Commission subsequently presented a parallel proposal (also based on article 122 of the Treaty on the Functioning of the EU) with the specific details of a market correction mechanism, on 22 November 2022. The Council therefore removed the provisions regarding the market correction mechanism from this regulation in order to address the issue separately and in a coherent manner. The Council will now analyse the proposal for a market correction mechanism and seek a political agreement as soon as possible.
Further solidarity measures
The regulation introduces further solidarity measures in case of a genuine gas supply shortage, that complement existing rules. The new rules make it possible for member states to reduce the non-essential gas consumption of protected customers (such as outdoor heating or the heating of residential swimming pools in households), in order to supply gas to essential services and industries. Essential consumption by protected customers (such as indoor heating of households, schools and hospitals) will be safeguarded in all circumstances. Member states will be free to define what constitutes non-essential gas consumption.
The new rules also extend the measures that allow member states to request solidarity from other member states to cases where they are not able to secure the critical gas volumes needed for their electricity system. Member states clarified the exceptions to these rules, for instance essential volumes of gas supplies for solidarity-protected customers (households, certain social services), gas supplies for electricity needed to produce and transport gas, certain critical infrastructures and installations crucial for the functioning of military, national security and humanitarian aid services.
The regulation also extends solidarity measures to member states with LNG facilities.
The regulation sets out a number of default rules for sharing gas in case of a genuine emergency. The default rules will step in only if member states have not concluded bilateral agreements setting the modalities of solidarity, as required under the security of supply regulation. Only 6 out of possibly 40 solidarity agreements have been concluded until now.
Regarding the price of solidarity gas, member states agreed that those member states benefitting from solidarity would cover the market price of the gas, in addition to litigation or arbitration costs and other indirect costs, including the reimbursement of financial or other damages resulting from shedding customers, provided they don’t exceed 100% of the price of gas. If they do, member states may request the Commission to decide if higher compensation is deemed appropriate.
Background and next steps
The Regulation is to be formally adopted by the Council, together with an agreement on the proposal for a market correction mechanism at the next extraordinary energy Council.
The Commission presented this proposal on 18 October under article 122 designed for emergency situations. The proposal follows up on the European Council conclusions of 20 and 21 October.