As a follow-up to my post from 27 August on energy prices, I just want to share what I learned from a discussion on energy shock at the Bruegel annual conference in the last couple of days. Basically, my suspicion about market failure in the energy futures trading got confirmed.
The link to the recorded stream:
At the session “Mitigating the energy shock” on 7 September, energy industry representatives complained about the dysfunctionality of the trading in the TTF Index (the Title Transfer Facility - a virtual trading point for natural gas in the Netherlands). Namely, Francesco Starace, the CEO of ENEL (the Italian multi-billion manufacturer and distributor of electricity and gas) said that TTF got totally disconnected from fundamentals. Any piece of news on what Putin says leads to massive price jumps. The result is that market participants need to keep large amount of cash to meet possible margin calls. The amount of cash frozen this way is now exceeding EUR 200 bn. This is terribly inefficient, as companies can not use this cash for anything else. And for smaller companies it may mean the risk of getting insolvent. The solution, according to Starace, is to put limitations on the TTF fluctuations.
Claire Waysand, Executive Vice President of Engie, another large multinational energy company, headquartered in France, called even for a bolder solution – a cap on wholesale gas price.
Notably, the reaction of Ditte Juul Jørgensen, the Director-General of DG ENER, was that the European Commission has not focused on price volatility so far, as the priority was to fill gas storage facilities. Now that this goal is accomplished, the Commission is starting to address the price issue.
Well, the concern about the security of supply is understandable, but it does not justify the tolerance of unjustified price swings. Regulating the trading in futures is not so difficult and could have been done much earlier. This way we could have mitigated the energy crisis.
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