EU launches gas market correction mechanism from 15 February 2023: a safety valve at EUR 180/MWh

From 15 February 2023 the gas market correction mechanism applies in the European Union, introduced by Council Regulation (EU) 2022/2578 of 22 December 2022. It is a temporary price "safety valve": if the TTF exchange level of EUR 180/MWh is exceeded, persisting for three working days and at the same time at least EUR 35/MWh higher than the LNG reference price (calculated from a basket of LNG price assessments), the mechanism is meant to limit further price rises. It does not set a fixed gas price, but is meant to prevent the extreme spikes observed in the summer of 2022.

What is changing

The mechanism is an extraordinary instrument, created within the EU's package of crisis measures. It covers TTF futures contracts with delivery in the nearest months. When both conditions are met, a price above EUR 180/MWh for three days and a difference of at least EUR 35 relative to the LNG price, the limit is triggered, and the European Commission may suspend it if it causes disruption, e.g. threatens security of supply. Safeguards against disruption of the derivatives market were also introduced.

The regulation was created at a time when gas prices were still elevated, but were falling after the August 2022 peaks. In the winter of 2022/23 prices gradually fell thanks to mild weather, savings and LNG deliveries.

Significance for the industry in Poland

For the Polish market the mechanism itself is only background (it is temporary), but gas prices affect the profitability of biomethane investments and the decisions of industrial customers. A fall in exchange prices reduces the economic advantage of biomethane over natural gas, but does not change the need to build domestic sources: security of supply and carbon footprint remain arguments.

For biogas plants selling electricity and heat, what matters more than the price-limiting mechanism is how energy prices develop in contracts. In Poland, auction support schemes, in which the remuneration is determined by the bid and not by the current market price, are also significant.

How to read the EUR 180 threshold

The level of EUR 180/MWh was many times higher than the prices before the crisis, but lower than the 2022 peaks, when quotations exceeded EUR 300. The mechanism was therefore meant to act as a safeguard in case the extreme situation was repeated, and not as an element of everyday price policy. The carefully designed trigger conditions were meant to prevent a situation in which the cap would deter LNG suppliers from Europe, which could worsen security of supply.

What next

The regulation applies for a limited time, and the Commission is to assess its operation. In practice its mere presence is considered to have a calming effect on the market. For the biomethane industry it is crucial that the stabilisation of gas prices does not weaken the pace of work on the rules and infrastructure that will make it easier to inject renewable gas into the grid.