Council Adopts Regulation to Cap Gas Prices at €180/MWh

On December 22, 2022, the Council adopted Council Regulation (EU) 2022/2578 establishing a temporary market correction mechanism to protect Union citizens and the economy against excessively high gas prices.

The market correction mechanism (MCM) entails a price safety ceiling for gas transactions on virtual gas trading platforms in the EU will be applied if and when gas prices reach exceptional levels and diverge significantly from LNG prices.

Price cap conditions

The MCM activates if the month-ahead (or front-month) TTF prices (i) exceed €180/MWh for three consecutive days while (ii) being €35 above an LNG reference price to be set by ACER.  While active, the price of covered natural gas futures is capped dynamically on a daily basis (so called, dynamic bidding limit), at the sum of (a) the LNG reference price and (b) €35.  For instance, if the price cap mechanism is active and the LNG reference price is €165, TTF prices will be capped at €200 (165+35).  If the LNG reference price drops below €145, the Regulation provides that the dynamic bidding limit shall remain at €180. In other terms, the ceiling cannot be lower than €180. 

The dynamic bidding limit shall apply for a minimum of 20 working days. Afterwards, it is deactivated  if the LNG reference price falls below €145 for three consecutive working days. The dynamic bidding limit can also be suspended by an implementing decision of the Commission, if it identifies manifest risks that the price cap jeopardises security of gas supply, intra-EU gas flows or financial stability.

TTF derivatives are covered by the cap, and the Commission is empowered to extend the cap to other gas derivatives through an implementing regulation, to be adopted by March 31, 2022.  

Practical impact and competition concerns:

The agreed price ceiling is €100 lower than the Commission’s first proposal to cap prices at €275 when that ceiling was exceeded for ten days. If the agreed price ceiling had been in force the past year, prices would have been capped at €180 for about 2 months mainly in August and September. By contrast, the Commission’s proposed €275 price cap would not have been triggered.

Recital 24 of the Regulation expresses the concern that the dynamic bidding limit may lead to collusion amongst traders between gas suppliers or traders. To avoid this, it encourages financial regulators ACER and competition authorities to observe markets “particularly carefully” when the mechanism is activated.

Next steps:

The regulation enters into force on February 1, 2023, and the price cap on February 15, 2023.  The regulation is temporary and will apply for one year.

The legal basis for this Regulation is Article 122(1) of the TFEU, a treaty provision that can only be used in cases of serious hardship and in compliance with the principle of  solidarity between Member States (for further details, see CLEARY ALERT MEMO: Article 122 TFEU as a Legal Basis for Energy Emergency Measures). The above additional temporary emergency instruments complement the current regulatory framework for security of gas supply, including Regulation (EU) 2017/1938 on security of gas supply, designed to address short-term supply disruptions (for further details, see CLEARY ALERT MEMO: European Council Regulation to Address High Energy Prices).