Price caps are a bad idea, says the European Energy Association

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OSLO/LONDON – As the European Union weighs options to tackle soaring energy costs, the European Federation of Energy Traders (EFET) has capped wholesale electricity and gas prices under the “What not to do” label, EFET said in a statement. note.

EFET, an association made up of major banks, oil and gas producers, utility companies and traders, has expressed concern about dysfunctional energy markets and high margin call costs. , mainly for gas, earlier this year.

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“Wholesale energy prices reflect the current scarcity of energy in Europe. Their current level creates challenges for both consumers and market players. Yet preserving the ability of the market to function is key to ensuring that energy goes where it is most needed,” the memo dated September 8, but made public on Tuesday, reads.

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The EU has been considering various caps on electricity and gas prices for weeks and the European Commission is due to propose a package of emergency measures on Wednesday.

The EU market watchdog is also seeking to ease the requirement for energy companies to hoard increasing amounts of cash to back derivatives contracts, with a solution leaving banks on the hook.

Such margin calls reached staggering levels after Russia invaded Ukraine and shut down the Nord Stream gas pipeline to Germany – a key artery bringing Russian gas to Europe.

Firms have struggled to meet their hedging needs, an essential part of trading, as the initial margin or deposit required by exchanges to secure a derivative contract has soared.

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EFET has suggested EU leaders offer targeted aid for margin calls, such as “relaxing the specification of eligible collateral types”.

The association added that Europe should not suspend gas, electricity or carbon markets and should not introduce mechanisms for recovering revenues from wholesale energy transactions that could lead to market fragmentation.

Many European countries offer state-backed loans and guarantees to cope with businesses until a regulatory fix is ​​in place.

As well as tackling margin calls, EFET said EU leaders should set targets to reduce electricity demand, introduce market-based tenders to reduce industrial demand and coordinate priority ordering for those who may have to give up gas and electricity in times of shortage, so-called load shedding. (Reporting by Nora Buli in Oslo and Julia Payne in London Editing by Mark Potter)

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Andrew B. Reiter