EEX sees EU plans for gas price cap as threat to supply security

European Energy Exchange AG

21/11/2022 14:29

* 
      Gas price cap will not lower gas costs, EEX says
    

        * 
      Could lose cargoes, drive trading off exchanges
    

        * 
      Uncleared contracts imply higher counterparty risk
    

        * 
      Less transparency of operators' exposures
    

  
    By Vera Eckert
       FRANKFURT, Nov 21 (Reuters) - 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  DB1Gn.DE 
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.
 (Reporting by Vera Eckert, editing by Jane Merriman)
 ((vera.eckert@thomsonreuters.com; +49 30 2201 33654;
@EckertVera;))