Questions and Answers on proposals to fight high energy prices and ensure security of supply

How will today's proposal limit energy prices in Europe?

Today's proposed Council Regulation seeks to tackle excessive energy price levels through different measures that aim to prevent price spikes and manipulation, provide more transparency and stability to the market, and ensure fair prices and gas flows also in a crisis situation. It builds upon measures already in place to reduce demand, ensure alternative supplies, accelerate the roll-out of renewables, and limit the impact of electricity prices for consumers via the inframarginal price cap and the solidarity levy for fossil fuel companies agreed earlier this month.

First, the proposed Regulation advances work on a new complementary benchmark for LNG. At the moment, the pricing of LNG imports is often based on the Title Transfer Facility (TTF). The TTF is no longer an adequate reflection of market realities as it is unduly influenced by pipeline infrastructure bottlenecks in North-Western Europe and therefore Russian manipulation of natural gas supplies to the EU. The proposed Regulation tasks the European Agency for the Cooperation of Energy Regulators (ACER) to create an objective price assessment tool, no later than two weeks after the entry into force of the Regulation, and by 31 March 2022 a benchmark of the EU's LNG imports. This would be done by collecting real-time information on all daily LNG transactions and increasing the transparency in the market.

To tackle situations of excessive natural gas prices, the Commission is seeking a mandate from the Council to create a gas market correction mechanism under specific conditions. The Regulation would empower the Commission to propose a Council measure to establish a maximum dynamic price at which spot market transactions for natural gas can take place in the Title Transfer Facility (TTF). Under the proposal, other Union gas trading hubs may be linked to the corrected TTF spot price via a dynamic price corridor. The measure should allow for over-the-counter gas trades, not affect EU's security of gas supply and intra-EU flows, not lead to an increase in gas consumption and not affect the stability and orderly functioning of energy derivative markets (futures).

Furthermore, the proposed Council Regulation aims to reduce price volatility by requiring trading venues to establish a new temporary intra-day volatility management mechanism (‘circuit breaker') aimed at limiting large price movements in electricity and gas derivatives markets within the same trading day. To ensure uniform conditions, the Commission is seeking a mandate to specify certain technical elements of this temporary measure in an implementing act, while national competent authorities would be charged with supervising its implementation. The European Securities and Markets Authority (ESMA) will be tasked to coordinate the application of this mechanism, based on reports regularly submitted by the national competent authorities. To ensure that the new mechanism is well adapted to specific features of affected derivatives contracts, trading venues should be free to apply contract-specific volatility limits while respecting the requirements set down by law.

The proposal also contains default solidarity rules to apply between Member States in the absence of bilateral solidarity agreements and a price formula to be applied to shield emergency supplies from the volatility of spot market prices. The Regulation proposes to use the average market price of the month preceding the request for assistance by the requesting Member State. This will provide certainty to the different parties and clarify the price to be applied in a context of scarcity.

The proposed joint purchasing of gas has the potential to reduce uncoordinated bidding for gas supplies between Member States, thereby resulting in fairer access to gas and potentially lower prices. This will be particularly relevant to support the replenishment of the EU gas storages next year as most of them could be depleted by next Spring.

To tackle the impact of prices on EU consumers, the Commission also intends to give to Member States more leeway to support their companies by amending the Temporary State Aid Crisis Framework while maintaining the level playing field across the EU. We will present the amending proposal before the end of October.

The Commission is also presenting new flexibilities under Cohesion Policy to provide support to SMEs particularly affected by energy price increases, vulnerable households and employees and self-employed. The Commission is currently discussing with the co-legislators in the framework of the ongoing legislative negotiations on the Regulation on the Recovery and Resilience Facility. The proposed changes to the Common Provisions Regulation 2014-2020 could make available up to 10% of the total national cohesion policy funds allocation for 2014-2020 (worth nearly €40 billion). 

The Commission will carry out an assessment of the investment needs for REPowerEU. This assessment will cover investments in cross-border infrastructure, including critical pan-European interconnections, energy storage, energy efficiency, and renewables that are needed to speed up the clean energy transition and avoid fragmentation in the single market. It will also consider investment absorption capacity. Its results will form the basis for Commission proposals to add to the EU financial firepower for REPowerEU so as to ensure competitiveness of European industry as well as energy independence across the EU.

The Commission will also continue developing with the Member States ways to limit the impact of high gas prices on electricity prices. An EU-level solution needs to work for all Member States, addressing any unequal financial impact among them while not increasing gas consumption and managing flows beyond the EU's border.

How quickly will these measures help European citizens and industry?

Policy measures to tackle prices and demand, and ensure solidarity in Europe send a signal to the market that the European Union is increasingly well prepared for the current energy crisis, which can reduce volatility. This can have an immediate impact on prices. In the next weeks and months, additionally, the demand reduction measures already taken as well as redistribution of revenues stemming from the inframarginal price cap and solidarity levy agreed by Energy ministers at the beginning of October should start having an impact.

The proposed Council Regulation under Article 122 of the Treaty on the Functioning of the European Union helps to deliver further prompt actions to enhance security of supply and mitigate high prices in the current context of tight gas supplies due to Russia's deliberate cuts and volatile prices.

The proposed Council Regulation requires a qualified majority vote in the Council to be approved, and its adoption will depend on the Council's internal procedures, but recent examples have shown that Member States can act with speed on such measures. EU leaders have already acknowledged the urgent need for additional measures to prepare for possible further gas disruptions in the coming winters. Therefore, the Commission stands ready to have the proposed measures in place as soon as possible in order to provide reassurance to markets and further relief to EU households and businesses.

How will the proposed new measures strengthen the EU's security of energy supply?

The proposed Council Regulation includes various measures to strengthen the EU's security of supply. First, by enabling the joint purchasing of gas. As a first step, the proposed framework, includes an obligation to pool demand of volumes of gas which are equivalent to 15% of gas storage targets. With this step, the Commission aims to develop the Union's collective buying power, ensure more equal access to new or additional gas sources for storage filling, at more sustainable prices for companies across all Member States. The tendering of aggregated demand should be particularly beneficial for companies that previously were purchasing gas only or mainly from Russian suppliers, contributing to the EU's diversification efforts.

Second, the proposals will enhance solidarity between Member States and ensure collective action. In particular, the proposal sets out the default rules and procedures that will automatically apply between Member States to implement their solidarity obligation, unless they agree on other bilateral arrangements. The proposal also widens the obligation to provide solidarity by extending it to Member States with LNG facilities. In addition, it extends the existing obligations of solidarity between Member States to cover the needs of critical gas-fired power plants. Member States would be able to request emergency solidarity measures when they are not able to secure the critical gas volumes needed for their electricity system. For the same reason, Member States providing solidarity should also be entitled to ensure that the operation of their own critical gas-fired power plants is not endangered when providing solidarity. The provision is aimed to avoid an electricity crisis as a consequence of a severe gas emergency.

Furthermore, the proposed Regulation strengthens the existing provisions applicable in case of a regional or Union gas supply emergency by introducing a system for price setting and capacity allocation. Based on a Commission proposal, the Council would be able to establish a maximum price of gas in the region affected by the emergency and the allocation of gas capacities available to those Member States affected by this regional or Union emergency.

Finally, the Commission proposes to widen the possibilities to pro-actively reduce gas demand. Under the proposed Council Regulation, Member States, can reduce the ‘non-essential consumption' of gas by protected customers under certain conditions (for example outdoor heating and the heating of private swimming pools). This would not apply to vulnerable consumers, who have no margin to reduce their consumption. Neither should it lead to overall disconnection of any protected customers. The gas saved can benefit those sectors that are essential to the functioning of society, as identified in the ‘Save Gas for a Safe Winter' package, adopted in July. The Commission is continuously monitoring the progress in meeting the 15% demand reduction target agreed by the Council. If necessary, the Commission stands ready to trigger an EU Alert and make gas savings mandatory or even review the target if such measures prove insufficient.

How will the aggregation of EU gas demand and joint gas purchasing work in practice?

The joint purchasing of gas at EU level consists of two steps: demand aggregation and joint purchasing. It will allow the EU to use its collective purchasing power to obtain better prices from suppliers, reduce the risk of Member States and Energy Community countries outbidding each other on the market and, in doing so, driving up prices. It will ensure transparency in terms of process, volumes and timing but also help smaller and landlocked Member States in particular, who are in a less favourable situation as buyers, to secure fair and competitive access to gas. The focus will be on, but not limited to, coordinating and aggregating (pooling) demand to support the filling of gas storage facilities, in line with our filling targets for the next winters.

In practice, for the demand aggregation, purchasing companies from across the EU and Energy Community Contracting Parties would aggregate their needs by submitting their demand for gas (in terms of volume, delivery time, duration and place) through an IT tool (bidding platform) operated by a service provider contracted by the Commission. Member States would be required to pool demand of gas volumes equivalent to at least 15% of their storage filling requirements for the following year, in line with the gas storage regulation. The service provider would then seek offers from suppliers through a tender process, using the IT tool, for volumes of natural gas sufficient to meet the aggregated demand.

Regarding the coordinated gas purchasing, the companies that participated in the demand aggregation would decide, depending on the volume of gas obtained, as well as the price and other conditions, whether to purchase the gas. If they decide to go ahead with the purchase, they can decide to either enter the contracts individually or to form a gas purchasing consortium coordinating their positions with respect to volumes, prices, delivery points and so on, and to enter into contracts with the suppliers that offered gas. Creating a single gas purchasing consortium would offer strong buying power and increase the likelihood of achieving better prices, but more than one consortium should also be allowed to operate.

An ad-hoc Steering Board, composed by representatives of both the Commission and Member States and open to representatives of Energy Community Contracting Parties (Western Balkan countries, Ukraine, Moldova and Georgia), will oversee the whole process to ensure full compliance with security of supply, transparency and solidarity. The aim is to have the joint purchasing tool ready no later than in early spring 2023 to support the filling of gas storage ahead of the next filling season. In the future, this joint purchasing could be used to purchase renewable energy supplies like hydrogen from non-EU sources. 

Will it be possible for Europe to use the demand aggregation mechanism to get gas from Russia in the future? 

The possibility of using the joint purchasing mechanism for importing Russian pipeline gas is explicitly excluded. Joint purchasing has been set up in the spirit of the RePowerEU Plan, with the objective of reducing our dependence on Russian fossil fuels by fast forwarding the clean transition, enhancing diversification of supply sources and joining forces to achieve a more resilient energy system and a true Energy Union. The mechanism will support particularly those companies that were previously purchasing gas only or mainly from Russian suppliers by helping them to obtain supplies from alternative natural gas suppliers or providers in advantageous conditions.

How does this proposal enhance solidarity between Member States? 

Today's proposal widens and operationalises the existing solidarity obligation under the security of supply rules. Currently, it applies between the Member States that are directly connected or via a third country. Its application in the event of an emergency requires detailed technical and financial arrangements which need to be agreed bilaterally between Member States. However, only 6 out of the 40 bilateral arrangements required to implement the existing obligation have been agreed so far by the Member States. The proposed Regulation therefore defines the rules and procedures that will automatically apply between those Member States which have not agreed alternative bilateral solidarity arrangements.

One of the main barriers for many Member States was agreeing on financial compensation to be paid by a Member State requesting solidarity. This proposal removes this obstacle, as the new rules clarify which elements by default constitute a ‘fair compensation' for solidarity in case Member States were not able to agree in advance on this compensation. The solidarity compensation will be based on the average market price of gas of the last 30 days preceding the request for assistance by the requesting Member State. The proposal also makes clear that Member States must respond within 12 hours and provide the solidarity measures agreed within 3 days.

The proposal enlarges the scope of the solidarity obligation to Member States with LNG facilities not directly connected with the Member State requesting solidarity, if the requesting Member States has the infrastructure necessary to receive this LNG.

Finally, this new regulation also presents a proposal for an allocation mechanism to apply in case of an EU or regional emergency. In such case, the Council should be able to decide on an appropriate allocation of the gas capacities available in the EU to those Member States affected by the emergency based on a Commission proposal.

How will the adopted solutions maintain the integrity of the internal market? 

The proposal is compatible with the rules on the internal market for energy, including EU competition rules. Functioning cross-border energy markets are key to ensure security of supply in a situation of supply shortages.

To that end, the proposal specifically introduces safeguards for cross-border flows and empowers the Commission to request a competent authority or Member State to take action in case of undue restrictions of cross-border gas flows, access to gas infrastructure, or measures endangering gas supply in another Member State.

The joint purchasing mechanism under the proposed Regulation must be in compliance with the Union competition rules and maintain the integrity of the internal market. That is why, in order to effectively use the joint purchasing and to conclude gas agreements with suppliers submitting bids as a reply to the tender, companies have to coordinate conditions of the purchase, such as volumes, gas price, delivery points and time, within the limits of EU law. Gas companies and gas consuming companies participating in a purchasing consortium must ensure that the information directly or indirectly exchanged is limited to what is strictly necessary for the purposes of jointly purchasing gas, in line with Article 101 of the Treaty on the Functioning of the European Union (TFEU) In light of the exceptional circumstances, in the light of which the competition rules are applied, the Commission has indicated that it stands ready to accompany companies in the design of the gas purchasing consortium and to issue a decision, pursuant to Article 10 of Regulation 1/2003, on inapplicability of Articles 101 and 102 TFEU if relevant safeguards are incorporated and respected.

Finally, internal market fragmentation will be avoided by ensuring the market correction mechanism for natural gas transactions in the spot TTF market is developed in a way that would not prevent intra-EU flows.

What is the Commission proposing to tackle the impact of energy prices in financial markets?

The current stress on electricity markets is primarily due to Russia's aggression against Ukraine and its manipulation of gas supply. This is an exceptional situation for energy markets, with some secondary effects on energy derivatives markets. Energy derivative markets play an essential role by allowing energy companies to hedge their risks e.g. the wholesale price they have to pay for their supplies or the output price at which they can expect to sell gas or electricity.

The Commission has been working closely with ESMA and the European Banking Authority (EBA) to support the proper functioning of European wholesale energy markets. Following this outreach, the Commission is today proposing a number of measures covering derivatives, trading and benchmarks, while ensuring that financial stability risks are contained and adequately mitigated.

On derivatives, the Commission has adopted – in line with advice from ESMA – two measures designed to ease liquidity stress some energy companies are currently experiencing. The first measure will raise the commodity clearing threshold from €3 billion to €4 billion. It means that energy companies will be allowed to enter into more over-the-counter transactions without being subject to margin requirements. The second measure will temporarily expand the list of eligible assets that can be used as collateral to meet margin calls, e.g. adding public guarantees and uncollateralised bank guarantees, subject to conditions.

On trading, the Commission proposes a time-limited measure to manage excess volatility in gas and electricity derivatives markets, while preserving the price formation processes. The new temporary intra-day price spike cap mechanism will avoid excessive price volatility and prevent extreme price spikes in prices on energy derivative market. Such a mechanism will ensure sounder price formation mechanism in those markets, protecting EU energy operators from large intra-day upward price movements and helping them secure their energy supply in the medium term.

Finally, on benchmarks, the Commission is taking steps to create a LNG benchmark that better reflects the price the EU pays for its gas imports. The Commission has observed a gap price between LNG spot prices and some indexes used as a proxy for LNG imports prices into Europe and that are influenced by constraints such as the effects of pipeline deliveries, and gas manipulation by Russia. This warrants the creation of a dedicated LNG benchmark.

The Commission has, therefore, proposed to empower the ACER to collect, process and publish price assessments on LNG transactions.

To ensure the integrity of the wholesale energy market, the Commission welcomes that ACER and the European Securities and Markets Authority (ESMA) are enhancing their cooperation, with the creation of a new joint Task Force. This will strengthen their capabilities to monitor and detect possible market manipulation and abuse, in Europe's spot and derivative energy markets.

Why are you changing rules regarding collateral?

Most of the trading in energy derivatives is conducted on regulated (futures) markets and is cleared centrally via central clearing counterparties (CCPs). In such markets, the current regulatory framework provides the necessary safeguards to ensure financial stability, such as margin requirements for clearing between buyers and sellers: if one party defaults, the other market participants are protected from this risk.

However, amid the sharp rise in gas and electricity prices over the past year, energy companies have been required to post correspondingly higher amounts of cash collateral to CCPs as margin calls have risen in line with prices. This has resulted in problems of liquidity for energy companies

To provide some urgent relief to those non-financial counterparties, in particular energy firms, it is important to expand the list of eligible collateral at EU CCPs as quickly as possible.

To alleviate this stress, the Commission has today adopted a Delegated Act, which allows the use of uncollateralised bank guarantees and public guarantees, under specific conditions, as eligible collateral for meeting margin calls. This measure is in line with ESMA's proposal of 14 October 2022. This measure is temporary and will expire 12 months after entry into application. Depending on the evolution of the situation on energy derivative markets, the Commission stands ready to ask ESMA to consider an extension of those temporary measures. In addition, ESMA has issued guidance clarifying the eligibility of other assets, such as commercial paper or EU bonds, for use as collateral in meeting margin calls.

Why are you increasing the clearing threshold? What does it mean in practice?

The clearing threshold for commodity derivatives, which is a part of the European Market Infrastructure Regulation (EMIR), has not been revised since 2013. The Commission is today increasing this threshold to cater for inflation and the fact that the price of some derivatives and commodity derivatives have risen sharply and become much more volatile, as a result of the Russian invasion of Ukraine.

To take into account the impact of high energy prices on EU non-financial counterparties such as energy firms, ESMA has proposed that the clearing threshold for commodity derivatives should be increased from €3 billion to €4 billion. It means that energy companies will be allowed to enter into more over-the-counter derivative transactions without being subject to margin requirements.

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