Regulation on reducing gas demand in the EU by 15% comes into force

On 5 August 2022, a Council Regulation on Coordinated Demand Reduction Measures for Gas (the “Regulation”) was adopted by written procedure, with only Hungary and Poland voting against it (see Council press release). The Regulation came into force on 9 August 2022 after its publication in the Official Journal of the EU (“OJEU”).

A proposal for the Regulation was made by the European Commission on 20 July 2022 (the “Proposal”) as part of its “Winter Preparedness Package” including legislative and non-legislative initiatives to reduce overall gas consumption in Europe by 15% during the next winter period. The Commission highlighted that the new legal tools are necessary as the existing Security of Supply Regulation (Regulation (EU) 2017/1938) is insufficient to deal with a widespread, protracted disruption (or even complete cut-off) of gas supply from Russia.

Despite several Member States initially objecting to the Proposal, a political agreement was reached quite quickly during the extraordinary Council meeting on 26 July 2022. The initial version of the Regulation was amended significantly, including by transferring the power to trigger a mandatory EU-wide demand reduction obligation from the Commission to the Council (on a proposal by the Commission), providing for a number of substantial (and rather tailored) exemptions and limiting the term of the Regulation to one year. The compromise version raised questions as to whether it will in fact allow a 15% reduction to be achieved. However, it is still regarded as a major step to increase the EU’s preparedness for gas supply disruptions and demonstrates a high degree of unity and solidarity among Member States.

The Proposal provides for both a voluntary and a mandatory reduction of gas consumption.

Member States will be required to use their best efforts to reduce their national gas consumption between 1 August 2022 and 31 March 2023 by at least 15% compared to their average consumption between 1 August and 31 March of the past five years.

The Council may, acting by a qualified majority, declare a “Union alert” on a proposal by the Commission. The Commission will submit such a proposal: (i) if there is a substantial risk of a severe gas supply shortage or an exceptionally high demand of gas, for which voluntary measures are not sufficient, but where the market is still able to manage that disruption; or (ii) where five or more Member States have declared an alert at national level. The Recitals to the Regulation state that the mechanism should become operational sufficiently in advance of the 2022 autumn – this may indicate that the Council expects that a Union alert might need to be declared soon.

If a Union alert is declared, the 15% reduction target of overall gas consumption becomes mandatory (in principle). Any reductions of gas consumption achieved by the Member States before the alert was declared are also taken into account. The 15% reduction would be measured against the same reference period (i.e., during the last five consecutive years before the Regulation came into force), although for the Member States where the gas consumption increased by at least 8% between 1 August 2021 and 31 March 2022, only this period will be taken into account as a reference period.  

The Regulation contains an extensive list of exemptions and possibilities to declare a derogation from the mandatory reduction target. It is clear that some of these exemptions made the final cut following intensive lobbying by several Member States, and reflecting a rather particular domestic context in each of those countries. In particular, Member States that are not interconnected to other Member States’ gas networks and Member states whose electricity grids are not synchronised with the European electricity system can be exempt from mandatory gas reductions. Member States in certain other situations may limit the reference gas consumption taken into account for the calculation of their reduction target, or otherwise limit their target.

Member States must notify the Commission of their decision to limit their mandatory demand reduction. If the Commission finds that such limitations are not justified on the conditions set out for the exemptions they are based on, it will adopt an opinion indicating why that is the case. It is not clear however what would happen next. The Regulation just states that limitations to the mandatory demand reduction must be removed when the conditions of the exemption are no longer fulfilled. The better reading is probably that the Commission would transmit its opinion to the competent authority of the relevant Member State, in charge of the enforcement of the Regulation. The competent authority would then have to take the necessary measures to ensure the mandatory demand reduction is achieved (or whatever other modification or recommendation by the Commission is implemented).

Member States are free to choose the appropriate measures to reduce demand (whereby they can gain inspiration from the Commission’s Communication “Save gas for a safe winter” – see below) and should prioritise measures affecting non-protected customers, taking into account their economic importance as well as, among other things, the following elements:

• the impact of a disruption on critical supply chains;
• the possible negative impacts in other Member States, in particular on supply chains of downstream sectors that are critical for society;
• the potential long-lasting damage to industrial installations; and
• the possibilities for reducing consumption and substituting products in the EU.

The Regulation also provides that its provisions on mandatory demand reduction shall apply without prejudice to existing long-term contracts. This should allow Member States to provide for some form of grandfathering when implementing demand reduction measures and thereby avoid claims by market players that can no longer fulfil their obligations as a result of such government action. As no definition or explanation is given, the breadth of this carve-out remains unclear. Does it strictly concern long-term energy contracts (e.g., a corporate PPA with a minimum take-off / take-or-pay obligation) or any type of contract (e.g., an advertising agreement that requires neon commercials running day and night, where a local government decides to prohibit neon lighting within certain timeframes)? This is particularly relevant where such contracts lack contractual hardship or change in law provisions. More guidance on the scope of this carve-out provision would have been helpful; this will now be left largely up to the individual Member States to decide.

The Member States will need to update their national emergency plans: (i) to reflect voluntary reductions by 31 October 2022; and (ii) in case of a declaration of a Union alert.

The Regulation will apply for a period of one year. By 1 May 2023 the Commission will need to present a report to the Council with a review of the Regulation. Based on the report, the Commission may propose to prolong the period of application of the Regulation (but the final decision will remain with the Council).

“Save gas for a safe winter”

The Winter Preparedness Package submitted by the Commission on 20 July also contained a Communication “Save gas for a safe winter”, which outlines the market situation, tools the EU already has at its disposal and the measures taken so far and an Annex containing guidelines on a European gas demand reduction plan, which includes a description of measures that can be taken immediately in order to free up gas volumes, criteria to identify critical sectors of the economy and industrial assets. These documents can be used as guidance by Member States in complying with their obligations under the Regulation.

The Winter Preparedness Package was accompanied by a number of factsheets (Save Gas for a Safe Winter, a European Gas Demand Reduction Plan and supporting cities to save energy), a press release and Q&A. These should be read with caution, as they were based on the Commission’s initial Proposal, which rather substantially diverts from the final Regulation.   

Amendment to the State Aid Temporary Crisis Framework

Also on 20 July 2022, the Commission adopted an amendment to the State Aid Temporary Crisis Framework initially decided on 23 March 2022, which complements the Winter Preparedness Package and extends the Temporary Crisis Framework by additional types of aid measures in line with the REPowerEU plan (see our previous blog post on REPowerEU).

In particular, Member States would be able to set up schemes for investing in renewable energy with simplified tender procedures (for example, where support is required for specific technology), set up new tender based schemes, or directly support the projects without tenders (with certain limits on public support) to further accelerate the diversification of energy supplies. The aid under new measures can be granted until 30 June 2023. The amendment also describes the types of aid that may be available on case-by-case basis.