Energy Traders Seen Needing Billions in Regulation Shakeup

  • Rules to require up to 6 billion euros each in extra capital
  • Wholesale prices to rise 1% as bid/offer spreads may widen

Large energy firms would need to add as much as 6 billion euros ($6.7 billion) in extra capital under proposed European Union trading rules designed to prevent market abuse, according to the European Federation of Energy Traders.

The European Securities and Markets Authority’s proposals may push up wholesale electricity prices by 1 percent, or 7 billion euros per year, because of the burdens they would place on energy-trading market makers, Paul Dawson, the group’s chairman, said Thursday in an interview in Brussels. That’s because firms would be required to hold an extra 3 billion euros to 6 billion euros in extra capital under the ESMA guidelines, including against open positions, he said.

The update of the region’s Markets in Financial Instruments Directive set for 2017, designed to help prevent another financial crisis, will reshape commodities industries, including the $940 billion power and natural gas markets. ESMA says the recast will prevent abuses, while utility executives and energy watchdogs have said the rules impose costs that may prompt some companies to scale back their trading.

Under the proposed rules, some companies would be treated as speculators when their main job is making sure markets trade smoothly and have sufficient liquidity, said Dawson, also head of regulatory affairs at RWE AG’s trading unit. If market liquidity goes down, energy costs will go up, he said.

“Making that more expensive blows out spreads, lowers competition in the energy markets and makes them less secure,” Dawson said. “There seems to be a lack of appreciation of the role of intermediaries.”

ESMA chairman Steven Maijoor said the changes are designed to create a more-level playing field for commodities companies and banks, in a conference call Monday with reporters, after the proposals were released. He acknowledged that costs for non-financial firms would increase as a result.

Balancing Act

“The proposals attempt to strike a balance between getting safer markets and
more transparency, while respecting business needs,” Reemt Seibel, a
Paris-based spokesman for the authority, said Thursday by phone. “We appreciate the possible impact,” he said, declining to comment on the EFET estimates.

Lower traded volumes on markets could translate into 11.7 billion euros of yearly additional costs for Europe’s factories, because it will take longer to buy or sell energy in advance, EFET said in an e-mailed statement.

“Adopting proposals that would inflict significant additional costs on the European economy and harm the EU’s competitiveness would be in stark contrast with some of the key policy objectives” of the European Commission, the group said.

The commission has three months to decide whether to endorse the proposals before final approval by the European Parliament and the bloc’s Council.

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