The Commission proposes a cap on the price of natural gas at 275 euros per megawatt hour

Market correction mechanism to protect EU businesses and households from episodes of excessively high gas prices in the EU, the Commission announced a while ago as its response to the ongoing energy crisis.

The European Commission proposes to set ceiling on the price of natural gas at 275 euros per megawatt hour for next month’s TTF contracts, Energy Commissioner Country Simson announced at a press conference in Brussels today.

Today, we propose to put a ceiling on the TTF gas price to protect our people and businesses from extreme price hikes.

The new mechanism aims to reduce the volatility on European gas markets while safeguarding the security of gas supply.

More about the new EU instrument ↓

— European Commission 🇪🇺 (@EU_Commission) November 22, 2022

This mechanism complements measures to reduce gas demand and ensure security of supply through the diversification of energy supply. The new mechanism aims to reduce volatility in European gas markets while ensuring security of gas supply.

Following Russia’s invasion of Ukraine and disruption of energy supplies, natural gas prices have hit record highs across the EU, reaching record highs in the second half of August this year. The extreme rise in prices for almost two weeks in August was extremely damaging to the European economy, with knock-on effects on electricity prices and a rise in headline inflation. The Commission proposes to prevent the recurrence of such episodes by a temporary and well-targeted means of automatic intervention in natural gas markets in the event of extreme increases in natural gas prices.

Assurances of supply and market stability

The proposed instrument consists of a safety price cap of €275 for TTF derivatives for the next month. The Securities Transfer Facility (TTF), which is the most commonly used benchmark for the price of gas in the EU, plays a key role in the European wholesale gas market. The mechanism will automatically activate when both of the following conditions are met:

• Preliminary month TTF export settlement price exceeds €275 for two weeks.
• TTF prices are €58 higher than the benchmark LNG price for 10 consecutive trading days within the fortnight.

When these conditions are met, the Agency for the Cooperation of Energy Regulators (ACER) will immediately publish a market correction notice in the Official Journal of the European Union and inform the Commission, the European Securities and Markets Authority (ESMA) and the European Central Bank ( ECB). On the following day, the price correction mechanism will come into effect and orders for quarter-year TTF derivatives exceeding the safety price cap will not be accepted. The mechanism can be activated from 1 January 2023.

Assurances of security of supply and market stability

The proposed Council Regulation includes safeguards to avoid disruptions in energy and financial markets. In order to avoid security of supply problems, the price cap is limited to a single futures product (TTF futures) so that market operators are still able to respond to demand requests and supply natural gas in the spot market and OTC. To ensure that gas demand does not increase, the proposal requires member states to notify within two weeks of the activation of the market correction mechanism the measures they have taken to reduce gas and electricity consumption.

Once today’s proposal for a market correction mechanism is approved in the Council, the Commission will also propose to declare an EU alert under the Save Gas for a Safe Winter regulation adopted in July, triggering mandatory gas savings to ensure demand falls. In addition, there will be ongoing monitoring by ESMA, the ECB, the Agency for the Cooperation of Energy Regulators (ACER), the Gas Coordination Group and the European Network of Gas Transmission System Operators (ENTSO-G).

To react to possible unintended negative consequences of the price cap, the proposal provides that the mechanism can be immediately suspended at any time. This can happen:

• Automatically, with deactivation, when its operation is no longer justified by the situation on the natural gas market, i.e. when the gap between the TTF price and the LNG price is no longer covered for 10 consecutive trading days.
• By suspension decision of the Commission, when risks are identified to the Union’s security of supply, to efforts to reduce demand, to gas flows within the EU or to financial stability.
• There is also the possibility for the Commission to prevent the activation of the mechanism in the event that the competent authorities, including the ECB, warn of the realization of such risks.

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