EU Set to Cap Spike in Gas Prices

The European Commission has proposed a Market Correction Mechanism to protect EU businesses and households from  excessively high gas prices in the EU, as part of its ongoing response to the ongoing energy crisis.

The extreme price spike in August, which lasted nearly two weeks, was extremely damaging to the European economy, with contagion effects on electricity prices and an increase in overall inflation. The Commission proposed a temporary and well-targeted instrument to automatically intervene on gas markets in the event of extreme gas price hikes to prevent such episodes from recurring.

The proposed instrument consists of a €275 monthly safety price ceiling on Title Transfer Facility (TTF) derivatives.

The Title Transfer Facility (TTF) is a hub or virtual trading point in a so-called entry/exit system where network users can exchange gas. PRAs monitor the activity of day-ahead markets and publish indices, including TTF-related ones, that are typically referenced in contracts.

As trades are conducted without knowing the counterparty, exchanges typically have ‘clearing houses’ that manage counter-party risks. Due to supply disruptions from Russia, the proportion of Russian pipeline gas in total pipeline imports in the EU has dropped from 40% to 9% this year.

The primary goal of the market correction mechanism proposed in Regulation is to avoid extremely high gas prices, which may be caused in part by inefficiencies in price formation mechanisms.

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