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EU extends correction mechanism to protect gas market

The EU is expanding its gas market correction mechanism to include additional virtual trading points, which will help protect the single market from gas price fluctuations. The European Commission believes that it is imperative to extend the mechanism to other VTPs, despite differing opinions.

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The EU has expanded its gas market correction mechanism to include other virtual trading points (VTPs) in the region, beyond the Dutch TTF.

The EU’s new single market protection measure

The newly implemented measure, which came into effect on May 1, will help protect the single market and reduce the risk of further price fluctuations in the energy and financial markets. The original market correction mechanism was introduced in February 2022 and requires that the one-month TTF price exceed €180/MWh for three business days and that the one-month TTF price be €35/MWh above a global reference price for liquefied natural gas at the same time.

The decision to extend the mechanism beyond the FTT was taken because of the “volatile and unpredictable” nature of the EU gas market and the need to provide “even greater protection against high and volatile gas prices,” according to the European Commission. The same activation parameters will be maintained and the rules will be adjusted so that the mechanism will be activated simultaneously for derivatives linked to other VTPs as soon as it is activated for the TTF.

The impact of the extension of the EU gas market correction mechanism on the energy and financial markets

Although the FTT dominates the market, accounting for more than 90% of gas derivatives traded on regulated markets in the EU, the European Commission believes it is imperative to extend the mechanism to other VTPs. However, European energy regulator ACER and financial regulator ESMA have differing views on extending the mechanism. While ACER found “valid arguments” for extending the mechanism only to VTPs where gas derivatives trading liquidity was modest to high, ESMA questioned the need to extend it to other VTPs, particularly those with very marginal trading activity.

European energy trader group EFET has also expressed concern that the mechanism could further distort the market if it is extended to trading points other than the Dutch FTT. However, the European Commission is confident that the extension will provide a more uniform response and avoid distortions in the internal gas market.

By extending its gas market correction mechanism, the EU is taking steps to protect the single market and mitigate the risks of further price fluctuations in the energy and financial markets.

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