As if slumping prices weren’t enough — German electricity is trading near a 12-year low — traders and utilities in Europe’s $940 billion power andnatural gas markets have another reason to be worried.
What does Europe’s energy market look like?
Europe’s energy industry is both fragmented and unified. National markets persist, but there are cables and pipelines linking them together and the EU is pushing for more integration to improve market efficiency.
Utilities, banks, grids and other traders buy and sell billions of dollars worth of power, gas within and between the region’s 28 members states. They also buy and sell a range of derivative contracts including futures and options.
Why is the directive so vital for the energy industry?
The regulator says that hundreds of energy contracts from German power to carbon permits will for the first time be subject to the same regulations as stocks and bonds traded by banks, including mandatory position limits on trades and requirements for collateral to set against trades.
Each energy company may from 2018 need to boost their capital by more than one billion euros ($1.1 billion), mainly to guarantee trading positions, according to PricewaterhouseCoopers LLP. Capital isn’t generally required today. The rules may add as much as 20 percent to operating costs, David Coulon, head of PwC’s commodity-management practice in London, said.
Why does the EU want to include energy trading?
The tougher rules are needed to prevent financial-market abuse, says theEuropean Securities and Markets Authority, which is leading the redesign. To ensure this covers the widest possible range of financial instruments, the areas and markets covered by European Union authority need to be expanded beyond the traditional financial asset classes of stocks, bonds and currencies.
“There’s a battle going on,” says Aviv Handler, managing director of ETR Advisory in London, which provides advice to trading companies, exchanges and technology providers. “The authority’s view is that it should be regulating the commodity markets and the industry is in fear of the capital requirements.”
The bloc’s regulator argues it needs to oversee the most important traders in each financial market. If most of a company’s activity is financial, then it should be treated like a financial firm, says Reemt Seibel, a Paris-based spokesman for the authority.
“We are looking to find a good balance,” he said. “The pure energy business should not be covered.”
What does that mean for energy traders?
The new rules will probably require companies to hold more cash for trading. That may lead to a reduction of participants in the markets, saidGertjan Lankhorst, chief executive officer of GasTerra BV, a Dutch company that sells gas from Europe’s biggest field.
Banks including Barclays Plc to Bank of America Corp. have already exited Europe’s energy markets in the past two years, citing increasing regulation and sliding prices.
“In the worst scenario all energy companies will be treated as financial institutions” leading to a “huge reduction” of participants in the market, Lankhorst said. This would not be “good for liquidity, not good for the functioning of the market.”
What does the industry say the rules will do to energy prices?
Fewer traders means a less efficient market that may boost consumer bills by billions of euros, according toPaul Dawson, head of regulatory affairs at the supply and trading unit of RWE AG, Germany’s second-biggest utility.
The new laws might even require grids to post collateral for trades done with the sole purpose of ensuring a balance of supply and demand on their networks through the day, according to Claire Camus, a spokeswoman in Brussels for Entsoe, an industry group for Europe’s grids.
Proposals would exempt companies whose buying and selling account for less than 0.5 percent of the total trading of that commodity, and use less than 5 percent of a group’s capital.
Those thresholds are too low and threaten to “devastate” some markets,Stefan Dohler, head of markets at Vattenfall AB, the largest Nordic utility, said by phone from Hamburg. Starting with higher thresholds and narrowing them over time would be better, he said.
The authority is considering “major refinements,” Seibel said.