REMIT to hit liquidity in European energy markets

An EU regulation that will make companies report electricity and natural gas trades from May or June will result in higher wholesale prices and might lead to a drop in liquidity in over-the-counter energy markets, participants said at a conference in Rome on Tuesday.

All electricity and natural gas trades and at some stage orders will have to be reported under the Regulation on Wholesale Energy Markets Integrity and Transparency, better known as REMIT.

Trade reporting will start six months after the European Commission publishes its implementing acts for REMIT. The commission delayed publishing the acts until the autumn during the summer ( see EDEM and ESGM 10 June 2014 ).

A representative from the Italian energy regulator AEEGSI said during the event the implementing acts are expected in November 2014, a deadline that would set the start-date for reporting to May 2015. But a spokeswoman from the commission would only say recently the acts will be published by November or December.

Costs

Companies attending the conference in Rome organised by the European Federation of Energy Traders (EFET) said smaller companies will struggle with the extra burden in terms of back-office costs to report trades.

“The [operational] costs [of REMIT] are very high – in the order of euro decimals per MWh for a market that runs on profit margins in the order of euro cents per MWh,” Leonardo Zannella, head of trading at Italian utility Enel, said at the event.

Zannella criticised the short six-month period companies will have to get up to speed with the finer details of the final implementing acts. He also questioned the decision not to differentiate REMIT obligations by company size, meaning that small-to-medium companies will be hit harder by the new regulation in relative terms.

“The higher costs brought about by REMIT will prevent some companies from entering in the wholesale sector, which has already been compressed profit-wise,” Zannella concluded.

The majority of market participants polled by ICIS at the event agreed with Zannella’s views, and said that higher back-office costs may make participation in energy markets less attractive, especially for smaller players. Most said REMIT might well shrink liquidity, at least initially.

“A drop in liquidity is possible, although it’s impossible to guess how deep it will be beforehand. Another thing is that the transition is very unlikely to be smooth, and correcting malfunctions could take years if they are serious enough to call the commission back into action,” one source who preferred to speak under condition of anonymity told ICIS.

Another source was sceptical the implementing acts will be published in November. He added the existing draft acts did not clarify the difference between ‘standard trades’, which will need to be reported by participants the day after the close of the deal, and ‘non-standard trades’, which can be reported one month after the transaction date. ICIS understands any trades underpinned by a EFET contract would be considered ‘standard’. Riccardo Patrian