Could Europe’s Energy Crisis Backfire?

According to Europe’s top energy exchanges, they said that a planned restriction on natural gas prices poses a severe danger to the region’s supply security and financial stability and would do little to decrease energy costs.

The Association of European Energy Exchanges stated in a joint letter that the European Commission’s intention to propose a cap on benchmark gas prices this week would possibly have a nonreversible negative effect on the operation of the region’s energy markets.

Outlook on European Energy Market

According to the organization known as Europex, the gas cap framework does not yet account for the danger of driving players away from exchanges and into the private, over-the-counter market, where there is less pricing transparency and a larger chance of default. According to the statement, the system should “substantially” raise the collateral or margin requirements, a development that considerably impacted liquidity at the height of the oil crisis.

When month-ahead futures on the Dutch Title Transfer Facility gas trading center are over a specific level for an undetermined period of weeks, one restriction will be activated.

In an interview, Tobias Paulun, the chief strategy officer of the European Energy Exchange AG, expressed his fear that the idea will have the opposite impact and worsen supply security. According to Europex, traders and utilities may opt not to hedge their output or consumption in the TTF front-month contract and instead choose to trade in the spot market to balance their positions. However, there is no guarantee that the security of supply would be the same. It would put significant pressure on spot pricing.