Market Correction Mechanism

Market Correction Mechanism

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Gas Pipes

The Council Regulation (EU) 2022/2578 of 22 December 2022 establishes a gas “market correction mechanism to protect Union citizens and the economy against excessively high prices” (MCM Regulation). It enters into force on 1 February 2023 for a period of one year.

What is the MCM?

The market correction mechanism (MCM) is an instrument designed to limit prices in EU gas markets. It is activated when prices at EU virtual trading points move above certain levels and when these prices are also significantly above the LNG import price.

The MCM applies to the TTF gas price, and is activated only if certain conditions are met. An implementing act of the European Commission will establish by 31 March 2023 how to extend the MCM to the other EU virtual trading points.

The MCM is not applied to over the counter transactions (OTC). The Commission can propose to amend the MCM to extend it to OTC.

The mechanism can only be activated from 15 February 2023.

MCM activation

The MCM Regulation tasks ACER with monitoring the following elements with a view to activating and deactivating the MCM bidding limit:

  • Reference price defined as a basket of indexes aiming at reflecting the liquefied natural gas (LNG) import price to the EU;

  • Front-month TTF derivative settlement price.

As of 15 February 2023, ACER will activate the MCM bidding limit if the following two conditions are met:

  • The front-month TTF derivative settlement price exceeds 180 EUR/MWh for three consecutive working days; and

  • The front-month TTF derivative settlement price is 35 Euros above the MCM reference price during the same period.

Upon activation, ACER shall publish a notice stating that a market correction event has occurred on its website no later than 23:59 CET on the day of event.

Upon the activation of the MCM, orders on TTF derivatives (front-month to front-year) 35€ above the MCM reference price (which is a basket of LNG import indexes) cannot be accepted. Should the reference price be lower than 145 EUR/MWh, the MCM bidding limit is set at 180 EUR/MWh.

This MCM bidding limit applies until:

  • ACER publishes a deactivation notice twenty working days from the occurrence of the market correction event if the reference price is below 145 EUR/MWh for three consecutive working days; or

  • The European Commission suspends the MCM in case of significant deterioration of the gas supply situation in the EU.

The MCM reference price is an approximation of the price to continue importing LNG to the EU. The ACER LNG price assessment and other LNG price indexes are included in the reference price. ACER is required to publish the MCM reference price starting from 1 February 2023.

MCM monitoring and suspension

The MCM Regulation tasks ACER, the European Securities and Markets Agency (ESMA), ENTSOG and the Gas Coordination Group to monitor the effects of the MCM when activated and inform the European Commission about unintended market disturbances related to security of supply.

The monitoring of the MCM assesses its impact on gas supplies to the EU, demand reduction targets, intra-EU flows, gas supply contracts and financial markets.  

The Commission shall suspend the MCM should it lead to detrimental effects in EU gas markets.

ACER and ESMA effects assessment reports

ACER and ESMA shall carry out an assessment of the MCM effects to analyse the appropriateness of the MCM design.  

The reports should also assess whether the MCM leads to significant shift of trading from TTF to OTC markets or to trading venues outside the EU (e.g. UK).

The reports from ESMA and ACER shall be submitted to the Commission by 1 March 2023.

ESMA and ACER published preliminary reports on 23 January 2023 on the effects of the MCM (see below).

 

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