Proposed EU energy interventions would add complexity, fragment market – EFET

LONDON (ICIS)–EU member states would need to ensure the uniform implementation of policies being adopted in response to the energy crisis, the chief executive of Europe’s biggest energy traders body has told ICIS.

This would prevent the fragmentation of European gas and electricity markets, European Federation of Energy Traders (EFET) CEO Mark Copley said.

Speaking to ICIS on the sidelines of the Energy Trading Day in Zurich this week, Copley said national governments were producing complex regulations at breakneck speed and warned that without clear coordination among member states, there would be multiple barriers to trading:

“A single EU market is good but if you have 27 sets of rules that are incompatible you end up building complexity upon complexity,” Copley said.

One instance where there is a strong need to ensure regulatory changes are implemented uniformly is the claw-back mechanism.

The European Commission wants to rake in revenue that non gas-fired electricity producers would make above a set price cap. There were recent indications that the Commission would allow member states to set their own price cap, a move that could create disparity among EU markets.

Copley warned that proposed measures such as price caps, windfall taxes or claw-back measures aiming to rake in cash from non-gas producers to shield consumers will reduce the incentive to trade.

“We now have waves of intervention which come at a cost,” he said.

Copley quoted the example of Spain and Portugal, which took some of the most interventionist measures, introducing a price cap on the cost of gas to generate electricity which will be in place until the end of May 2023.

The impact was felt immediately after the measure was introduced in June. As expected, the price of electricity fell but the drop came at the cost of spiking gas demand for electricity generation which nearly doubled on last year’s values.

It also created an opportunity for traders to sell comparatively cheaper electricity to the premium neighbouring market, France.

Copley said proposals to amend existing benchmarks and create complementary reference prices looked like “a wise idea until you start to unpack it”.

He said the amount of monitoring of transactions and price benchmarks made established prices credible and difficult to replace with alternative indices.

Doug Wood, gas committee chair at EFET, echoed the views noting that a complementary LNG index would be much less reliable on several accounts.

Firstly, he said the traded LNG market was much less liquid than mature western European hubs, which meant it was much more difficult to create a reliable index based on an illiquid market.

Secondly, he noted that many of the LNG contracts that would be used as a reference point for a benchmark were outside the EU jurisdiction.

Thirdly, Wood said the EU intended to create a lower index to attract buyers but said that did not necessarily mean that it would also attract sellers.

Wood raised questions about the EU’s intention to set up a joint purchasing platform and its ability to negotiate prices for new gas imports.

Both Copley and Wood warned that in their rush to shield consumers from spiking energy bills, some member states were at risk of adopting measures with long-lasting damaging consequences.

They singled out Romania after the government introduced a 100% tax on electricity export revenues and a 98% tax on the revenue of gas and power traders in the country.

“These are very populist measures which risk isolating Romania from the rest of Europe. They will scare companies out of the market and [contrary to government expectations] they will not help the people of Romania,” Copley said.