EU Energy Actions

On Dec. 19, 2022, EU energy ministers reached agreement on a temporary natural gas price cap to shield their economies from high energy prices. At that meeting, they also adopted a regulation on coordination of natural gas purchases (the EU Energy Platform) and price benchmarks. They also approved an approach on energy sector methane emission reductions and reached agreement on a framework to accelerate permitting for renewable energy projects (not discussed here).

Natural Gas Price Cap: The “market correction mechanism” approved by ministers will not allow transactions on futures markets if the TTF price exceeds 180€/MWh and other conditions are met. To meet concerns from some countries that the price cap could impact security of energy supply, the European Commission could declare an emergency that would suspend the market corrective mechanism. So, it is questionable—even in a situation with prevailing prices above the cap—whether this mechanism will be used.

Price Benchmarks and Volatility: Ministers agreed to steps to limit intra-day natural gas price volatility and “to obtain an accurate, objective and reliable assessment of the price for LNG deliveries to the Union…” given concerns that TTF is no longer an accurate natural gas benchmark. No later than Jan. 31, 2023, trading venues are to establish “an intra-day volatility management mechanism” based on upper and lower price boundaries beyond which natural gas trades may not be executed. In addition, the European Union Agency for the Cooperation of Energy Regulators (ACER) was tasked with collecting “all the LNG market data that are necessary to establish a daily LNG price assessment.” By no later than March 31, 2023, ACER is to publish this daily price assessment “to provide more transparency to Member States and market participants on the prevailing price of LNG imports to Europe.” According to the agreed regulation, this LNG benchmark “paves the way for its voluntary uptake by market participants as the reference price in their contracts and transactions.”

Methane Emissions Reduction: The ministers reached agreement on a proposal to track and reduce methane emissions in the energy sector (oil, natural gas, and coal) that will now be discussed with the European Parliament to reach a final legislative proposal/agreement. While the obligations in this approach only impact energy operations in the EU (including strict requirements on leaks, eliminating venting and flaring, and plugging abandoned wells), the proposal recommends tracing of methane emissions from EU energy imports. This would include a requirement that importers to the EU of oil and natural gas report on whether the exporter/producer is undertaking measurement and reporting of its methane emissions, and whether it meets UNFCCC reporting requirements or with OGMP 2.0 standards. This is meant to increase transparency of methane emissions from energy imports to the EU, and “allow the Commission to consider further actions in the future.”

EU Energy Platform: Ministers adopted a regulation to provide the legal basis for operations of the platform to pool natural gas demand and seek supply offers (the so-called “joint purchasing” mechanism). The regulation requires EU Member States to participate in the process of demand aggregation organized by the “service provider” contracted by the EU Commission to manage the platform, with volumes equal to at least 15% of their 2023 EU storage fill requirement (equivalent to around 13.5 bcm). This would allow gas suppliers to make offers based on large, aggregated volumes. The entities participating in the demand aggregation process would then be able to conclude gas purchase contracts, individually or in a coordinated manner with others, with natural gas suppliers or producers that have matched the aggregated demand. However, there is not/not any obligation to purchase gas through this aggregation process.

The service provider will also be able to facilitate or negotiate longer-term deals for consortia that wish to pool their demand for that purpose, outside of the demand aggregation for filling storage. The regulation indicates “the service provider may, on a transparent basis, coordinate elements of the conditions of the purchase contract or use joint purchase contracts in order to achieve better conditions with their suppliers, provided they comply with Union law, including Union competition law…”