Questions and Answers on the gas market correction mechanism
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