EU Solidarity Regulation: What Does the EU Commission Envision for Gas Purchasing Beyond 2023?

On September 28, 2023, the Commission released a comprehensive report assessing the functioning of the Emergency Council Regulation 2022/2576 (the “Solidarity Regulation”),[1] which was adopted on December 2022 in the context of a spike in gas prices following the war in Ukraine and that is due to expire in December 2023.[2] 

As explained in our previous post,[3] the cornerstone of the package was the creation of AggregateEU, an innovative platform to aggregate the European gas demand – with the final aim of better negotiating prices –working within the existing regulatory framework.  It was launched on April 25, 2023, marking an historic and symbolic milestone in the energy sector.

The Commission is now suggesting to integrate in a more structural way within the European legal framework certain aspects of what was supposed to be a temporary measure.  As the Commission proposal does not waive the application of EU competition law rules, companies in the natural gas market should keep in mind the risks associated with joint purchasing agreements, especially in light of the recent Guidelines on applicability of Article 101 TFUE.[4]

Solidarity Regulation in Focus: Insights from the EC’s Latest Report

The Commission’s evaluation focusses particularly on the following objectives of the Solidarity Regulation: (i) better coordinating the gas purchases; (ii) enhancing the use of LNG facilities, gas storage facilities and pipelines; (iii) preventing excessive gas prices and excessive intra-day-volatility in energy derivatives markets; (iv) providing measures in case of gas emergency.  Overall, the Commission perceives its implementation as a success, as the mechanisms have proved beneficial for the industry.  

i. Better coordinating gas purchases

From the outset the Commission considered that coordination of gas purchases was key to reducing gas prices.  To that end, Article 3 of the Solidarity Regulation requires natural gas companies to notify the Commission of upcoming significant tenders or contracts for the sale and purchase of gas (when volumes exceed 5 TWh/year).  In its assessment, the Commission notices that this requirement did enhance transparency, with 22 notifications on record as of July 14, 2023.  But this provision  also made plain the sensitivity of the pre-contractual phase in business negotiations.  As many companies were reluctant to share their commercial arrangements, notifying tenders proved to be easier than notifying contracts.  At the same time, the Commission praised the effective performance of the ad hoc Steering Board, an advisory committee - composed of one representative per Member State - [5] with the purpose of enhancing coordination of the joint purchasing mechanism.  Allegedly, the Steering Board offered support for the mechanism at national level, facilitating widespread industry participation.

Articles 5 to 8 of the Solidarity Regulation allowed the service provider Prisma to establish the joint purchasing mechanism by tendering rounds through the AggregateEU platform.  154 companies registered,[6] with larger compagnies generally more willing to participate than smaller ones.  The joint purchasing mechanism witnessed substantial volumes, with several Member States surpassing their compulsory thresholds.  The first two tendering rounds aggregated 27.5 billion of cubic meters (bcm) of demand, twice the amount of  the mandatory demand aggregation contained in the Regulation (13.5 bcm).  Suppliers  also participated proactively, leading to 33.9 bcm being offered in the first two rounds, with a significant surplus in supply.[7]  Against this successful participation story, some market players and some national authorities criticized the facility to withdraw demands and offers and called for more binding commitments.  The geographical restriction on AggregateEU participation also posed issues for large corporations with UK, Swiss, or EEA subsidiaries.

ii. Enhancing the use of LNG facilities, gas storage facilities and pipelines

Similar provisions to Articles 12 and 13 of the Solidarity Regulation, providing respectively for secondary capacity booking platforms, and transparency platforms for LNG and gas storage facility users, have been included in the revised Gas Regulation (EC) No 2009/715, currently under negotiation.

iii. Preventing excessive gas prices and excessive intra-day volatility in energy derivatives markets

One of the primary objectives of the Solidarity Regulation was to mitigate price fluctuations and ensure stability within energy financial markets by implementing intra-day volatility management mechanisms (“IVM”), required by Article 15 to 17.  In its own report,[8] the European Securities and Markets Authority (“ESMA”), pointed out that IVMs should not become a permanent feature of the EU legal framework considering that existing provisions of the Market in Financial Instruments Directive (MiFID) have proven to be sufficient to limit price volatility.  The Commission acknowledges the ESMA opinion that there is no need for a second layer of circuit breakers in the form of IVMs.  However, it announces ongoing monitoring of the impact of IVMs on the energy commodity market in next few months to take a more informed decision.

On the other hand, the Commission considers that the LNG price assessment and benchmark measures should be extended.  Article 18 of the Solidarity Regulation entrusted the Agency for the Cooperation of Energy Regulators (“ACER”) with the publication of a daily assessment of the price at which LNG cargos were bought my Member States at an international level.  Increased transparency in import pricing not only exerted a downward pressure on prices but also strengthened solidarity and coordination among Member States. Consequently, a similar permanent measure is anticipated to be incorporated into the revised Regulation on Wholesale Energy Market Integrity and Transparency (“REMIT”).

iv. Providing measures in case of gas emergency

The Solidarity Regulation also establishes a solidarity mechanism to be used when bilateral solidarity agreements between connected EU Member States, as provided in Regulation 2017/1938,[9] are absent.  These default rules expand the scope of solidarity in gas supply to encompass critical gas volumes required to ensure the adequacy of the electricity system, thereby mitigating the risk of an electricity crisis.  Additionally, EU Member States with LNG facilities are now obliged to participate in this mechanism of solidarity, with compensation limited to the gas price, along with storage, transportation, litigation, and indirect costs.  Although the Commission couldn’t test this mechanism because Member States did not experience a gas shortage in the Winter 2022 , it conducted a “dry run” exercise that confirmed Member States’ readiness for energy emergencies.  However, the Commission identified several issues that require attention: Member States entered into too few bilateral agreements  there is no clear criterion for allocating gas when there are two unsatisfied solidarity requests from different Member States, and uncertainties exist in the legal framework for requesting and receiving LNG, including compensating third parties and ensuring payment guarantees.

What Does the Future Hold for the EU Solidarity Regulation Beyond 2023?

The Solidarity Regulation was conceived as a temporary measure to address the gas crisis, without any exemption from competition rules.  In its report, the Commission has determined that the Solidarity Regulation has effectively contributed to the stabilization of the gas market.  Despite a substantial reduction in gas imports from Russia (-70 bcm in 2022), the European Union has managed to maintain a stable gas supply through increased imports of LNG (50 bcm in 2022), non-Russian pipeline imports, and reduced gas demand (-58 bcm in 2022).  However, there are still significant risks to the security of gas supply, including a sudden halt in Russian gas imports, adverse weather conditions, increased gas demand in Europe or elsewhere leading to competition for LNG shipments and a higher use of gas for electricity generation.  Therefore, the Commission recommends extending either all or some of the provisions, especially since its current expiration date is still set for December 2023.  The revised EU Gas Regulation might be the chosen piece of legislation to be integrated with these measures.

Notwithstanding the positive report, the additional advantages the Solidarity Regulation offers compared to the natural forces of a liberalized market, are not immediately evident.  Its implementation raised some critics that question its effectiveness and transparency.  According to a study conducted by the Oxford Institute for Energy Studies (“OIES”),[10] AggregateEU is more a matchmaking mechanism  than a purchasing one, as there is no obligation of joint purchasing of gas if matching occurs on the platform.  The companies still have to engage in subsequent procedures and costs connected with negotiations and logistics.  

Finally, there are serious concerns that AggregateEU could lead to infringements of EU competition law, as the Commission grants no derogation from ordinary competition rules and this is particularly problematic in regard to information sharing.  If it is true that Article 101(3) TFUE could be used to prove pro-competitive effects of the joint purchases of energy,[11] in its report, the Commission did not show that more market participants have been brought together, or that buyers were able to buy gas at a lower price than through existing mechanisms.  Without that evidence is difficult to assess the benefit for EU gas consumers, assuming the cost reductions are passed on.

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Co-authored with Luca Francesco Giacobbe 

[1] Report from the Commission to the Council on the main findings of the review of the Council Regulation (EU) 2022/2576 of the 19 December 2022, in view of the general situation of the gas supply to the Union, COM(2023) 547 final, 28 September 2003, available here.

[2] Council Regulation (EU) 2022/2576 of 19 December 2022 enhancing solidarity through better coordination of gas purchases, reliable price benchmarks and exchanges of gas across borders, OJ L 335, 29.12.2022, p. 1–35, available here. 

[3] See Cleary Gottlieb EU Energy Disruption Resource Center post “Eu Joint Gas Purchase Platform Kicks Off”, of June 27, 2023, available here.

[4] See Section 4 about Purchasing Agreement of the Commission Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European  Union to horizontal co-operation agreements (2023/C 259/01) of July 2023, available, here.

[5] Commission Decision of 13 January 2023 establishing the ad hoc Steering Board to facilitate the coordination of demand aggregation and joint purchasing of gas 2023/C 48/05, C/2023/407, OJ C 48, 8.2.2023, p. 6–10, available here.

[6] Reported on July 14, 2023.

[7] The data comes from the Table in page 10 of the Report.

[8] See ESMA Report of 30 June 2023 on the implementation and functioning of the Intra-day Volatility Management Mechanism, based on data collected between February and May 2023, available here.

[9] See Article 13 of the Regulation 2017/1938 of 25 October 2017 concerning measures to safeguard the security of gas supply, available here.  According to this mechanism, in the event of extreme gas shortage, a connected Member State is required to provide gas to a requesting Member State, when the latter is unable to satisfy the necessities of its protected customers, as households.

[10] EU Joint Purchasing of Gas – an assessment, by Alex Barnes, OIES.  

[11] See para. 305 of the 101 Guidelines, ibidem.