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Energy traders call for emergency liquidity support amid price volatility

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Margin requirements for power exchanges have increased sixfold over the past year.

The European Federation of Energy Traders (EFET) has called for the creation of a time-limited emergency liquidity support system to ensure the continued functioning of wholesale energy markets in a context of continued volatility.

In a letter sent to market participants this month, the trade association highlighted price levels and volatility in wholesale energy markets, including in bilateral exchanges and in the UK ICE market. Futures Europe, the German European Energy Exchange and the Dutch regulated markets ICE Endex.

“Massive price movements in European energy markets have resulted in a massive increase in margin requirements for market participants,” the letter explains.

“Since the end of February 2022, an already difficult situation has worsened and more and more energy market participants find themselves in a position where their ability to find additional liquidity is greatly reduced or, in some cases, There is therefore a significant risk that some companies will not be able to meet the additional margin calls issued by their clearing bank, even if they have to continue to cover their physical assets to avoid exposing themselves to the risks of market price.

EFET gave the example of a producer who hedges both gas and electricity via exchanges, in the summer of 2021 it had to pay an initial margin of £841m (£1bn). euros). In October 2021, this amount had increased to 3.4 billion pounds sterling (4 billion euros) and in March 2022 to 5 billion pounds sterling (6 billion euros).

The same company will also have seen daily margin cash flow from price movements, which previously stood at around £42m (€50m) in one business day, climb to £420m. (500 million euros).

For this reason, it is not impossible to imagine that generally sound and healthy companies will not be able to access liquidity to meet these unprecedented margin requirements. This risk could increase further if sanctions against Russian imports of gas, oil and coal are tightened, increasing volatility in wholesale markets.

If these markets caused companies to fail, this would in turn create greater volatility in the market and could lead to a domino effect, jeopardizing energy security across Europe.

As such, the Federation suggested the establishment of emergency funding mechanisms, which would be triggered when the margin requirement to operate in the market reached a level likely to lead to the default of several market participants.

Funding could be provided by any public entity with a high credit rating, suggests EFET, including governments, national central banks or public-law financial institutions like the Bank of England, the European Central Bank or the Bank European investment.

This liquidity support program would be managed by member firms of the clearing house and used only during times of extraordinary market stress.

In the UK, the impact of market volatility is reflected in a dramatic increase in household energy bills. In April, the price cap is expected to jump 54% to £1,971 due to the 500% increase in gas prices in 2021, due to a number of factors including the restart of economies post COVID -19, reduced imports from Russia and strong demand. in Asia.

Following the Russian invasion of Ukraine on February 24, price volatility has increased further, with analysts now predicting bills to top £3,000 for the next price cap period in October.

The UK only depends on Russia for around 4% of its gas consumption, but the price is set by the international market. Therefore, although there are few risks to security of supply, the country will be exposed to dramatic increases in costs.

Calls are mounting for the UK to act to protect consumers, businesses and the wider economy amid continued energy volatility. Prime Minister Boris Johnson is expected to publish an energy supply strategy this month and has stressed the importance of renewables, nuclear and domestic oil and gas production for energy security.