The European Union (EU) energy ministers are debating this Thursday the European Commission’s proposal for a last resort mechanism that will prohibit transactions from 275 euros per Megawatt-hour (MWh) on the main European natural gas exchange.
Announced on Tuesday, this proposal for a “safety ceiling” will be presented to the European ministers responsible for it by the European Commissioner for Energy, Kadri Simson, on which occasion the person in charge will explain what this market correction mechanism consists of, aimed at limiting peaks excessive gas prices.
In this, which is the first discussion on the proposal, an agreement is not expected for now.
What is certain is that EU energy ministers will try to reach agreement on two emergency measures previously proposed by the Commission to tackle the ongoing energy crisis, one referring to strengthening solidarity through better coordination of gas purchases, cross-border exchanges and prices reliable benchmarks, and another on speeding up licensing procedures for renewable energy projects.
Brussels wants to establish rules of solidarity in the EU to make gas available to all Member States in an emergency, such as a disruption in Russian supply, ensuring that countries can access the reserves of others, not least because only 18 of the 27 countries of the community block have storage infrastructure.
At the same time, the community executive intends to move forward with joint purchases of gas, with widespread support among Member States for the creation of legal instruments for such joint purchases, similar to that carried out for antiCovid-19 vaccines, but which should only advance in the spring 2023.
In the case of the correction mechanism, which will be discussed for the first time, it is a “last resort measure” to face situations of excessive natural gas prices, establishing a maximum dynamic price at which natural gas transactions can occur with one month in advance on the markets of the TTF, the main European natural gas exchange.
The European Commission’s proposal then provides for a temporary “security ceiling” to control gas prices in the TTF, and this limit will require permanent monitoring and will only be activated under two conditions: prices above 275 euros for two weeks and when the value is 58 euros higher than the reference price for liquefied natural gas (LNG) during 10 trading days before the end of the considered period of two weeks.
Despite the fact that natural gas prices have been situated between €5 MWh and €35 MWh in the last decade, the values negotiated in the TTF with one month in advance have been, in recent months, above €200/MWh and reached a peak of almost 314 euros/MWh last August 26th.
The idea is, therefore, to move forward with this temporary mechanism to limit prices in the TTF, which plays a fundamental role in the European wholesale gas market, while the European Commission works on a new complementary reference index, which it will present in early 2023 to include conditions of the European market, such as the use of LNG.
Geopolitical tensions due to the war in Ukraine have affected the European energy market because the EU is still dependent on Russian fossil fuels such as gas (despite having reduced imports by pipeline from 40% to less than 10%), fearing cuts and disruptions in the supply this winter.
Portugal will be represented at the meeting by the Secretary of State for the Environment and Energy, João Galamba.