Insights Blog

Throughout 2022 the EU progressed several initiatives to ensure security of supply, including agreement to establish a platform for common purchases of gas. Member States agreed to ensure gas storage capacity was filled to minimum levels (Council Regulation (EU) 2022/1032) and average storage levels are now at 92%. They also agreed to reduce overall EU gas demand by 15% during August 2022 to March 2023 (Council Regulation (EU) 2022/1369). Further action was requested to mitigate high prices and ensure adequate storage levels in 2023/2024.

Draft Regulation

In advance of the European Council meeting on 20-21 October the Commission published a draft Regulation on enhancing solidarity through better coordination of gas purchases, exchanges of gas across borders and reliable price benchmarks. It was broadly endorsed by Member States, with reports highlighting that consensus was reached on progressing a gas market correction mechanism.

Circumstances unique to Ireland will be relevant. Since Brexit, Ireland is not directly interconnected to other EU Member States and would require the infrastructure necessary to receive LNG to participate in the EU’s gas solidarity obligation. Physical positions are balanced on the Irish Balancing Point but price references broadly follow the UK market rather than the Netherlands’ Title Transfer Facility, and so it is not at this stage clear how provisions on the gas market correction mechanism would apply.

The draft Regulation contains mechanisms in the following areas.

Temporary Joint Purchase of Gas

  • The intent is to use collective purchasing power to negotiate better prices. Joint purchasing would be overseen by a Steering Board comprising Commission and Member State representatives. Purchasing companies would aggregate their demand using a service provider procured to organise the process. Companies would submit their demand for gas (volume, delivery time, duration and place) via an IT tool. The data would be published (subject to protection of confidential information) and offers sought via a public tender process for gas volumes to meet the aggregated demand. Company participation would be voluntary subject to Member States ensuring adequate participation to meet minimum storage requirements. Participating companies would coordinate their purchasing by forming one or several consortia to contract with bidding suppliers. 
  • In addition, to best use pipeline & LNG capacity, system operators would be required to offer underutilised contracted firm capacity as a monthly capacity product and as daily and within-day capacity products. As regards LNG terminals, the Commission made proposals for an organised market for secondary capacities through revision to the gas legislation in the context of Fit for 55, but LNG terminals are addressed again for expedition: LNG and storage facility users wishing to re-sell contracted capacity on the secondary market (defined here) would be entitled to so do.

Security of Supply

  • Demand reduction: Member States could exceptionally take measures to reduce non-essential consumption of protected customers (defined here). 
  • Solidarity obligation: Member States would be able to trigger a solidarity request if gas-fired plants critical to electricity system adequacy are at risk of not getting critical gas volumes. This is an expansion of the current solidarity protection obligation. The proposal also sets out default technical and financial rules to apply to bilateral solidarity arrangements (where they have not already been agreed between individual Member States) to supply solidarity protected customers (defined here) and gas fired plant in the event of emergencies leading to very severe shortages of gas.
  • Regional allocation in an emergency: If solidarity mechanisms need to be organised across the EU or regionally, the Council could decide on an efficient allocation of available gas capacities to affected Member States, based on a proposal from the Commission.

Gas Prices

  • Price formula in default solidarity arrangements: The default bilateral solidarity rules mentioned above are set up so that the Member State providing the gas would be compensated on the basis of the average market price for the last month, rather than the current spot price, which may have spiked in the crisis situation leading to the triggering of the solidarity obligation.
  • New benchmark for LNG: The Commission considers that, for LNG imports, hub indexed pricing is unduly influenced by pipeline supplies and existing infrastructure bottlenecks. The proposal tasks ACER with creating an objective price assessment tool and, over time, a benchmark of the EU’s LNG imports by collecting information on daily transactions – these proposals build on ACER’s REMIT functions.
  • Gas Market Correction Mechanism: The Title Transfer Facility in the Netherlands is used as a price reference and basis for hedging gas contracts across various EU hubs. The Council, upon a proposal by the Commission, could adopt a decision providing for a temporary mechanism establishing a maximum dynamic price at which natural gas transactions can take place in the TTF spot markets under specified conditions. Other EU trading hubs would be linked to the corrected TTF spot price by way of a temporary dynamic price corridor.

Reducing Price Volatility

A number of measures were also proposed to tackle the impact of the energy crisis on the derivatives market, including measures to reduce price volatility in the electricity and gas derivative markets. Our Derivatives Group’s update on those measures will be published shortly.

Critical Infrastructure

The European Council meeting of 20-21 October called for work to be taken forward quickly on a coordinated approach to strengthen the resilience of critical infrastructure, including the early implementation of the revised Directive on security of network and information systems and the proposal for a Directive on the resilience of critical entities.

Next Steps

The European Council meeting of 20-21 October called on the Council and the Commission to work on the detailed arrangements for joint purchasing, the gas market correction mechanism, the price volatility management mechanism, and energy solidarity measures. They required assessment of the impact on existing contracts, stating that long-term contracts should not be affected and that account should be taken of different energy mixes and national circumstances. The Transport, Telecommunications and Energy Council (Energy) of 25 October 2022 generally welcomed the proposals and emphasised the need for swift and coordinated efforts. The next General Affairs Council is scheduled for 18 November 2022 and discussion on the developing mechanisms is expected to continue.