Tue. Dec 6th, 2022

Brussels, 22 November 2022

Today, the Commission has continued its response to the ongoing energy crisis by proposing a Market Correction Mechanism to protect EU businesses and households from episodes of excessively high gas prices in the EU. This complements measures to reduce gas demand and ensure security of supply through diversification of energy supplies. The new mechanism aims to reduce the volatility on European gas markets while safeguarding the security of gas supply.

Following the Russian invasion of Ukraine and weaponisation of energy supplies, natural gas prices have seen unprecedented price peaks across the EU, reaching all-time highs in the second half of August this year. The extreme price spike over almost two weeks in August was highly damaging for the European economy, with contagion effects on electricity prices and an increase in overall inflation. The Commission is therefore proposing to prevent the repetition of such episodes with a temporary and well-targeted instrument to automatically intervene on the gas markets in case of extreme gas price hikes.

You can follow the press conference by Commissioner for Energy Kadri Simson live on Ebs.

press release and Q&A are available online.

Source – EU Commission – Email


Q&A: Gas market correction mechanism

 

Brussels, 22 November 2022

 

1. How will this measure moderate gas prices in Europe?

Since the start of Russia’s aggression against Ukraine gas prices have seen increased volatility, most notably in the second half of August 2022 when prices reached unprecedented peaks on the most commonly used European price benchmark, the Dutch Title Transfer Facility (TTF). Given the role of the TTF as a reference in contracts all over Europe, the Commission is proposing a Market Correction Mechanism that will limit excessively high prices spikes on this exchange. The proposal aims to address the phenomenon of excessive price peaks caused by the TTF price benchmark becoming less representative of the evolving gas market. The ultimate goal is to protect EU businesses and consumers from price peaks that do not reflect market fundamentals and to provide more predictability to gas market players.

The proposed Market Correction Mechanism builds upon the principles and safeguards laid down in Article 23 and 24 of the Commission proposal for a Council Regulation enhancing solidarity through better coordination of gas purchases, exchanges of gas across borders and reliable price benchmarks tabled on 18 October 2022. It is designed to act as an effective instrument against excessive gas prices and to be activated only if prices reach levels which are exceptional compared with LNG prices at other trading exchanges.  This is to avoid significant market disturbances and disruption of affordable gas supply across the EU.

2. How will the market correction mechanism work in practice?

In practice, the Mechanism will consist of a safety ceiling on the price of gas traded in the month-ahead TTF derivatives market, meaning that there will be a bidding limit of €275 to the orders for front-month TTF derivatives in case two cumulative conditions are fulfilled. When the mechanism is activated, orders above this limit price would not be accepted. The TTF price reference plays a key role in the European wholesale gas market, so it can be expected to have a stabilising effect when activated. The triggering of the proposed mechanism is automatic when both of the following conditions are met. The first is that the front-month TTF derivative settlement price exceeds €275 for 2 weeks. The second, equally necessary for the activation, is that the TTF European Gas Spot Index as published by the European Energy Exchange is €58 higher than the reference price for LNG during the last 10 trading days before the end of the above-mentioned two weeks period. The reference price for LNG will be calculated based on the daily average of a basket of benchmarks, consisting of the Daily Spot Mediterranean Market, the Daily Spot Northwest Europe Market, and the daily price assessment to be produced by the Agency for the Cooperation of Energy Regulators (ACER) as envisaged in the Commission proposal for a Council Regulation of 18 October.

When ACER observes that a market correction event has occurred, meaning that both of the two above-mentioned triggering conditions are met, it will publish a market correction notice in the Official Journal of the EU, with the mechanism coming into force the day after its publication. ACER will inform the Commission, the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB) of the market correction event.

3. Why was the price ceiling established at this level?

The proposed price ceiling for triggering the Market Correction Mechanism is carefully calibrated on the basis of the TTF prices observed in 2022. Throughout most of the year, gas prices have been very high, reaching a peak during the summer. The peaks reached in the second half of August have been taken as the reference for the excessively high prices which this proposed mechanism aims to prevent.

The price level has been carefully chosen to reflect the potential impacts of its application, and is an essential element of the Commission proposal to avoid the damaging effects of excessive price spikes for citizens, businesses and for the whole European economy. The proposed level will minimise potential risks to the EU’s financial stability as well as preventing a disruption of deliveries which would endanger the Union’s security of supply. The level has also been chosen to ensure that the cap does not jeopardise our ability to attract LNG from the global market to Europe.

4. What are the safeguards to ensure the EU’s security of gas supply and markets functioning?

The proposed mechanism is designed in a way to guarantee the continued functioning of energy and financial markets in the EU and contains safeguards to avoid risks to the security of gas supply and financial stability.

First, the chosen level of the safety price ceiling ensures that the validity of long-term contracts is not impacted by the mechanism. Second, the instrument is targeted and it will only apply to one futures product (TTF month-ahead products). This will allow market operators facing supply requests to be able to procure gas on spot markets and over-the-counter. Third, it entails a thorough system of expert monitoring involving ACER, ESMA, the ECB, the Gas Coordination Group and the European Network of Transmission System Operators for Gas (ENTSO-G), which are tasked to constantly monitor the effects of the bidding limit on markets and security of supply. This includes an ex-ante check whereby the Commission, in case of concrete indications that a market correction event is imminent, can request an opinion from the ECB and ESMA and, where appropriate, from ENTSO-G and the Gas Coordination Group on the impact of a possible market correction event on security of supply, intra-EU flows and financial stability. This will enable the Commission to suspend the activation by ACER if need be. The opinion should take into account price developments in other relevant organised market places, notably in Asia and the US. Fourth, it aims to prevent an intended increase in energy demand by requiring Member States, in addition to the existing reporting obligations on the implementation of demand reduction, to notify to the Commission within two weeks which measures they have taken to prevent an expansion of gas and electricity consumption. Once today’s proposal for a Market Correction Mechanism is adopted in Council, the Commission will also propose to declare an EU-alert under the Save Gas for a Safe Winter regulation that was adopted in July, triggering mandatory gas savings to ensure demand reduction.

To be able to react to possible unintended negative consequences of the price limit, the proposal foresees that the mechanism can be suspended at any time, either automatically or by a Commission decision. Automatic deactivation takes place when ACER establishes that the second activation condition (the difference between the TTF price and the LNG price reference) is no longer met for 10 consecutive trading days. ACER will without delay publish a deactivation notice in the Official Journal of the EU. A day after the publication, the bidding ceiling will cease to apply.

If unintended market disturbances or manifest risks occur, negatively affecting security of supply, intra-EU gas flows or financial stability, the Commission can issue a suspension decision. This decision must take into account a set of criteria established in the Council Regulation, including: danger to the Union’s security of gas supply, notably in case a regional or Union emergency is declared under the EU’s Gas Security of Supply rules and in case of a possible need for rationing; an overall increase of gas consumption or failure to reach mandatory EU demand reduction targets; prevention of intra-EU flows of gas; impact on the validity of existing gas supply contracts; and impact on the stability and functioning of energy derivative markets as well as the EU’s financial stability. In this case, the Commission would publish the notice in the Official Journal thereby stopping the application of the bidding ceiling as of the day after publication.

5. When will the mechanism enter into force and how long will it apply for?

The proposed Council Regulation is a temporary and emergency measure. It will enter into force on the day following its publication in the Official Journal of the European Union and will be in force for one year. However, the market correction mechanism can only be activated as of 1 January 2023.

This proposal for a Council Regulation under Article 122 of the Treaty on the Functioning of the European Union needs to be adopted by a Qualified Majority of Member States. This procedure allows for prompt action to protect citizens and the economy against excessively high prices and volatile markets.

The Commission will carry out a review of the Regulation by November 2023 at the latest assessing the situation of the gas supply to the EU and present a report on the main findings of that review to the Council. On that basis, the Commission may propose the extension of the validity of this Regulation.

For More Information

Press release

Source – EU Commission


Market Correction Mechanism: EU Commissioner Simson on limiting excessive gas price spikes

 

Brussels, 22 November 2022

“Check against delivery”

Thank you, Éric.

I will now present a market correction mechanism. This was proposed to address episodes of excessively high gas prices in Europe, when they are not justified by the situation on the global gas markets.

Today’s proposal comes at the end of a very long process where the Commission has worked, in close consultation with Member States, on measures to tackle the exceptionally high and volatile gas prices.

On 5 October, President von der Leyen outlined a roadmap of actions in a letter addressed to the Heads of State or Government and proposed to consider a price limitation on TTF.

Since then, this idea has gained traction, and has been discussed by Heads of State or Government and Energy ministers, on more than one occasion.

Building on this, the Commission presented a month ago an emergency Regulation to establish a new EU benchmark for LNG, address intra-day volatility on energy derivatives market and prevent episodes of excessive volatility through a market correction mechanism.

Based on the conclusions of the October European Council, we have now turned the general principles set out in the October Regulation into a self-standing legal proposal.

We know that Europe is today paying a high price for gas, which has ensured that the EU continues to attract large volumes of LNG. But there is another dimension to this price dynamics, which has to do with a high premium that Europe is charged because of the market anxiety created by the risk of supply disruptions or deliberate manipulations of gas supplies by Russia.

Last August, prices on the TTF virtual trading point surged from 220 euro to almost 320€/MWh while global LNG prices were significantly below those levels.

Since then, we have seen the gas prices fall considerably, to 116 euros now. That reflects the action we have taken to reduce demand, fill our underground gas storage and diversify our supplies. But we remain exposed to these damaging price hikes, which harm European industry and place a burden to our households.

Until now, we have been missing a tool in our toolbox to address these situations, like the one that we witnessed in August.

This is what we are proposing today. 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.

Let me explain how the mechanism will work. We propose an upper ceiling on the month-ahead TTF price in case it exceeds 275 euros per megawatt hour. Beyond that price, transactions will not be able to take place.

The market correction mechanism will be triggered when two conditions are met. First, the gas price exceeds a predefined level, which we set at 275 euros, for two weeks. Second, the spread between the TTF price and global LNG price is 58 euros or more for ten trading days. This last condition is critical to ensure that intervention happens only when the TTF gas price is no longer reflecting the market fundamentals. It is also crucial to ensure we would be able to continue to attract LNG in a challenging moment for Europe.

When both these conditions are in place, the mechanism would activate automatically and not require any additional procedures or separate decisions.

There is a system of close monitoring after the activation of the ceiling, with the participation of ACER, ECB and ESMA. If the conditions for the triggering are no longer fulfilled, ACER will immediately and automatically deactivate it, by publishing a notice on the Official Journal.

We are aware that this kind of market intervention entails a number of risks. We have reflected this in a set of robust safeguards, including the high level of triggering conditions. If security of supply, our demand reduction efforts or market stability are in jeopardy, the mechanism can be suspended immediately by the Commission.

As any political 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 that can cause severe hardship to our citizens and harm to EU’s industry and businesses or impact the stability of the financial markets. And there are the benefits of shaping the market expectations and behaviour of gas trading parties, who know that Europe will not accept to buy at any prices.

The market correction mechanism is subject to a significant debate between the Member States. I believe that what we have proposed today can find common ground between diverging views.

This is not a silver bullet that will bring gas prices down. But it provides a powerful tool that we can use when we need it, complementing our more structural efforts to lower prices, namely by controlling our demand and ensuring sufficient gas supply for Europe through joint purchasing and active external energy policy.

Thank you.

Source – EU Commission

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