European Commission plans to propose a cap on natural gas prices after Nov. 24 may pose major risks to financial stability and supply security in the region’s energy markets, the European Energy Exchange said on Monday.
The European Union has been struggling to contain soaring energy prices due to a drop in Russian gas supplies following the Ukraine crisis.
The European Commission, the EU executive, has been trying to work with energy ministers from member states to find ways to tackle the price inflation.
Reuters last week saw EU documents sketching out planned moves to cap front-month contract prices on the Dutch Title Transfer Facility (TTF) market which would follow talks on this on Thursday.
The talks would try to seek compromise between member states opposed to any intervention and those wanting the plan to extend to more gas contracts than just the month ahead.
The TTF, which is a virtual exchange for trading gas, dominates north-west European gas trading. The EEX offers contracts for physical TTF delivery.
“This proposal has the potential to widen the energy crisis into a wider financial one as well, because it significantly impairs the trading activity of market participants,” said Tobias Paulun, chief strategy officer at Deutsche Boerse’s EEX.
“We are especially concerned that the effects of this proposal would be evaluated ex-post, which is too late when the damages have occurred,” he said in an interview.
Paulun said that similar criticism of the plan has been published in a letter to the Commission and EU energy and finance ministers by the Europex association of European Energy Exchanges where EEX is a member.
In the letter, seen by Reuters, the 31-member Europex organisation said the plan would have “serious and potentially irrevocable negative effects on the functioning and competitiveness of the European energy wholesale market” beyond the current crisis.
An enforced maximum price could result in European utilities and traders losing access to sufficient gas cargoes in the global market. “It would not lower the price of gas,” Paulun said.
He said utilities might also stop hedging their production and consumption and instead move into bilateral over-the-counter trading. OTC trading is riskier because there is no central clearing for these contracts as there is on an exchange, although exchanges offer some OTC clearing services.
OTC trades are underpinned by deposits but these might not be big enough, which could raise counterparty default risks while reducing transparency around operators’ exposure.
Also, since the 2008 financial crisis, EU policy has favoured energy trading moving on to exchanges where business is centrally cleared.
Paulun said operators might be tempted to avoid month-ahead hedging and do business only one or two days before the desired delivery, also increasing systemic risks.
