The EU's Long-awaited Joint Gas Purchasing Regulations: The Rational and Legal Pitfalls
Concrete steps were taken at the end of 2022 to realize the European Union’s (“EU”) long-awaited joint gas purchasing ambitions. Some form of a European gas buyer’s consortium might become a reality in 2023. The rationale is that a gas purchasing consortium could negotiate lower prices and ensure a more stable supply, especially in a context of scarcity. According to the International Energy Agency, Europe will face a potential shortfall of some 30 bcm in 2023 – i.e., two thirds of its current consumption. Meeting the EU’s targets for re-filling its gas storage facilities by the early autumn of 2023 may well encourage the formation of joint purchasing consortia.
A new Council Regulation 2022/2576 in December 2022 prescribes joint purchasing in a two-step process. The first is mandatory and the second voluntary. In the first step, gas purchasing companies must aggregate their demand using an EU-wide dedicated service provider, selected through a public procurement procedure. Member States must ensure at least 15% of their storage filling requirements for next year are included by their companies in the demand aggregation process (approximately 13.5 billion cubic meters across the EU as a whole). Beyond the 15% aggregation will be voluntary but based on the same mechanism. Having matched demand with supply through this aggregation process, the second step would involve some of these companies voluntarily deciding to form a gas purchasing consortium (or multiple, regional consortia).
An ad hoc Steering Board made up of national and Commission officials will assess whether planned gas purchases strengthen security of supply and respect the principle of solidarity (but not their compatibility with the EU’s competition rules). In accordance with Article 3 of the new Regulation companies must notify essential contractual information to the Commission. The latter and on the advice of this Steering Board, will assess whether planned purchases could have a negative impact on the EU’s internal energy market or on security of supply. Although it cannot ban the conclusion of a contract, it can issue recommendations on further co-ordination and joint purchasing to individual gas companies. The commercial information to be notified should be treated as confidential by the Commission and the Steering Board.
Background
On 18 October 2022, the European Commission (“EC”) had launched a proposal for a Council regulation enhancing solidarity through better coordination of gas purchases, exchanges of gas across borders and reliable price benchmarks. Negotiations among the Member States proved complex especially given that some governments favored the introduction of a price cap in the wholesale gas market while others – including Germany and the Netherlands – opposed it. A compromise on this issue allowed the Council to adopt the new Regulation 2022/2576 in December 2022. This Regulation entered into force the next day and shall apply for a period of one year.1
Progress to get the platform up and running has so far been slow. Early, voluntary initiatives centered on the creation of an EU Energy Platform in April 2022 to secure the EU’s energy supply at affordable prices and to phase out dependency on Russian gas [see here for summary of its first meeting]. In the months that followed, five regional groups – comprising national officials –were set up to identify opportunities for common use of gas infrastructure, potential new suppliers and to formulate ‘action plans’ on gas demand and on the potential for joint purchasing in each region. A dedicated Commission task force supported the process.
Major gas consumers, such as the ceramic, chemical and fertilizer industries have been encouraged to participate in the Platform.
Legal Pitfalls
In the meantime, an Industry Advisory Group (“IAG”) has also been established to assist the Commission in providing ‘the industrial dimension’. This body comprises representatives from some 27 energy companies. It has met on three occasions in 2022. It has acknowledged that purchasing consortia can serve the purpose of grouping smaller companies (often based in land-locked countries), e.g., to facilitate their access to LNG terminals – as on individual basis they are too small to absorb a full cargo.
In addition to advising on various options for organizing joint purchasing the group has explored legal issues. If joint purchasing consortia are formed, the most prominent issue to be solved involves agreeing on legal liability (individual or shared) and finding commonality of risk assessment of their members.
Furthermore, the general conditions and process for getting a consortium assessed as compliant with EU competition rules has been on the IAG’s agenda. The Commission’s competition directorate (“DG Comp”) has advised that while the burden of proof remains with the companies, DG Comp can offer support to facilitate this process, in the shape of informal discussions. DG Comp has purportedly indicated that, in the case of joint purchasing, the higher risk is on the down-stream market. Although the EC has frequently indicated that it will provide further guidance on these issues and has also hinted at the possibility of a wider exemption from the Treaty rules, concrete measures have not yet been tabled.
Conclusion
The new demand aggregation tool is scheduled to be active by spring 2023 in order to have an impact on gas supplies during the next filling season (i.e., ahead of winter 2023/2024). Demand aggregation is only mandatory for 15% of national storage filling requirements but the new Regulation places broad notification obligations on the EU’s gas sector – even if this only relates to new contracts or tenders. It will be important to ensure that this information is treated with the utmost confidentiality. Joint purchasing remains voluntary and so far, there seems little appetite for EU companies to sign up to EU wide or regional consortia. The joint platform may not only be commercially unattractive for some players in the sector but the potential legal pitfalls – even if not unsurmountable- are undoubtedly discouraging.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.
