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Common purchases, gas market: the EU’s ways to reduce energy prices

The European Commission presented on Tuesday new proposals to mitigate soaring energy prices, including measures that are likely to gain consensus among Member States.

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These proposals will be examined on Thursday and Friday by the Heads of State and Government of the EU-27 at a summit, and then by the Energy Ministers on Tuesday.

Reforming the flagship gas market index The Commission is proposing to revise the index of the Dutch market platform TTF (the European “gas exchange”), a barometer used as a benchmark in the transactions of gas operators in the EU.

Traditionally focused on gas imported by pipeline, it has soared following interruptions in Russian deliveries and does not reflect the growing imports of liquefied natural gas (LNG) by ship, contributing to artificially inflated prices.
The European executive wants to create by March 2023 a “complementary” index more representative of the reality of supplies, ensuring “stable and predictable prices” for LNG transactions for the next reserve filling season.

Tame price volatility with joint buying

Until the new index is established, the Commission recommends adopting a mechanism to control price fluctuations on the TTF market for a few months, by setting a “dynamic” price ceiling (evolving and taking into account prices elsewhere in the world), beyond which transactions would be suspended. A way to prevent “extreme prices”.

On the derivatives markets, where financial products linked to the supply of gas are traded, Brussels wants to impose a circuit breaker in the event of a sudden surge in prices during the session.

Finally, to alleviate the liquidity problems of many energy companies, the Commission is proposing to temporarily expand the list of assets that can be used as collateral in market transactions.

Mandatory level of joint purchasing

The European executive is proposing measures to finally make joint purchases of gas at the EU level a reality, in order to obtain better prices for the replenishment of stocks before the winter of 2023.

It is also a question of avoiding that the States fuel the price explosion by competing with each other, as they did this summer by filling their reserves at the same time. The EU-27 had agreed at the end of March to a “joint purchasing platform”, but no deal has been struck.

In concrete terms, an external service provider (selected through a call for tenders) would be responsible for identifying gas needs and seeking interested suppliers to meet this “aggregate demand”. Importing energy companies wishing to negotiate these group purchases could form “consortia” and benefit from public guarantees.

These joint purchases would remain voluntary, but Brussels would like them to cover at least 15% of the stock filling objectives (the EU-27 had committed themselves for the winter of 2022 to fill at least 90% of their capacities): the States will have to ensure that this “compulsory” share is respected.

Finally, the Commission wants to be informed before the conclusion of any gas purchase of more than 5 terawatts/hour (i.e. 500 million m3) by a European company and will be able to issue “a recommendation” if the transaction risks affecting group purchases, security of supply or energy solidarity.

Automatic solidarity, lower consumption with joint purchase

Not all member states have “bilateral solidarity agreements” in place, guaranteeing them gas supplies from a neighbouring country in the event of a shortage: only six agreements have been concluded to date.

The Commission therefore proposes to establish a “model agreement” guaranteeing that any country in an emergency situation “will receive gas from other Member States” in exchange for “fair compensation”.

In addition, Brussels wants to authorize the States to take exceptional measures to reduce the consumption of “protected customers” (a legal term covering households, hospitals, SMEs, etc.), which until now have been entirely protected. Their “non-essential consumption” could now be subject to restrictions.

Gas prices for electricity production: the measure is adjusted

France has been a strong advocate of capping the price of gas used to generate electricity in the EU. This system, which has already been applied in Spain and Portugal, consists of sweetening the gas bills of electricity operators (the difference with the market price being covered by a public subsidy), in order to bring down electricity prices in turn.

But the idea of extending this “Iberian” system to the whole of the EU is being resisted by countries such as Germany and the Netherlands, which are reluctant to accept state intervention in the markets and are worried that the demand for gas will increase as a result of the increased appetite of electricity suppliers.

Noting the differences, Brussels did not include this mechanism in its proposals. “Some points have not been resolved: we must see how to avoid undesirable effects, such as a boom in demand or the risk of subsidizing electricity production that would ultimately be exported to countries outside the EU.
like the United Kingdom,” said an EU official.

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