On 19 December 2022 the European Union (EU) Member States agreed their position on a Proposal for a Council Regulation establishing a market correction mechanism. By means of background, the legislative proposal was published by the European Commission (“the Commission”) on 22 November 2022 (please see our blog note). While the text available is still in a draft version and will be subject to a formal approval and publication, it does reflect the political agreement reached.
Key points to note:
- Scope: The draft Council regulation introduces a market correction mechanism that will apply to “TTF derivatives” and “derivatives linked to other Virtual Trading Points”, both being defined terms under the draft law. Accordingly, “TTF derivative” is a derivative traded on an EU regulated market, “the underlying of which is a transaction in the Title Transfer Facility (TTF) Virtual Trading Point, operated by Gasunie Transport Services B.V.”. Initially (as of 15 February 2023) the correction mechanism can only be applicable to TTF derivatives, but the legislation also sets out a mechanism for the Commission to extend it to “derivatives linked to other Virtual Trading Points”. The gas market correction mechanism will not apply to OTC trades, day-ahead exchanges and intra-day exchanges.
- Activation mechanism: The market correction mechanism will be automatically activated if the “market correction event” occurs: (1) the month-ahead price on the Title Transfer Facility (TTF) exceeds 180€/MWh for three working days and (2) the month-ahead TTF price is 35€ higher than a reference price for LNG on global markets for the same three working days. While the mechanism is active, transactions concerning the in-scope natural gas futures and including “dynamic bidding limit” will be prohibited. The dynamic bidding limit is the reference price for LNG on global markets plus 35€/MWh. If the reference price for LNG is below 145€, the dynamic bidding limit will remain at the sum of 145€ and 35€. Once activated, the dynamic bidding limit will apply for at least 20 working days.
- Deactivation mechanism: If the dynamic bidding limit is below 180€/MWh for last three consecutive working days, it will be automatically deactivated. The dynamic bidding limit will also be automatically deactivated, at any time, if a regional or a Union emergency is declared by the European Commission according to the security of supply regulation, notably in a situation where the gas supply is insufficient to meet the gas demand (‘rationing’).
- Suspension mechanism: The market correction mechanism can be suspended by the Commission, by means of an implementing decision, if gas demand increases by 15% in a month or 10% in two months, LNG imports decrease significantly, or traded volume on the TTF drops significantly compared to the same period a year ago.
- Next steps: The Council Regulation is due to enter into force on 1 February 2023 and the correction mechanism in respect of TTF derivatives can apply as of 15 February 2023. By 23 January 2023, ESMA and ACER are required to publish a preliminary data report concerning the introduction of the market correction mechanism. By 1 March 2023 both authorities are required to submit a report to the Commission assessing the effects of the market correction mechanism on financial and energy markets and on security of supply and verifying whether the key elements and the scope of the market correction mechanism are still appropriate in the light of financial and energy market and security of supply developments. Taking into account the said reports, by 31 March 2023 the Commission will propose amendments to exclude hubs other than the TTF from the regulation in case their inclusion has negative effects on the functioning of the mechanism. By 1 November 2023, the Commission will carry out a review of the regulation in view of the general situation of the gas supply and based on that report, it may propose to extend its validity. The Commission may also propose an extension of the correction mechanism to OTC trades.
