Explanatory Memorandum to COM(2023)174 - Amendment of Regulation (EU) 2022/1369 as regards prolonging the demand reduction period for reduction measures for gas and reinforcing the reporting and monitoring of their implementation - Main contents
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| dossier | COM(2023)174 - Amendment of Regulation (EU) 2022/1369 as regards prolonging the demand reduction period for reduction measures for gas and ... |
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| source | COM(2023)174 |
| date | 20-03-2023 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
Over the past year, supplies of gas to the EU by Russia have been disrupted as a deliberate attempt to use energy as a political weapon. Russia has been for many years the main gas supplier of the EU. Historically, the EU relied on Russia for more than 40% of its gas supplies. The supply of gas has continuously decreased since February 2022. The pipeline flows of gas from Russia were less than 10% of the EU’s gas imports in January 2023. Twelve Member States have activated the first or second crisis level pursuant to the common EU classification, as foreseen by the Gas Security of Supply Regulation (EU) 2017/1938. This supply shock has already had significant impacts on the price level and volatility of gas and electricity, on inflation, on the overall EU financial and macroeconomic stability, and on all citizens.
In the meantime, while the EU has actively diversified supply sources to compensate for the strong decrease of Russian gas imports, there is a realistic prospect of a full and protracted disruption of the remaining gas from Russia at any moment. The EU must be prepared for it and take pre-emptive actions to mitigate the impacts of possible major supply disruptions. A great majority of EU citizens (84%) agree that the EU should reduce its dependency on Russian sources of energy as soon as possible. In addition, 81% say that they have taken action to reduce their own energy consumption (1).
For this reason, the Commission proposed on 20 July 2022 a Council Regulation on coordinated demand reduction measures for gas, which was ultimately adopted by Council on 5 August 2022 as Regulation (EU) 2022/1369. In recent months, Member States have worked diligently and have adopted measures aiming to reduce their respective gas demand by 15%, as foreseen by the aforementioned regulation. This has resulted in effective gas demand reductions across the EU by 19% between August 2022 and January 2023.
Despite the demand reduction achieved and diversification of supply, severe difficulties persist in the supply of energy, which can affect the competitiveness of the EU and the economic general situation. The risks include a possible rebound of LNG demand in Asia which can reduce the availability of gas on the global market, weather conditions which can affect hydropower storage and nuclear production and require a higher recourse to gas-fired power generation and some further gas supply disruptions, which can affect the filling of underground gas storage facilities required for a safer winter 2023-2024. Furthermore, contrary to the preceding filling season the 2023 storage filling season cannot count on the 60 bcm of Russian pipeline gas that was still imported into the EU in 2022.
In its report of 12 December 2022, the International Energy Agency estimates that a shortage of gas in 2023 could occur, unless the measures already undertaken in the Union are supplemented by additional actions to replace or save gas. In addition, the Commission prepared an accompanying report on the review of Regulation (EU) 2022/1369 following its Article 9 analysing the demand reduction achieved, the risks and possible scenarios of supply and shortage until the end of the next winter2. The findings of the report showed that a continued demand reduction of 15% until the end of March 2024 is necessary to ensure that Member States can comply with the storage target of 90% set out by Regulation (EU) 2022/1032, and to ensure the supply and demand adequacy for the winter 2023/24 which is imperative for security of gas supply. Without continued demand reduction, gas storages would be depleted at the end of the winter 2023-2024, leading to possible gas shortage and disruptions.
The report based on Article 9 furthermore shows that only a prolongation of 12 months ensures sufficient storage filling over the summer. Scenarios with shorter demand reduction periods would be insufficient to ensure security of supply at the end of winter 2023-2024. In contrast, an extension for a reduction period from August to March would leave insufficient time to fill storages at the appropriate 90% level, and lead to serious security-of-supply difficulties towards the end of next winter. Cold weather alone would almost fully deplete storages by 31 March 2024. Alternatively, an extension from April to October would see storages almost completely depleted by 31 March 2024, even without cold temperatures and without any of the other downside risks materialising that are further analysed in the accompanying Commission Staff Working Document. In other words, extensions shorter than 12 months may lead to panic buys, European actors outbidding each other, high prices and possible shortages.
The longer period of 12 months from 1 April 2023 to 31 March 2024 would reduce the possibility of price spikes and therefore limit the cost of gas purchases for Member States for the same volumes. Furthermore, an extension with a 12-month reduction period provides more flexibility to cater for the different characteristics between Member States. Whereas some Member States find it easier to reduce demand in summer (frontloading), others find it easier to reduce demand in winter (backloading). A shorter reduction period would not allow for this flexibility. In addition, a 12-month reduction period would allow flexibility between sectors: since residential demand is low in summer, an extension from April to October would put the burden disproportionately on industry and the less flexible power sector, which is dependent on the availability of alternative power sources.
Therefore, considering the risks regarding the Russian supply, the weather conditions and the global gas market developments in 2023, it is necessary to prolong a demand reduction of the same amplitude after the expiration of the period of the Regulation (EU) 2022/1369, and before the beginning of the filling season, as well as the necessity to continue this reduction over a 12-month period until 31 March 2024.
Apart from ensuring security of supply, demand reduction would ease the economic difficulties by reducing the price volatility and ease pressure on a tight gas market. While the worst economic impacts have so far been averted in 2022, global gas markets remain very constrained in 2023. Gas prices have reached historical highs in 2022 with a maximum price over 320 €/MWh on 26 August and they are now below 45 €/MWh. However, gas prices are still at a level twice as high as the historical norm.
The same spirit of solidarity which has prevailed in the adoption and application of Regulation (EU) 2022/1369 should continue. The legal framework for security of gas supply set by Regulation (EU) 2017/1938 remains insufficient to address long-lasting disruptions, which could lead to uncoordinated actions by Member States, threatening to endanger security of supply in neighbouring Member States and to place an additional burden on the Union’s industry, consumers, and functioning of the internal market. While some Member States are more exposed to the disruptions than others, any gas supply difficulties or shortages would cause harm to the economies of all Member States. As set out in the Communication “Save Gas for a Safe Winter” of 20 July 2022, it is cheaper for citizens and industry of all Member States, in a spirit of solidarity, to continue reducing demand in a proportionate and demonstrably manageable manner rather than face uncoordinated curtailments later. The reduction would continue the current one, and not be cumulative. It would represent a continued reduction of 15% for the period from 1 April 2023 to 31 March 2024 compared to a reference period from 1 April 2017 to 31 March 2022, and therefore be identical and proportionate to the reduction foreseen by the current Regulation. This reduction would amount to 60 bcm that will not be consumed in the period from 1 April 2023 to 31 March 2024.
In the informal Energy Council on 27 February 2023, the EU energy ministers discussed the preparation for the next winter and beyond. This discussion highlighted the broad understanding of major persisting risks on gas supply related to Russia and the global LNG market, with possibly a lower quantity of available gas due to the post-COVID recovery of the Asian economy. Moreover, threats on critical gas infrastructure for the EU supply cannot be ignored.
Therefore, the proposed Regulation extends Regulation (EU) 2022/1369 to 31 March 2024 and provides for an extended reduction period from 1 April 2023 to 31 March 2024, to ensure that demand reduction continues during the storage filling season in the summer of 2023 and during the winter 2023-2024. The demand reduction period and the reference period are adjusted accordingly, as well as the dates in Article 5(5) regarding the excess storage filling and the review date of Article 9, to ensure consistency with the prolonged time period.
The monitoring and reporting obligation of the gas consumption to assess the demand reduction achieved of Article 8(1) has been increased from once every two months to every month, given the need to have up to date figures in order to take an effective decision of proposing to declare a Union alert. In addition, given that there is insufficiently granular data available at EU level to determine how the demand reduction was achieved, it is proposed to include in the reporting a breakdown of the gas consumption per sector. This should help understand the nature of the achieved demand reduction, i.e. whether demand reductions are savings, substitution or demand destruction and would allow to make more targeted recommendations in light of maintaining the EU’s industry’s competitiveness on a global stage.
• Consistency with existing policy provisions in the policy area
The proposed instrument sets out temporary, proportionate and extraordinary measures. It complements existing relevant EU initiatives and legislation, which ensures that citizens can benefit from secure gas supplies and that customers are protected against major supply disruptions.
It flows logically from existing initiatives, such as the “REPowerEU”, the proposal for a “Hydrogen and Gas Market Decarbonisation Package” and the “Save Gas for a Safe Winter” initiative. The proposed initiative is fully complementary to the EU legislation on security of gas supply, which already established a comprehensive set of rules to better protect citizens and companies against supply interruptions. Regulation (EU) 2017/1938 introduced, inter alia, emergency plans whereby Member States are required to prepare for different crisis levels and plan for measures that can be taken in the event of a national alert. It also supplements Council Regulation (EU) 2022/2576 enhancing solidarity through better coordination of gas purchases, exchanges of gas across borders and reliable price benchmarks. Solidarity mechanisms are in place, ensuring that Member States cooperate across borders to ensure that energy is provided to those customers in a region who need it most, in case of supply disruptions.
Following the unjustified and unprovoked Russian invasion of Ukraine, the EU has set out the REPowerEU Plan with the aim to end the EU's dependence on Russian fossil fuels, as soon as possible and at the latest by 2027. To achieve this, the REPowerEU Plan sets out measures related to energy savings and energy efficiency and proposes an accelerated rollout of clean energy to replace fossil fuels in homes, industry and power generation. In this context, the proposed initiative builds on the tools the EU already has at its disposal and is fully consistent with the goals set out in REPowerEU.
Regulation (EU) 2022/1032 introduced storage obligations in response to the Russian invasion of Ukraine, in which supply shortages and price peaks can result not only from the failure of infrastructure or extreme weather conditions, but also from geopolitical changes, leading to longer lasting or sudden supply disruptions. The storage filling obligations in Regulation (EU) 2022/1032 contribute to safeguarding security of gas supply for the winter of 2022–2023 and the following winter periods.
The “Save Gas for a Safe Winter” Communication adopted on 20 July 2022 sets out the tools that the EU already has available for a coordinated demand reduction, and what else needs to be done, so that the EU is ready for full or partial disruptions. The proposed initiative responds to the increased risks resulting from Russia’s war against Ukraine and is fully complementary to the existing security of supply rules. It prolongs the rules of the Regulation (EU) 2022/1369 for coordinated demand reductions and prolongs the provisions for declaring a Union alert. Indeed, while there is already the possibility for the Commission to declare an emergency at Union level, the possibility to declare an alert at Union level should also be prolonged. The current situation shows that such an alert may be useful to ensure that all Member States take the necessary preventive measures to avoid an energy emergency.
This proposal for extending the current Regulation (EU) 2022/1369, enabling coordinated crisis preparation by introducing better coordination rules for demand reductions and by creating the possibility to introduce Union-wide mandatory gas demand reductions, is therefore complementary to existing provisions and the recent initiatives in the energy sector, safeguarding the security of gas supply and ensuring coordination between demand reduction measures across the EU.
• Consistency with other Union policies
The proposal is an extraordinary measure, to be applied for a limited time that is consistent with a broader set of initiatives to enhance the Union’s energy resilience and to prepare for possible emergency situations, as the proposal extends the current Regulation (EU) 2022/1369 to 31 March 2024. The proposal is also fully compatible with competition and market rules, as functioning cross-border energy markets are key to ensure security of supply in a situation of supply shortages. Appropriate rules in the proposal ensure that national measures do not hamper competition or compromise the integrity of the internal market. Providing for more coordinated demand reductions is also in line with the Commission’s Green Deal targets.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The legal basis for this instrument is Article 122(1) of the Treaty on the Functioning of the European Union (‘TFEU’).
The current and on-going shortage of gas supplies constitutes a severe difficulty in the supply of an energy product pursuant to Article 122 TFEU. The EU has not yet completely replaced Russian gas supply and currently relies on Russian gas for less than 10% of the pipeline imports. A complete halt of those imports would lead to insufficient storage levels in November and to a complete depletion of the EU storages during the winter season therefore exposing the EU to severe risks for security of supply. Furthermore, the current exceptionally high prices, twice as high as historical, underline the need for urgent action to further reduce gas prices in Europe and preserve the global competitiveness of the EU economy. Therefore, EU leaders and the Commission have identified the urgent need for continued measures for more coordinated and immediate action, in order to be better prepared for possible further gas disruptions in the course of the year. The measures to be continued under the instrument for a limited period of time allow all Member States to prepare for possible further supply shortages in a coordinated manner, in a spirit of solidarity. A time-limited extension of, as well as targeted amendments to, the measures taken under Regulation (EU) 2022/1369 will also allow the EU and Member States to assess the effect of these measures and to propose and adopt permanent amendments to the ordinary legal framework for security of gas supply as set out in Regulation (EU) 2017/1938. It is therefore justified to base the proposed instrument on Article 122(1) TFEU.
• Subsidiarity (for non-exclusive competence)
The measures planned to be continued under the present initiative are fully in line with the subsidiarity principle. Because of the scale and the significant effect of further cuts in gas supply on the part of Russia, there is a need for EU level action. A continued coordinated approach through Union-wide demand reduction, in the spirit of solidarity, is necessary to minimise the risk of potential major disruptions during the winter months when gas consumption will be higher and where Member States will need to partly rely on the gas stored during the injection season.
Given the unprecedented nature of the gas supply crisis and its transboundary effects, as well as the level of integration of the EU internal energy market, action at Union level continues to be warranted as Member States alone cannot sufficiently effectively address the risk of serious economic difficulties resulting from price hikes or significant supply disruptions in a coordinated manner. Only continued EU action motivated by a spirit of solidarity between Member States can ensure that supply disruptions do not lead to lasting harm for citizens and the economy.
By reason of its scale and effects, the measure can be better achieved at Union level, hence the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union.
• Proportionality
The initiative complies with the proportionality principle. It falls within the scope of Article 122(1) TFEU. The policy intervention is proportional to the dimension and nature of the problems defined and the achievement of the set objectives.
In view of the unprecedented geopolitical situation and the significant threat for citizens and the EU economy, there is a clear need for continued coordinated action. Hence, the proposal does not go beyond what is necessary to achieve the objectives laid down in the current instrument. The measures proposed to be continued are considered proportionate and build to the extent possible on existing approaches, such as the existing crisis levels and emergency plans established in accordance with Regulation (EU) 2017/1938.
This proposal sets the final result to be achieved, in the form of a process for setting a legally binding energy reduction obligation for Member States, while giving Member States full autonomy in choosing the most effective means to meet such obligation according to their national specificities and the measures already foreseen in the national emergency plans.
• Choice of the instrument
Taking into account the dimension of the energy crisis and the scale of its social, economic and financial impact, the Commission deems suitable to act by way of a regulation which is of general scope and directly and immediately applicable. This would result in a swift, uniform and Union-wide cooperation mechanism.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
Due to the politically sensitive nature of the proposal and urgency to prepare the proposal so that it can be adopted on time by the Council, a stakeholder consultation could not be carried out. However, the matter has been discussed with the Gas Coordination Group, which includes representatives of Member States and European associations representing suppliers, infrastructure operators, traders and the main consumers of gas. The members of the Gas Coordination Group during its meeting of 16 February have voiced their understanding of the importance of a continued demand reduction as a particularly cost-effective measure to preserve and strengthen security of supply. In addition, the point has been raised during the informal Energy Council meeting on 27 February 2023, where Member States confirmed the importance of adequate preparedness in view of the next winter 2023/24 and the important role of gas demand reduction in this context.
• Fundamental rights
No negative impact has been identified on fundamental rights. The measures under this instrument will not affect the rights of customers who are categorised as protected under Regulation (EU) 2017/1938, including all household customers. The instrument will enable to reduce the risks associated with gas shortage that would otherwise have major implications on the economy and society.
4. BUDGETARY IMPLICATIONS
This proposal does not require additional resources from the EU budget.
5. SUMMARY OF CHANGES INTRODUCED
Building on the findings of the Article 9 report, the changes proposed are targeted and limited in scope to prolong demand reduction after the expiration of the period of the Regulation (EU) 2022/1369 until the end of the next winter:
In Article 2, the reference period against which the reduction is measured is proposed to be changed from 1 August 2017 to 31 March 2022 in Regulation (EU) 2022/1369, to 1 April 2017 to 31 March 2022.
In Article 3, the period of 1 August to 2022 to 31 March 2023 for Member States to reduce their gas consumption on a voluntary basis is replaced by the period 1 April 2023 to 31 March 2024.
In Article 5, the period of 1 August to 2022 to 31 March 2023 for Member States to reduce their gas consumption on a mandatory basis in a Union alert declared by the Council upon proposal of the Commission is replaced by the period 1 April 2023 to 31 March 2024.
In Article 8, the bimonthly reporting of the demand reduction achieved is replaced by a monthly reporting of demand reduction of the electricity and heat generation, the industry and the households and services, according to existing Eurostat definitions and conventions.
In Articles 9 and 10 the date of the review by the Commission and the period of application of the Regulation are adapted respectively to extend until 31 March 2024. The existing provisions of Article 5 acknowledging specific national circumstances in case of mandatory demand reduction in a Union alert continue to apply. This holds in particular as regards the exemptions for Member States not directly interconnected to a gas interconnected system, the possibility to take into account gas consumed as feedstock in the reference period, the possibility to reduce the reduction in case of low export capacity already at maximum use, and finally in case of risk of an electricity crisis, including when the electricity system is desynchronised from a third country.