Emergency Energy Measures

On 6 October 2022, EU Energy Ministers adopted a Regulation on temporary and extraordinary energy measures in response to rising energy prices caused by an energy supply crisis. This situation resulted from a combined growth in gas demand driven by the post-Covid global economic recovery, lower generation from other energy sources, and a tightening of supplies from Russia as a consequence of the war in Ukraine.

IOGP recognizes the severe impacts that high energy prices have on consumers, economic activity and inflation, and supports targeted measures to support the most vulnerable consumers.

In this context, we believe that emergency market interventions should not undermine the successful establishment of the integrated and interconnected EU energy market.

The measures introduced on a temporary basis to address a crisis situation should, as a general principle, not become permanent measures. Should this be contemplated, they should be subject to proper public consultations and impact assessments.

Windfall profit tax

Summary:

The “temporary solidarity contribution” (Emergency Regulation 2022/1854) is a windfall profit tax on EU companies active in the oil, gas, and refinery sectors,  amongst others.

Q&A

What does the measure seek to achieve?
What are the risks?
What is our recommended way forward?

Its purpose is to collect revenues and redistribute them to help mitigate the impact of high prices on consumer bills. It is estimated to generate around €25 billion to help bring down energy bills.

How?

  • Member States will collect these revenues on excess profits in 2022 and/or 2023
  • Covers profits above a 20% increase on the average profits of the previous three years
  • Member States can apply a rate higher of 33% for their solidarity contribution

Source: European Commission

Windfall taxes are an unprecedented intervention by the EU into fiscal regimes. They create investment uncertainty, can discourage investments or even lead to divestments. This can negatively impact the competitiveness of the European oil & gas industry and weaken Europe’s attractiveness for international investors, also as a destination for energy supplies.

Furthermore, the windfall tax did not consider exceptional circumstances and loss of income resulting from the COVID-19 pandemic in 2020.

Stable and predictable fiscal regimes are a key element of a region’s attractiveness for global investments. IOGP supports the protection of vulnerable consumers but recommends that this not be done through ad hoc and retroactive changes to the fiscal regime, which can weaken Europe’s attractiveness for investments at global level.

Price Capping Mechanism

Summary:

The “market correction mechanism” (Emergency Regulation 2022/2578) entails a price capping mechanism for gas traded at Europe’s exchanges based on a new calculation of LNG market prices by the EU Agency for the Cooperation of Energy Regulators, ACER.

Q&A

What does the measure seek to achieve?
What are the risks?
What is our recommended way forward?

The market correction mechanism automatically intervenes in the gas markets in case of extreme gas price hikes. It aims to reduce the volatility in European gas markets while safeguarding the security of gas supply.

Source: European Commission

How?

The price cap is automatically triggered when the settlement price for the Title Transfer Facility (TTF)[1] monthly contract with the nearest expiration date (i.e. the month-ahead contract) for the three consecutive working days: exceeds 180€/MWh and exceeds the European Union Agency for the Cooperation of Energy Regulators (ACER) reference price by 35€/MWh or more.

[1] Natural gas virtual trading point

Capping wholesale gas prices by public authorities’ intervention creates a serious risk to market-based price formation and might limit the functioning of the EU gas market and allocation of gas to where it is most needed. Indeed, assessments of the stability of fiscal frameworks are a key element when investment decisions are taken.

By way of example, gas price limitations can result in LNG cargoes not being attracted to Europe anymore and can also impact the carefully calibrated risk and reward balances under existing (long-term) contracts concluded between producers, suppliers, transportation and storage operators, and consumers along the value chain with complex legal and commercial consequences.

These contractual chains are the backbone of secure supplies to Europe’s consumers. In the longer term, price caps disincentivize investments.

IOGP agrees with the concerns raised by ACER in its preliminary report on the effects of the gas market correction mechanism (January 2023).

The price capping mechanism must not be made permanent. Long-term contracts, with diverse indexations, are the best way to secure supply of natural gas to Europe and mitigate price volatility.

IOGP believes that free and transparent price formation for competing energies based on demand and supply fundamentals best ensures cost-efficient, secure supplies to consumers.

Demand Aggregation and Joint Purchasing

Summary:

The EU intends to coordinate gas purchases (amongst others) through a demand aggregation obligation and new joint purchase mechanism.
The EU Energy Platform (Emergency Regulation 2022/2576) will play a key role in this.

EU countries would be obliged to aggregate demand for volumes of gas equivalent to 15% of their respective storage filing obligations.
Beyond the 15%, aggregation will be voluntary but based on the same mechanism.

Q&A

What does the measure seek to achieve?
What are the risks?
What is our recommended way forward?

The measure aims to avoid having European market participants outcompete each other when seeking supplies from the global market, with the belief that this will increase purchasing power.

How?

By aggregating European market participants’ demand for natural gas and facilitating joint purchases through the establishment of an IT tool (joint purchase platform).

The independent purchase and sale of natural gas and other energies by market parties in competition with each other is a core element of a functioning, competitive and liquid market, and a cornerstone of the EU single energy market. The joint purchasing of gas may reduce competition and, consequently, weaken the benefits of a competitive market.

Establishing joint purchases raises questions related to competition law and the legal risks the participants will be exposed to. The mechanism would require, prior to any joint activities, clearance from relevant competition authorities.

Demand aggregation and joint purchasing mechanism must not be made permanent. If this is contemplated, there shouldn’t be an obligation to conclude contracts, and any demand aggregation and purchase must be voluntary.