Explanatory Memorandum to COM(2022)549 - Proposal for a COUNCIL REGULATION Enhancing solidarity through better coordination of gas purchases, exchanges of gas across borders and reliable price benchmarks - Main contents
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| dossier | COM(2022)549 - Proposal for a COUNCIL REGULATION Enhancing solidarity through better coordination of gas purchases, exchanges of gas across ... |
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| source | COM(2022)549  |
| date | 18-10-2022 |
CONTEXT OF THE PROPOSAL
Reasons for and objectives of the proposal
Contents
Russia’s unprovoked war of aggression against Ukraine and its weaponisation of energy supplies has exposed the Union’s dependency on Russian fossil fuels, tested our tools to ensure security of supply, and driven energy prices to unprecedented levels.
Over the last year, the Commission has put forward and implemented several initiatives, gradually moving from providing guidance to Member States to setting up an integrated security of supply strategy 1 , underpinned by legal instruments where necessary. This included, most recently, the emergency intervention to address high energy prices, 2 featuring for instance a coordinated reduction of electricity demand (notably in peak hours), an improved Member States toolbox to protect consumers and companies from high energy prices, and a solidarity contribution for the fossil sector.
Following the “REPowerEU” Communication, the Commission and Member States have asked for the creation of an EU Energy Platform, 3 with a view to ensuring security of supply. This Platform should support, in a spirit of solidarity, Member States and Energy Community Contracting Parties and their gas undertakings in obtaining additional supplies of LNG and pipeline gas to replace missing Russian gas supplies.
The current situation causes economic and social hardship, placing a heavy burden on citizens and on the economy. Rising energy costs are leading to reduced purchasing power for citizens 4 and loss of competitiveness for companies 5 . The shortage in gas and power supply and the relatively inelastic energy demand has led to significant increases in prices and volatility of gas and electricity prices in the EU. National measures to counter these trends may lead to fragmentation of the internal market and may not guarantee solidarity.
At the same time, the weaponisation of gas supply and the Russian Federation’s manipulation of the markets through intentional disruptions of gas flows have led to skyrocketing energy prices in the Union, endangering not only the economy in the Union, but also seriously undermining security of supply. A coordinated and swift reply from the EU is therefore needed. Russian gas supplies decreased significantly, down to 9% of our pipeline gas supply in September 2022 and 14% when including LNG, compared to a 41% share of Russian pipeline gas and 45% when including LNG in 2021. The apparent sabotage of the Nord Stream 1 pipeline increases the need to substitute Russian gas volumes quickly and on a lasting basis. Beside demand reduction, energy efficiency measures and the increase of renewable energy sources, the supply gap will need to be filled, where no other means of substitution are available, by purchasing equivalent volumes of gas from other suppliers, mostly LNG.
Compared to this winter, undertakings could face severe difficulties in meeting two additional challenges related to filling gas storage the following winter (2023/2024). First, it is highly probable that less and most likely no pipeline gas will arrive in the EU from Russia given the current political situation. Second, the target is to fill 90% of EU gas storage capacities as opposed to 80% for this winter as set out in the Gas Storage Regulation (EU) 2022/1032. In this situation, and building on existing legislation and other initiatives, aggregating the EU demand and joint purchasing could be a useful tool to help the Member States meet filling trajectories and targets enshrined in the Gas Storage Regulation.
Therefore, the Commission proposes this emergency regulation, which aims at mitigating the impact on the price for gas by addressing demand and supply 6 , ensuring security of supply across the entire European Union, and enhancing solidarity.
The regulation contains four main elements that will work, in a coherent manner, towards lowering prices and reinforcing solidarity and security of supply.
First, aggregation of EU gas demand and joint purchase of gas will allow the EU to use its collective purchasing power to negotiate better prices, reduce the risk of Member States outbidding each other on the already tight market and, in doing so, counter-productively driving up prices. It will improve transparency and help smaller Member States in particular, which are in a less favourable situation as buyers. The short-term focus under Article 122 will be on coordinating and aggregating (pooling) demand to support the filling of gas storage for the next, fast approaching, filling season.
Second, the proposal contains an entire package of measures on gas prices, to address excessive price levels and to ensure fair gas and electricity prices also in a crisis situation. The current proposal provides certainty as to the price to be used in a context of gas scarcity, when an emergency situation is declared. It also proposes a complementary benchmark on liquefied natural gas (LNG) supplies to ensure a representative benchmark for LNG imports not influenced by Russia’s manipulation. To deal with excessive volatility in the markets, it includes mechanisms to smoothen-out the volatility on futures markets by way of an intra-day price volatility management mechanism that limits extreme changes within a short time-period (“circuit breaker”).
Third, a joint approach to limiting prices requires solidarity across the Union. As not all Member States have mutual solidarity agreements in place, the Commission proposes directly applicable arrangements in the absence of such solidarity agreements. It will also propose to extend the obligation to provide solidarity to non-connected Member States with LNG facilities. This will ensure that we will be prepared and ready to act in case these agreements will be needed. The Commission is also looking into the need for further proposals for situations where some regions are facing a larger supply crunch than others.
Finally, further reduction of gas demand should be possible while also ensuring consumers continue to be adequately protected against supply shortages. The EU already has strengthened its tools for savings in gas and electricity. However, the implementation of the agreed regulations to their fullest extent is needed in order to reach the necessary demand reduction targets. This will help withstand further gas supply disruption, and ease pressure on international gas markets, and therefore on prices. The Commission will closely monitor demand reduction measures and stands ready to trigger the EU alert or even revise the gas demand reduction targets if voluntary demand reduction measures prove insufficient to ensure sufficient gas supplies over the winter
Main elements of this proposal
Joint purchasing and efficient operation of gas infrastructure
(a) Joint purchasing
This proposal addresses these urgent issues by developing a temporary joint purchasing tool, in line with the request from Member States 7 . There is considerable time pressure for this tool to be ready no later than in early spring 2023, and in particular ahead of the next storage filling season. Bearing this in mind, it is proposed to move quickly to establish the central tenets of joint purchasing under Article 122 as soon as possible, and therefore a number of these elements should apply on a provisional basis.
The proposal for joint purchasing establishes a process consisting of two steps: first, demand aggregation of natural gas; second, possible joint purchasing under the Energy Platform.
(i)First step: Demand aggregation
In the first step, gas purchasing companies would aggregate their demand using a service provider organising this process, contracted through a public procurement procedure by the Commission for this purpose. Companies can submit their demand for gas (in terms of volume, delivery time, duration and place) to the service provider via an IT tool to collect this data. The service provider would publish these data, with appropriate protection of confidential information, on its website, seeking offers through a public tender process for volumes of natural gas that meet the aggregated demand. This step would be voluntary except that – given the importance of storage filling – Member States would have to require that volumes equivalent to at least 15% (around 13.5 bcm for the EU as a whole) of their storage filling requirements for next year were included by their companies in the demand aggregation process. 8 The companies which participated in demand aggregation under a mandatory obligation could still decide whether to actually purchase the gas or not after the aggregation process. Further, the gas purchased does not necessarily need to be used for storage filling.
Given the importance of storage filling in the coming year in particular, this mechanism to jointly purchase gas would benefit from market leverage from joint purchasing and help ease the uncertainties and abnormally high prices seen in the last filling season this year.
Given the need for urgency, the service provider should be an existing company with detailed knowledge of energy markets and appropriate IT tools and expertise to perform these tasks. The joint purchasing is open to participation of companies from Energy Community Contracting Parties (Western Balkan, Ukraine, Moldova and Georgia).
(ii)Second step: Coordinated gas purchasing
In a second step, companies that have participated in the demand aggregation process described above may decide to form a gas purchasing consortium in order to enter into contracts with the suppliers that have offered gas under this process. They could thereby decide to purchase the gas on a joint basis, and coordinate elements of their positions such as volumes, prices, delivery points and time of delivery. A single gas purchasing consortium with strong buying power increases the likelihood of achieving better prices, but more than one gas purchasing consortium could emerge, given the very different demand pattern of undertakings across the EU. Respect of competition rules would have to be ensured (see “Consistency with other EU policies” below).
(iii) Ad hoc governance arrangements
The aforementioned measures should be accompanied by an adequate governance structure to ensure effective coordination to meet the objectives. Therefore, a Steering Board should be established on an ad hoc basis, composed of representatives of the Commission and Member States, to oversee both the process of (a) demand aggregation and (b) coordinated gas purchasing. The Steering Board can ensure transparency in the process and provide guidance so as to ensure that joint purchasing effectively respects security of supply and the principle of energy solidarity.
The proposal is carefully balanced and respects the principle of proportionality. There are certain necessary mandatory elements – for example on pooling of demand for the filling-in of gas storages – but these in no way constrain the freedom of undertakings to decide on whether to buy or not depending on the conditions that are offered through the demand aggregation process. The objective of joint purchasing is to support EU undertakings in their efforts to obtain additional gas and help to ensure more equal access to new or additional gas sources in the face of the current acute threat to the security of supplies. In addition, the proposal addresses the strong interest in a number of Member States to be able to operate in gas purchasing consortiums, subject to the relevant competition considerations.
In particular, as described, the tendering of aggregated demand for gas by the Service Provider could play a pivotal role in helping Member States to fill gas storages for the winter 2023/2024. Indeed, it could also therefore strengthen EU solidarity by helping ensure the fairer distribution of gas. Aggregation of demand and joint purchasing could also reduce the risk for individual gas undertakings in some Member States of overpaying for gas contracted on tight short term markets. It could also help smaller EU undertakings, including in landlocked countries that do not have the necessary experience in contracting LNG, to be able to pool their demand to contract LNG cargoes (which may be too large for individual undertakings to handle all at once), and also help them to structure LNG supply according to their particular needs. Joint purchasing could support particularly those undertakings that were previously purchasing gas only or mainly from Russian suppliers. Joint purchasing could grant a preferential treatment or support to supply of renewable gases such as biomethane and hydrogen, and to gas which would otherwise be vented or flared. Undertakings concluding contracts pursuant to this Regulation should be encouraged to use the UN Oil and Gas Methane Partnership 2.0 Standard to measure, report and verify methane emissions along the supply chain to the European Union. Finally, joint purchasing in the future could strengthen the potential for renewable energy supplies in helping to ensure access to future imports of hydrogen from non-EU sources.
(b)Efficient operation of pipelines and LNG terminals
The proposed regulation also addresses ways for the most efficient operation of pipelines and LNG terminals.
Diversification of supply sources away from Russian are changing the gas flow patterns in the EU. Therefore, the routes from LNG terminals to consumption centres may become more relevant than the currently predominant East-West direction of pipeline flows. However, such changes in gas flows may lead to congestion (contractual and physical) of the existing pipelines and the EU LNG terminals.
The existing congestion management measures for pipelines foresee “use-it-or-lose-it” procedures, which take at least six months before they show effect. Moreover, an administratively burdensome procedure to be performed by the National Regulatory Authority in the relevant Member States is necessary. This proposal grants the gas system operators tools to react rapidly to changes in gas flows and possible contractual congestion. In particular, the new rules could accelerate marketing of unused long-term capacities in case of short-term congestion.
Moreover, it is of the utmost importance to optimise the LNG absorption capacity of the EU LNG terminals and the usage of storage facilities. A transparency platform and the development of an organised market of secondary capacities are necessary, similar to those existing for the transport of gas via pipelines. The Commission proposal to revise the Gas Regulation of the Hydrogen and Gas Market Decarbonisation Package 9 already contains provisions to this effect in Article 10 and Article 31. The current proposal frontloads these provisions as part of the crisis response now, in order to help avoid situations in the future where new sources of gas are procured, but LNG terminals or gas storage facilities are used inefficiently without the necessary transparency.
Security of supply
(a)Demand reduction
An integral part of the EU security of supply response in the current challenging context is to pro-actively reduce the gas demand, to prepare for any potential supply disruptions while avoiding depleting the storage facilities. If necessary, the Commission will propose to trigger the Union alert pursuant to the Demand Reduction Regulation (Regulation (EU) 2022/1369).
In order to best anticipate and prepare for the winter 2023-24 and to fill underground storages up to 90%, as was agreed upon in Regulation (EU) 2022/1032, all demand of gas that can be reduced now will be of benefit. Therefore, efforts to reduce gas demand should be pursued beyond March 2023, in order to fill underground storages up to 90%, as was agreed upon in Regulation (EU) 2022/1032. The Commission will closely monitor demand reduction measures and stands ready to trigger the EU Alert or even revise the gas demand reduction targets if voluntary demand reduction measures prove insufficient to ensure sufficient gas supplies over the winter. Meanwhile, Member States should actively take all possible measures in line with the Gas Demand Regulation to reduce gas demand and in line with the European gas Demand Reduction Plan ‘Save Gas for a Safe Winter’, adopted in July 2022. Such measures include public awareness campaigns, demand-reduction measures in the buildings operated by public authorities and the commercial and outdoor spaces.
To reinforce preparedness to possible emergencies in the winter, the proposal introduces the new provisions below related to security of supply. Given the importance that all consumer groups contribute to saving gas within their ability, this proposal includes provisions that allow Member States to exceptionally take measures to reduce the ‘non-essential consumption’ of protected customers provided it does not reduce the protection of their essential consumption. These measures will under no circumstances affect the vulnerable consumers who have no margin to reduce their consumption and will not lead to the disconnection of any protected customers. Member States could redefine who are protected consumers, as long as vulnerable households continue to be protected in all circumstances.
(b)Extension of solidarity protection obligation to critical gas fired power plants
Under the current regulatory framework, in Member States where critical gas-fired power plants play a key role for security of electricity supply, they would have to be curtailed first, to the possible detriment of the security of electricity supply of other Member States, before Member States are allowed to request solidarity measures under Regulation (EU) 2017/1938. To prevent such negative spill-over effects into electricity generation, it is proposed that Member States may trigger a solidarity request, under certain conditions, if gas-fired power plants, that are needed to ensure the electricity system’s adequacy, are at risk of not being supplied with critical gas volumes. For the same reason, Member States providing solidarity will be entitled to ensure that the operation of their critical gas-fired power plants is not endangered when providing solidarity to another Member State.
(c)Default rules for bilateral solidarity
Specific measures in this proposal introduce a default mechanism between the Member States to ensure they help each other to supply the “solidarity protected customers” (households and district heating and essential social services under certain conditions) and critical gas fired power plants, in an emergency leading to very severe shortage of gas. The current security of supply rules have introduced the principle of such solidarity but its actual use in a crisis requires detailed technical and financial arrangements which were supposed to be agreed bilaterally between Member States. However, only six out of more 40 required arrangements have been agreed so far. The proposed Regulation, therefore, spells out the rules and procedures that will automatically apply between Member States which have not agreed on bilateral solidarity arrangements. It builds on the Commission’s Recommendation (EU) 2018/177 and the standard template proposed by the Commission in Annex 2 of the COM (2021) 804 proposal, with the necessary updates to reflect the fact that the market and security of supply situation has considerably deteriorated since then.
This default solidarity mechanism applicable in the absence of other bilateral arrangements includes the following:
·The solidarity compensation to be paid by the Member State requesting solidarity to the Member State providing solidarity will be based on the average market price of gas of the last 30 days month preceding the request for assistance by the requesting Member State of the most relevant exchange. This averaging reflects the likely extreme volatility of prices in a situation of emergency.
·Possible costs resulting from judicial or arbitration proceedings after the curtailment of industry will not be included in the solidarity compensation to be paid between Member States. If such costs are incurred, they would therefore have to be borne by the providing Member State pursuant to its own national rules. The reason is that the cost of compensation to industry resulting from curtailment is partially covered by the price of gas and, should a part remain from litigation, this part is highly uncertain and can largely exceed the costs of the gas. The uncertainty about indirect compensation costs therefore has proved to be a major obstacle to solidarity agreements. However, Member States will still be able to agree on different compensation conditions.
·The procedure to request and provide solidarity should, to the extent possible, prioritise voluntary market-based measures while operationalising the fact that solidarity may have to include measures such as release of strategic stocks or curtailment as last resort in a crisis. The proposal makes it clear that upon receipt of a solidarity request, the connected Member States must respond within 12 hours and provide the solidarity measures agreed within 3 days.
The current solidarity obligation applies between the Member States that are directly connected or via a third country. This proposal will also apply this obligation to Member States with LNG facilities which even if not directly connected could provide solidarity to a Member State in an emergency if endowed with the infrastructure necessary to receive this LNG.
(d)Allocation of capacity in a Union or regional emergency
Finally, the proposal points to the possibility of Union or regional emergency with major gas disruptions and supply shortages. In such a cases, the Union should be prepared to rapidly apply, solidarity mechanisms in a regionally coordinated manner to mitigate the emergency situation. Under these extraordinary circumstances, the Council should be able to decide on an efficient allocation of the gas capacities available to those Member States affected by a regional or Union emergency based on a proposal from the Commission. In such case, and in the absence of a bilateral solidarity agreement, the price for gas supplied under solidarity should be defined as the average market price of the last 30 days month preceding the request for assistance by the requesting Member State of the most relevant exchange (see also below, 3a).
Action on the level of gas prices
(a)Price formula in the default solidarity agreements
As mentioned above, solidarity should be based on a fair compensation, both for the requesting as well as for the providing Member States. The gas price has become much more volatile since 2021, which makes the spot market price in crisis situations less appropriate as a basis for fair compensation. Therefore, this Regulation proposes to use the average market price of the last month preceding the request for assistance by the requesting Member State of the most relevant exchange to provide certainty to the different parties.
With the average market price of the last month, the compensation is still based on the ‘market price’, as stipulated in the 2018 Recommendation. However, the monthly average market price is more independent from a volatile environment and likely very high spot prices during crisis situations, and as such, limits any perverse incentives. The providing Member States still receive a fair compensation as the gas flows come from long term contracts and storages, all being purchased at less than the expected crisis spot prices.
(b)Development of a new complementary benchmark for LNG
The EU’s LNG market is still emerging, and hub indexed pricing remains highly influenced by pipeline supplies and therefore by the Russian manipulation of natural gas supplies to the EU, as well as by existing infrastructure bottlenecks. The pricing of LNG imports within the EU is deemed to be unduly influenced by these constraints and questions remain as to the representativeness of the current indexes. At the same time, perceptions of malfunctioning in the financial markets for energy undermine public trust.
There is a need to provide for stable and predictable pricing for LNG imports, which are indispensable to replace the supply shortfalls caused by the likely halt of Russian gas imports. This proposal tasks the European Agency for the Cooperation of Energy Regulators (‘ACER’) to create within a short time frame an objective price assessment tool, and over time a benchmark, of the EU’s LNG imports by collecting real-time information on all daily transactions. This new benchmark will rely on same day reporting of LNG imports - comprising LNG bids, offers and transactions that specify delivery or are delivered in the EU – by any person who engages in such an activity, regardless of its place of incorporation or domicile. This will provide more comprehensive information to buyers and increase price transparency.
The proposed Regulation grants ACER the necessary powers to collect the transaction data needed for the establishment of the LNG benchmark, building on and reinforcing the tasks and powers ACER already has under Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency and Commission Implementing Regulation (EU) No 1348/2014 of 17 December 2014 on data reporting implementing Article 8(2) and Article 8(6) of Regulation (EU) No 1227/2011 of the European Parliament and of the Council on wholesale energy market integrity and transparency (hereinafter together referred to as ‘REMIT’).
(c)Gas Market Correction Mechanism
The Title Transfer Facility (TTF) is a virtual pricing location in the Netherlands, which due to its high liquidity often serves as a price reference for the European gas market, impacting contracts and hedging operations across the EU. However, the TTF is primarily a physical pipeline index for gas injection in the Dutch network, serving mainly as the hub for North-western Europe. Currently, the TTF is trading at a premium to most EU trading hubs, which for the most part reflect the shortage in supplies from Russian and the region’s infrastructure bottlenecks.
The fact that the TTF is used as a price reference and basis for hedging of gas contracts across the different EU hubs shows its relevance in setting the natural gas price in the EU.
As a last resort measure, this emergency proposal aims at tackling situations of excessive natural gas prices, by empowering the Commission to propose a Council measure to establish a maximum dynamic price at which natural gas transactions can take place in the TTF spot markets under specific conditions. Other Union gas trading hubs shall be linked to the corrected TTF spot price via a dynamic price corridor. In order to ensure no negative effects, 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.
Action to reduce price volatility
(a)Intra-day price volatility management mechanism:
Financial Regulation (MiFID II) already requires a set of mechanisms to be set up by regulated markets to contain significant volatility in financial markets and to prevent erroneous trading patterns. However, it appears that the number of times they have been triggered by trading venues remains low, which is mainly due to the fact that the mechanisms in place are intended to prevent erroneous orders and not rapid price swings reflecting market uncertainty. Large volatility spikes on gas and electricity markets are making it difficult for energy firms to continue participating in those markets and meet their hedging needs while ensuring security of energy supply for the end-consumers. Therefore, this proposal lays down a requirement for trading venues to establish a new temporary intra-day volatility management mechanism aimed at limiting large price movements in electricity and gas derivatives contracts within the same trading day. Moreover, so as to focus on the most liquid contracts, and to avoid unintended disruptions on markets for less liquid derivatives, the intra-day volatility management mechanism should focus on front-month energy derivatives. In order to provide trading venues with the necessary time to set up the mechanism, trading venues are expected to implement preliminary tools that can broadly achieve the same objective as the intra-day volatility management mechanism.
This new mechanism should supplement any static or dynamic circuit breakers that trading venues have put in place and should apply in addition to them. To ensure uniform conditions for the implementation of the new volatility management mechanism, the Commission should be able to specify certain technical elements of its calibration in an implementing act. Additionally, 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 European Securities and Markets Authority will be tasked, based on reports regularly submitted by national competent authorities, to coordinate the application of this mechanism throughout the Union, and to document divergences in the way this mechanism is implemented.
(b)Non-legislative action accompanying this proposal
The actions proposed in this Regulation are complemented by other actions to be undertaken by ESMA and ACER with a view to strengthen the energy markets and their transparency.
ESMA and ACER are enhancing their cooperation with a view to strengthen their capabilities on monitoring and detection of possible market manipulation and abuse. ESMA and national competent authorities are also strengthening their respective market monitoring and surveillance activities on the energy derivatives market.
Energy companies are finding it increasingly difficult to effectively hedge their commercial risks on centrally cleared EU energy markets. Increasing margin requirements and the difficulties faced by certain energy companies to secure sufficient liquidity to meet margin requirements may push them to reduce hedging activities, and consequently expose them to further risks. To alleviate this stress, the Commission has adopted a delegated act, which would allow the use of uncollateralised bank guarantees and public guarantees, under specific conditions, as eligible collateral for meeting margin calls. This delegated act is in line with ESMA’s proposal of 14 October. ESMA has also clarified that commercial papers and EU bonds are included in the list of eligible collateral to non-cash collaterals.
Consistency with existing policy provisions in the policy area
The proposed initiative sets out temporary, proportionate and extraordinary measures. It complements existing relevant EU initiatives and legislation, which ensures that citizens can benefit from secure gas supplies and that customers are protected against major supply disruptions.
It flows logically from existing initiatives, such as the “REPowerEU plan” and the proposal for a Hydrogen and Gas Market Decarbonisation Package 10 . In addition, the recently adopted Gas Storage Regulation (EU) 2022/1032 11 introduced storage obligations in response to the Russian invasion of Ukraine. Regulation 2022/1032 prescribes in Article 6a obligations to fill in gas storages in accordance to pre-set trajectories and targets. The proposed initiative is complementary to the EU legislation on internal market and security of supply.
Following the Russian invasion of Ukraine, the EU has set out the REPowerEU Plan with the aim to end the EU's dependency on Russian fossil fuels, as soon as possible and at the latest by 2027. To achieve this, the REPowerEU Plan sets out the EU Energy Platform established by the Commission and the Member States for the common purchase of gas, LNG and hydrogen. It announced that the Commission would be developing a joint purchasing mechanism. In these respects, the proposed initiative is fully consistent with the goals set out in REPowerEU.
The proposal reinforces and complements the Gas Security of Supply Regulation (EU) 2017/1938. The latter already includes an obligation to provide solidarity, as well as the notion of solidarity protected customers, which includes households and under certain circumstances essential social services and district heating. The proposal extends this solidarity obligation to safeguard the supply of critical volumes for gas fired power plants and operationalises it through a default mechanism in case of absence of bilaterally agreed solidarity arrangements.
The proposal also fully reflects the goal of the Demand Reduction Regulation (EU) 2022/1369 to pro-actively reduce gas demand to mitigate potential supply disruptions due to Russia’s invasion of Ukraine. Demand reduction remains a key pillar of our security of supply response and the proposal strentghens this pillar by allowing Member States to undertake savings from non-essential consumption, while still protecting vulnerable and other protected customers.
The Commission proposal for a Regulation on the internal markets for renewable and natural gases and for hydrogen adopted under the Hydrogen and Gas Market Decarbonisation Package includes measures to enhance the transparency and access to LNG terminals and gas storage facilities. The current proposal includes the same provisions with shorter deadlines for their implementation, so it is fully consistent with the Gas Regulation. Moreover it is also consistent with the requirements of the recently adopted Gas Storage Regulation (EU) 2022/1032 introducing storage obligations in response to the Russian invasion of Ukraine.
Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No 1775/2005 contains, in its Annex 1, point 2.2.5, provisions regarding a long term “use-it-or-lose-it” mechanism. These provisions have been adopted to prevent blocking of transport capacities by market participants in times when they cannot or do not plan to utilise them. Due to the crisis situation, the current proposal reduces administrative burden and anticipates the application of these provisions. In particular, the current proposal reduces the time which elapses when the capacity is not used from six months to one month. The proposal is therefore consistent with the rules of internal market to prevent inefficient use of gas networks.
The provisions to enable ACER to publish an LNG benchmark build on and complement ACER’s existing tasks under the REMIT legal framework.
In addition to the emergency intervention on the electricity market to tackle high prices, the Commission will improve the design of the electricity market for the longer term.
The main objective of this reform of the electricity market design will be to bring the benefits of affordable non-fossil technologies to consumers, while preserving the benefits of a common, market-based electricity system. The aim of this reform is to make sure that no energy carrier can cause market disruption like natural gas currently does, while taking into account the profound transformations needed for a decarbonised and largely electrified continent.
The Commission has committed to present the main elements of the reform by end 2022. This will serve as a basis to consult ministers and other stakeholders on a set of ideas brought forward by the Commission. This process is currently expected to lead to a Commission proposal 2023.
Consistency with other Union policies
The proposal, aiming at fundamentally reinforcing security of supply and tackling high and volatile energy prices, is also consistent with the longer term objective of the Green Deal insofar as the demand reduction efforts will accelerate energy efficiency measures and structural changes.
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.
As concerns the rules on demand aggregation and joint purchasing, establishing ways of purchasing gas jointly in a more coordinated way is also in line with the decarbonisation path indicated in the Green Deal and the RepowerEU. The Energy Platfom includes also renewable hydrogen in its scope.
The provisions to enable ACER to establish an LNG benchmark contribute to market transparency and, indirectly, to lower wholesale prices for gas and are therefore consistent with EU competition policy.
The rules on demand aggregation and joint purchasing can be applied in a manner compatible with EU competition rules, which allow joint purchasing between competing undertakings under certain conditions and which are applied in the light of prevailing market circumstances.
To reduce the risk of competition concerns, the service provider shall not be part of a vertically integrated undertaking active in the production or supply or consumption of natural gas within the Union or the Energy Community Contracting Parties.
In case of a severe supply disruption or supply shortage, joint purchasing among natural gas undertakings operating at the wholesale level is likely to be compatible with the EU competition rules where such crisis cooperation is (i) necessary for the purposes of addressing a severe supply disruption or shortage; (ii) temporary in nature; and (iii) proportionate to the objective pursued.
In general, joint purchasing is less likely to give rise to competition concerns where the participating undertakings do not have market power in the purchasing and selling markets. This being said, under the current exceptional market conditions, European gas undertakings and undertakings consuming gas are confronted with severe supply constraints which give very substantial negotiating power to parties on the supply side. A buying consortium for the purposes of increasing the negotiating power of gas purchasers should be accessible to any willing market participant on non-discriminatory terms, assembling participants active on a large variety of unrelated product and geographic markets, such that the representation of any given set of competitors, even if significant in terms of market shares on a given downstream or related market, will be limited relative to total participation. The buying consortium should be set up in a way that does not lead to any risk of competition distortion in the downstream or related markets in which participants may compete.
Participation by firms availing of the service provider in the demand aggregation mechanism of the service provider will be taken into account as a positive factor when balancing the possible risks and benefits of gas purchasing cooperation schemes under Union competition law, to the extent that such participation contributes to achieving greater efficiencies, thereby contributing significantly to counter-balancing any competition risks under the overall balancing test.
It will be particularly important to ensure that the transparency that is necessary for demand aggregation to function, as between individual participating undertakings and the service provider, the Commission and national competent authorities does not translate into wider transparency on volumes, delivery schedules or realised prices for individual participating undertakings, or indeed at the level of a given sector or sub-sector which could represent a downstream or related market on which competition should continue to play out.
While the Commission’s Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements 12 , state that combined market shares below 15% in the purchasing and selling market(s) are indicative of a lack of market power, a combined market share above that threshold in one or both markets does not automatically indicate that the joint purchasing arrangement is likely to give rise to restrictive effects on competition. A joint purchasing arrangement which does not fall within that safe harbour requires an assessment of its effects on the market, involving factors such as possible countervailing power of strong suppliers and the necessary governance and information-exchange arrangements to ensure continued competition on downstream markets, against the background of the current exceptional market circumstances.
The Commission stands ready to accompany companies in the design of such a consortium and to rapidly issue a decision, pursuant to Article 10 of Regulation 1/2003, on inapplicability of Articles 101 and/or 102 TFEU, if relevant safeguards are incorporated and respected. The Commission also stands ready to provide informal guidance to the extent that the participating undertakings in any other consortia face uncertainty with regard to the assessment of one or more elements of the joint purchasing arrangement under EU competition rules. 13
Participants of the joint purchasing of gas might need financial guarantees if any of the undertakings is not ultimately able to pay for the final amount contracted. Member States or other stakeholders may provide financial support, including guarantees, to natural gas undertakings or undertakings consuming gas. The legal proposal mentions this possibility of financial aid to undertakings participating in joint purchasing. The proposal stresses that such support needs to be in accordance with State aid rules, where applicable.
Establishing ways of purchasing gas jointly in a more coordinated way, is also in line with the decarbonisation path indicated in the Green Deal and the RepowerEU. The Energy Platfom includes also renewable hydrogen in its scope.
The provisions to enable ACER to establish an LNG benchmark contribute to market transparency and, indirectly, to lower wholesale prices for gas and are therefore consistent with EU competition policy.
LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
Legal basis
The legal basis for this instrument is Article 122 i of the Treaty on the Functioning of the European Union (‘TFEU’). This Article can only be applied for issues of severe difficulties and has to be applied in the spirit of solidarity.
The current shortage of gas supplies from the Russian Federation constitutes a severe difficulty in the supply of an energy product within the meaning of Article 122. EU leaders and Commission have identified the urgent need for additional measures for more coordinated action, on a temporary basis, in order to be better prepared for possible further gas disruptions in the coming two winters.
The current security of gas supply regulatory framework, notably the Gas Security of Supply Regulation (EU) 2017/1938, was designed to deal with short-term supply disruptions and not with a prolonged cut from our main supplier. Therefore, additional temporary emergency tools for security of gas supply are needed, among others to prevent undue cross-border restrictions and preventing that a prolonged gas supply disruption has major spill-over effects harming the electricity system’s adequacy. Likewise, the notion of protected customers was designed for short periods of shortages, while in case of a prolonged disruption, Member States should be able to let protected customers also contribute to reducing demand via a reduction of non-essential consumption.
The solidarity provisions set out in the Gas Security of Supply Regulation (EU) 2017/1938 should be accompanied by bilaterally agreed solidarity arrangements, spelling out the legal, technical and financial details for solidarity. This solidarity obligation is not operational, due to a lack of agreements, justifying a need to complement the existing provisions by including a default solidarity mechanism in case of absence of bilaterally agreed arrangements.
The measures under the instrument allow undertakings in all Member States to prepare for possible further supply shortages in a coordinated manner and use the gas infrastructure in a more efficient way. It is expected that most of the European gas storages could be depleted during the winter period. In the absence of supplies from the Russian Federation, Member States could face difficulties in filling storages up to the necessary levels. This situation calls for the coordination in the purchasing of gas and the establishment of a joint purchasing process that could allow joint purchasing in practice.
Joint purchasing helps to ensure more equal access for undertakings across Member States to new or additional gas sources in urgent situations where solidarity is required. It could, in the spirit of solidarity, reduce the detrimental effect of outbidding, driving prices up and also help smaller undertakings benefit from more advantageous purchasing conditions resulting from aggregated demand.
Using joint purchasing could help the Member States to lessen the challenges in filling gas storages stemming from declining gas deliveries from the Russian Federation. For instance, it could help to coordinate gas purchases while maintaining prices at sustainable levels. It could also allow, through the ad-hoc Steering Board, for coordination of joint filling and storage management in view of the next filling season. Joint purchasing could therefore strengthen EU solidarity in purchasing and distribution of gas. In the spirit of solidarity, joint purchasing could support particularly those undertakings, that were purchasing gas only or mainly from Russian suppliers.
The urgency situation fully justifies the use of Article 122 TFEU in order to establish an entity as soon as possible by contracting the necessary services from existing entities.
The success of joint purchasing of gas will depend on the availability of capacities in LNG terminals and pipelines. This is even more important in current circumstances, where congestion of pipelines and terminals cause bottlenecks in the supply of gas, including for the filling of storages. Applying rules of transparency and selling of unused capacity of LNG terminals and unused capacities of pipelines allows to maximise the available capacity of gas infrastructure. Open, more efficient and non-discriminatory use of infrastructure increases cross-border and internal flows of gas and is a necessary condition to enable LNG reaches consumers across the EU. The rules which are currently in place are not sufficient to ensure it. It is necessary that rules enabling the capacities of LNG terminals and pipelines are put in place and applied as soon as possible.
The LNG price assessment should be published daily starting no later than two weeks after the entry into force of this Regulation making sure that an objective price reference is available for market participants as of the 2022/23 winter seasons. This price assessment should be complemented by the publication of an LNG benchmark by 1 March 2023 at the latest. Although the establishment of such a tool on a permanent basis should at a later stage be included in a more comprehensive revision of the REMIT legal framework, the on-going crisis situation requires urgent action already now to address the immediate situation of severe difficulties in the supply and accurate pricing of LNG deliveries to the Union on a temporary basis until such revision of the REMIT legal framework can be adopted. In this sense, the proposal on the LNG benchmark should also be seen as provisional in order to act as a “bridge” to more permanent arrangements to be proposed under the ordinary legislative procedure.
It is therefore justified to base the proposed instrument on Article 122 i TFEU.
Subsidiarity (for non-exclusive competence)
The planned measures of the present initiative are fully in line with the subsidiarity principle. Because of the scale and the significant effect of further cuts in gas supply on the part of the Russian Federation, there is a need for EU level action. A coordinated approach through joint purchasing with regional and broader scope and more efficient use of LNG terminals, gas storages and pipelines is necessary to minimise the risk of potential major disruptions during this and next winter and where Member States and their undertakings will need to seek replacement for the Russian supplies. This can be regulated efficiently at EU level instead of national level.
A coordinated approach at EU level is also necessary on security of supply measures, including demand reduction measures. Such a coordination is crucial to ensure that Member States have the possibility to respond in an efficient and timely manner to solidarity requests. While Member States will continue to have the possibiltiy to enter into bilateral solidarity arrangements, default rules will be in place until such arrangements are concluded, allowing for all EU Member States to benefit from solidarity. This will ultimately ensure that the provision of bilateral solidarity is not hindered by the lack of administrative and financial arrangements between the Member States, while also allowing Member States to complement the default rules with negotiated conditions.
Given the unprecedented nature of the gas supply crisis and its cross-border effects, as well as the level of integration of the EU internal energy market, action at Union level is warranted as Member States alone cannot effectively address the risk of serious economic difficulties resulting from price hikes or significant supply disruptions in a coordinated manner.
This proposal sets the final result to be achieved, in the form of extending solidarity protection and setting default solidarity rules, while giving Member States autonomy in choosing the most effective means to meet such obligations and to agree solidarity measures bilaterally. The provisions related to demand reduction do not exceed what is necessary to safeguard security of supply by leaving to authorities in Member States to decide the savings from the non‑essential consumption by protected customers, provided it does not affect vulnerable customers,.
It is worth to stress that the current proposal foresees that private undertakings will remain parties to the contracts for gas supply established under the joint purchasing. Neither the Union nor the Commission will enter in gas supply contracts as a party.
By reason of its scale and effects, the measure can be better achieved at Union level, hence the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union.
The establishment of an EU-wide benchmark for LNG transactions is also not possible at Member State level but can be better achieved at Union level. The previous experience with the TTF benchmark, which is linked to a trading hub in a single Member State, shows that a system of decentralised benchmarks may provide market participants with incomplete information and lead to higher prices.
Proportionality
The initiative complies with the proportionality principle. The policy intervention is proportional to the dimension and nature of the problems defined and the achievement of the set objectives.
In view of the unprecedented geopolitical situation and the significant threat for citizens and the EU economy, there is a clear need for coordinated action. The measures set out in the proposal do not go beyond what is necessary to achieve their objectives and are proportionate to those objectives. In particular, they build to the extent possible on existing approaches, such as the existing arrangements of the internal gas market.
More specifically, the current proposal foresees that demand aggregation and joint purchasing of gas take place on a voluntary basis, with only a limited exception as regards mandatory participation in demand aggregation for the purpose of filling gas storage facilities. Private undertakings will remain parties to the contracts for gas supply established under the joint purchasing.
Natural gas arriving through the entry points from the Russian Federation is excluded from participating in the mechanism as its inclusion would contradict the objective of the proposed Regulation which seeks to ensure sources alternative to Russian supplies. Moreover, undertakings controlled by the Russian Government or any Russian natural or legal person; or undertakings controlled by any other natural or legal person, listed in the sanctions of the Union established on the basis of Article 215 TFEU, are excluded from participating in joint purchasing as well as in participating in the service provider operating joint purchasing
The measures Member States will be able to take to reduce non-essential consumption of protected customers should be necessary and proportional, applying particularly in situations of a declared crisis pursuant to Article 11 i and Article 12 of Regulation (EU) 2017/1938 or of a Union alert pursuant to Regulation (EU) 2022/1369. Despite the application of non-essential consumption reduction measures, protected customers will continue to benefit from protection against disconnection. Furthermore, such measures may not limit the protection required for the vulnerable customers, whose current consumption should be considered as essential.
The extension of solidarity to critical gas-fired power plants imposes restrictions on market operators that are necessary to ensure security of gas supply during a situation of reduced gas supply and increased demand during the winter season. They build on existing measures laid down in respectively Regulations (EU) 2022/1369 and (EU) 2017/1938, aiming at making those measures more effective under the current circumstances.
The obligation on market operators to provide ACER with information on LNG transactions is necessary and proportionate to achieve the objective of enabling ACER to establish an LNG benchmark; it is aligned with market operators’ existing obligations under REMIT and ACER will keep sensitive business information confidential.
The measure to limit intra-day price volatility lays down requirements for trading venues and traders that are necessary in order to allow energy companies to continue participating in gas and electricity markets and meet their hedging needs, thus ensuring security of energy supply for final consumers.
Choice of the instrument
Taking into account the dimension of the energy crisis and the scale of its social, economic and financial impact, the Commission deems suitable to act by way of a regulation which is of general scope and directly and immediately applicable. This would result in a swift, uniform and Union-wide cooperation mechanism.
RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
Stakeholder consultations
Due to the politically sensitive nature of the proposal and urgency to prepare the proposal so that it can be adopted on time by the Council, a stakeholder consultation could not be carried out.
Fundamental rights
No negative impact has been identified on fundamental rights. The measures under this initiative will not affect the rights of customers who are categorised as protected under Regulation (EU) 2017/1938, including all household customers. Measures to reduce consumption shall only target non-essential uses and will not lead to disconnection of household customers or to reduced protection to customers who are most vulnerable. Exclusion from joint purchasing of undertakings from states which are subject to sanctions imposed by the EU will be limited to apply as long as such sanctions are in place. The initiative will enable to reduce the risks associated with gas shortage that would otherwise have major implications on the economy and society. The obligation on market operators to provide ACER with information on LNG transactions is necessary and proportionate to achieve the objective of enabling ACER to establish an LNG benchmark; it is aligned with market operators’ existing obligations under REMIT and ACER will keep sensitive business information confidential.
BUDGETARY IMPLICATIONS
The budgetary implications are limited to the need to finance, through service contracts or other initiatives managed directly by the Commission, the setup of the mechanism by the service provider that will be operating demand aggregation for joint purchasing. Neither the Commission, nor the service provider operating joint purchasing, however, will purchase gas on behalf of the participating undertakings. These undertakings will enter in purchasing contracts with suppliers chosen through the purchasing mechanism. See the financial statement for more details.
The budgetary impact on the EU budget associated to this proposal also concerns the human resources and other administrative expenditures of the European Commission’s Directorate-General (DG) for Energy, as well as of ACER.
The proposal sets out an enhanced Gas Security of Supply architecture, with new obligations for Member States and, correspondingly, a reinforced role for DG Energy in a wide range of areas – namely:
·Overall management and implementation of the Regulation (3 FTE),
·Preparation and implementation of a proposal for a Council measure which provides for a mechanism to allocate gas capacities to supply Member States for which a regional or Union emergency has been declared; management and implementation of the proposal, including the involvement of the crisis management group (2 FTE).
·Work to design competition law compliant implementation of gas purchasing consortium, requiring exchanges with industry (2 FTEs)
·Assessment of Member States requests for allowances regarding higher critical gas volumes (1 FTE).
·Follow-up to solidarity requests; facilitation of the implementation of solidarity agreements (1 FTE)
·Administrative assistance (1 FTE)
·The proposal also sets out new tasks for ACER to collect LNG transaction data for the purpose of establishing an LNG benchmark (5 FTE).
OTHER ELEMENTS
Not relevant.