The European Commission officially proposed a ‘Market Correction Mechanism’ to protect the bloc’s ‘businesses and households from episodes of excessively high gas prices’ on Tuesday.
To prevent future price hikes like the one seen in August, the Commission is proposing a temporary and targeted instrument to automatically intervene in the gas market in case of extreme gas price hikes. The proposed instrument would consist of a safety price ceiling of 275 euros on the month-ahead TTF (Title Transfer Facility) derivatives.
The Title Transfer Facility, which is the EU’s most commonly used gas price benchmark, plays a key role in the European wholesale gas market. The mechanism would be triggered automatically when both of the following conditions are met: the front-month TTF derivate settlement price exceeds 275 euros for two weeks; TTF prices are 58 euros higher than the LNG reference price for 10 consecutive trading days within the two weeks.
When these conditions are met, the Agency for the Cooperation of Energy Regulators (ACER) would immediately publish a market correction notice in the Official Journal of the European Union and inform the Commission, European Securities and Markets Authority (ESMA) and the European Central Bank (ECB). The following day, the price correction mechanism would enter into force and orders for front-month TTF derivatives exceeding the safety price ceiling would not be accepted.
Should Member States approve the proposal, the mechanism will be activated from 1 January 2023.
“Gas prices in the EU have fallen since August thanks to demand reduction, mandatory storage filling, diversification of supplies and other measures proposed by the Commission in recent months. But we have been missing in our toolkit a way to prevent and address episodes of excessively high prices. Today, we propose to put a ceiling on the TTF gas price to protect our people and businesses from extreme price hikes. The mechanism is carefully designed to be effective, while not jeopardising our security of supply, the functioning of EU energy markets and financial stability.” said Kadri Simson, EU Commissioner for Energy.
To help avoid security of supply problems, the price ceiling is limited to only one futures product (TTF month-ahead products). Therefore, market operators would still be able to meet demand requests and procure gas on the spot market and over-the-counter. To ensure gas demand does not increase, the proposal requires Member States to notify within two weeks from the activation of the Market Correction Mechanism which measures they have taken to reduce gas and electricity consumption.
In addition, to avoid unintended negative consequences of the price limit, the proposal foresees that the mechanism can be suspended immediately at any time.
Polish PM reacts – V4 meeting to discuss energy policy
Speaking to the Polish News Agency (PAP), Prime Minister, Mateusz Morawiecki gave his comments on the new mechanism: “the latest proposal is a proposal for a maximum gas price, but at a very high level”.
“It is not difficult to set the bar very high and say: the price has no right to rise about level X. The trick is to keep [it] at a suitable level in today’s crisis circumstances” said the Polish Prime Minister. “Unfortunately, this worries me, and that’s why tomorrow in Košice at the Visegrad Group summit, this will certainly be a topic of discussion”.
The Visegrad Group (V4) summit is scheduled for later today, which will focus on energy security and policy, according to PM Morawiecki. In addition, the EU’s Extraordinary Transport, Telecommunications and Energy Council is currently in session to discuss the proposed Market Correction Mechanism and other areas related to the bloc’s energy policy.