- Eurelectric welcomes the opportunity to contribute to the review of the functioning of commodity derivatives markets. Electricity utilities rely on commodity derivative markets to manage risks stemming from the generation and supply of electricity. Competitive and liquid commodity markets are therefore a key enabler for the energy transition, allowing utilities to offer tailored energy supply and financing solutions to actors across the electricity value chain while ensuring predictable energy prices.Â
- Electricity, and commodity markets more broadly, support key aims of European economic and climate policy by maintaining the security of energy supply at a cost in line with market fundamentals. As Member States operate large shifts in their generation mix, commodity derivative markets are key in managing associated price volatility. Considering the scale of investments needed to decarbonise electricity supply and to electrify end-uses, a stable regulatory framework is important to maintain trust in EU energy markets.
- Against this backdrop, major market interventions or changes to conditions for utilities to operate in commodity markets would send the wrong signal. In particular, we strongly believe that the ancillary activity exemption (AAE) should be maintained. The AAE is essential for electricity market functioning because it allows asset-backed utilities to perform portfolio optimisation without being subject to banking regulation. Changing or even abolishing this exemption would cause high costs in setting up a licensed entity and trap vast amounts for mandatory margining and prudential capital requirements. It would therefore result in a massive misallocation of resources that utilities need to perform their core business of electricity generation and supply.Â
- Electricity utilities are subject to a comprehensive set of sector-specific and financial market legislation, requiring them to report all physical and financial transactions concluded in the EU via dedicated mechanisms. While access to data across physical and financial energy markets may be fragmented due to the incremental development of energy market legislation, it is important to note that market participants have invested large amounts to comply with reporting requirements under REMIT, EMIR and MiFID/R. For this reason, we urge regulators to prioritise inter-agency cooperation and data-sharing rather than changing well-established reporting frameworks.
- While shared data access within the boundaries of each regulator’s supervisory mandate can improve market oversight, this should be implemented ‘behind the scenes’ and preserve existing reporting interfaces. The same applies to information collected regarding market participants’ positions, which can be obtained by regulators while preserving the regulatory status quo.
- Finally, we believe that interventions in price formation through position limits and circuit breakers should only be used as measures of last resort to curtail erratic market behaviour. For electricity utilities, it is crucial that low position limits or long trading halts do not undermine their supply mandate. The rigid system of position limits that prevailed before the Capital Markets Recovery Package should not be reinstated, since it would complicate hedging and create unnecessary inefficiencies.
- In general, the signalling effect of price interventions or market access restrictions on market participants’ trading activity should not be underestimated. As public support schemes for electricity generation are reduced, access to liquid forward markets becomes increasingly important. The existence of competitive energy markets should therefore not be jeopardised by the current review cycle.