Enhancing solidarity in EU gas markets

Written by Alex Wilson.

The European Commission has adopted a proposal to improve the functioning of EU gas markets during the current energy crisis. It introduces a joint purchasing tool, seeks to improve efficiency and security of gas supply, and limits prices and volatility. The proposed Council regulation is under discussion among EU Member States.

Background

On 18 October 2022, the European Commission adopted a proposal for a Council regulation enhancing solidarity through better coordination of gas purchases, exchanges of gas across borders and reliable price benchmarks. This is one of several urgent EU legislative actions undertaken to address the energy crisis triggered by Russia’s illegal invasion of Ukraine. The proposal is linked to the Commission’s REPower EU plan (18 May 2022), which aims to end Europe’s reliance on energy imports from Russia and accelerate the clean energy transition. And it is closely related to other emergency EU legislation adopted over the course of 2022, including an EU Regulation on filling in gas storage levels; a Council Regulation voluntarily curbing gas consumption over the winter period; and a Council Regulation containing a series of emergency measures (demand reduction, market intervention and windfall levies) to address the problem of very high energy prices across the EU in 2022 and 2023 (see EPRS briefing on the topic).

Legal basis

The proposed Council regulation uses Article 122 of the Treaty on the Functioning of the European Union (TFEU) as its legal basis, like many other urgent EU proposals adopted in the face of the energy crisis. Article 122 TFEU is designed for use in case of a serious threat to energy supplies, and it is certainly the case that close energy ties between the EU and Russia (until recently the leading supplier of fossil fuels to Europe) have collapsed because of the invasion of Ukraine in 2022. This deterioration of energy relations is evident from the EU embargo on imports of Russian coal; the impending EU embargo on Russian oil and oil-related products; and the drastic reduction in Russian pipeline gas supplies. Article 122 TFEU can accelerate the process of EU decision-making in an emergency situation, because it only requires the agreement of the Council of the EU and does not provide for any legislative role for the European Parliament. However, frequent use of Article 122 TFEU can reduce the level of democratic scrutiny over EU policies. The normal legal basis for EU energy policies is Article 194 TFEU, which is being used to revise more permanent legislation on EU gas markets. Furthermore, Article 194 TFEU was used to agree the EU regulation on gas storage, which was swiftly adopted by the Parliament and Council under an expedited procedure.

Main features of the proposed Council regulation

This proposal aims to develop greater joint purchasing of gas and ensure the efficient operation of gas infrastructure, pipelines and LNG terminals. It also includes measures to enhance security of supply, and takes action to address the current problem of high prices and volatility in EU gas markets. In light of the emergency character of the Council regulation and its related legal basis (Article 122 TFEU), the Commission has proposed that it should be valid for a period of one year, albeit with the possibility of prolongation.

Joint purchasing

The EU would take the first concrete steps towards the joint purchasing of gas by developing a temporary joint purchasing tool. The tool would be ready by spring 2023 and impact on gas supplies during the next filling season (i.e. ahead of winter 2023/2024). Joint purchasing would involve a two-step process. Firstly, gas purchasing companies would aggregate their demand using a dedicated service provider, hired under a public procurement procedure. Member States would have to ensure at least 15 % of their storage filling requirements for next year were included by their companies in the demand aggregation process (roughly 13.5 billion cubic metres across the EU as a whole). The second step would involve some of these companies voluntarily deciding to form a gas purchasing consortium (or even multiple consortia that vary by region). The idea is that a gas purchasing consortium could negotiate lower prices and ensure a more stable supply, especially in a context of scarcity. This proposal is consistent with a longstanding demand of the European Parliament for a joint EU gas purchasing mechanism.

Efficient operation of pipelines and LNG terminals

The proposal grants the gas system operators more tools to react rapidly to changes in gas flows and possible contractual congestion. These are becoming more problematic because of the urgent need to diversify gas supplies away from Russia, which in turn sharply increases the EU’s reliance on liquefied natural gas (LNG) supplies, obtained from a wide range of exporting countries. The proposal envisages a transparency platform and the development of an organised market of secondary capacities for LNG imports, similar to those already in existence for the transport of gas via pipelines. This is consistent with the Commission’s legislative proposal (December 2021) to reform EU gas and hydrogen markets.

Security of supply

The proposal would facilitate Member States in taking further steps to reduce EU gas demand beyond this winter. Security of supply will remain a major concern going into the following winter (2023-2024) because of the (likely) total interruption of Russian gas supplies, making it much harder to fill in gas storage sites to their full capacity. To better prepare for an emergency, Member States would be able to redefine their protected consumers, so long as vulnerable households continue to be protected in all circumstances. Member States would likewise be able to reduce the ‘non-essential consumption’ of protected customers, provided this does not lead to disconnection. Critical gas-fired power plants would now be covered by a solidarity protection obligation. Default rules for bilateral solidarity between Member States would henceforth apply in all instances where no solidarity agreements exist. This has now become a necessity, given that only six out of the 40 required solidarity agreements are in place. In the event of an EU or regional emergency involving major gas disruptions and supply shortages, the Council of the EU would have the possibility to decide on an efficient allocation of gas capacities.

Addressing high prices and volatility

The proposal would develop a new complementary benchmark for LNG imports to Europe. The Dutch Title Transfer Facility (TTF), Europe’s main market hub for gas, remains too dependent on prices for pipeline gas from Russia, with the result that its operation may now be artificially inflating EU gas prices. The EU Agency for the Cooperation of Energy Regulators (ACER) would be tasked with developing this new benchmark. The proposal also envisages the future possibility of developing a gas market correction mechanism, in the form of a potential new Council Regulation that would establish a maximum dynamic price at which natural gas transactions can take place in the TTF spot markets.

The proposal would introduce an intra-day price volatility management mechanism aimed at limiting large price movements in electricity and gas derivatives contracts within the same trading day, and which would complement existing ‘circuit breakers’ established on trading platforms. To this specific end, and to better assess issues relating to high pricing and volatility, ACER and the European Securities and Markets Authority (ESMA) would be allocated new tasks and required to cooperate more closely.

The proposal does not include concrete measures to implement a price cap on gas imports to the EU, and therefore does not fully address the European Council’s request for a ‘temporary dynamic price corridor’ and a ‘temporary EU framework to cap the price of gas in electricity generation’ (see below).

Next steps

Member States are in the process of negotiating the final text of the Council regulation, and some have expressed their dissatisfaction with a text that does not contain concrete proposals for a cap on gas prices, as requested by the European Council on 20-21 October 2022. The Commission has previously expressed its concerns about the unintended consequences of a gas price cap, arguing that it could disincentivise demand reduction and jeopardise security of supply to Europe. Nevertheless, some kind of plan to curb gas prices could form part of the process of Member States agreeing to the text of this Council regulation.

Read this ‘at a glance’ on ‘Enhancing solidarity in EU gas markets‘ in the Think Tank pages of the European Parliament.