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Policy Brief / Gas

From a Reactive to a Proactive EU Regulatory Framework for Long-term Gas Import Contracts

Author(s): CONTI Ilaria, DE HAUTECLOCQUE Adrien, GLACHANT Jean-Michel

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ABSTRACT

Highlights

  • In the context of the current revamping of Regulation 994/2010 on the security of gas supply (hereafter the “Gas SoS Regulation”), this short paper from the Florence School of Regulation investigates ways to strengthen the EU regulatory framework for long-term import contracts (hereafter “LTCs”) with non-EU gas suppliers. The focus is exclusively on commercial contracts.
  • While LTCs do not constitute an impediment to competition or security of supply “per se” – they may actually enrich the energy mix and source diversification of certain EU Member States, contributing to their stability and security - it is undeniable that in some cases the dominance of a foreign supplier strongly impacts market competition and limits a Member State’s economic and political choices. The impact of LTCs on security of gas supply and competition is therefore markedly different in hub-based Western markets and isolated Eastern markets. The  issue raised by LTCs is both real and localised. The problem-solving potential of an effective implementation of the third energy and infrastructure packages cannot be emphasised enough, but transitory measures appear necessary.
  • In essence, the existing EU regulatory framework on LTCs (mainly EU competition law, REMIT and Article 13(6)(b) of the Gas SoS Regulation) follows a ‘reactive’ approach, as it principally aims to respond to a budding gas supply crisis or a market abuse that has already occurred. Both the EU competition law and REMIT work ex post. They are not underpinned by a security of supply rationale and are unable to address the concerns of the most vulnerable Member States as regards the security of their gas supply. The Gas SoS transparency mechanism is a forward-looking instrument, but it only reaches its full effect in the so-called alert and emergency stages. It is also fundamentally limited by severe design flaws and enforcement issues.
  • In this context, we advocate (i) an enhancement of the transparency framework anticipated by Art 13(6)(b) of the Gas SoS Regulation, both in its national and European dimensions; and (ii) the creation of a notification mechanism allowing for control by national regulators ex ante, i.e. before LTCs are signed.
  • The notification mechanism, conditioned by a market share threshold, should be as simple  as possible to limit regulatory costs and red tape. The assessment should be largely limited to (i) the most harmful infringements of competition law, which could be defined within dedicated soft law guidelines; and (ii) potential breaches of the Gas SoS Regulation, so as to limit the likelihood of regulatory errors. To make sure that regional and EU interests are well accounted for, and potential national regulatory capture is offset, an obligation modelled on Art 36(8) and (9) of the Gas Directive to request a binding opinion from the Commission should be introduced. In the longer term, ACER should be given a more central role.