Margin calls hamper gas price discovery in Europe

© Reuters. FILE PHOTO: The wind power plants of German utility RWE, one of Europe’s largest electricity companies, are pictured in front of RWE’s brown coal power plants in Neurath, northwest of Cologne, in Germany, March 18, 2022. REUTERS / Wolfgang Rattay

AMSTERDAM (Reuters) – The high cost of margin calls has driven participants out of the European gas market, reducing liquidity and making it more difficult to determine a price, the utility’s business unit manager said on Wednesday. German RWE at an industry conference in Amsterdam.

“There is not enough liquidity in the market to absorb the right price signals, especially not in the next few years to come,” said Andree Stracke, head of RWE’s trading subsidiary, RWE Supply & Trading, during of the Flame Conference.

Gas prices hit all-time highs last winter because people holding long positions on the exchanges could no longer afford the margin calls. Exchanges closed positions, reducing volumes and liquidity, he added.

Commodity exchanges and wholesale markets routinely require deposits from participants to cover potential liabilities from open futures or futures positions. Down payments required increase, prompting refills called margin calls, when prices become unusually volatile.

As for gas prices, the current level of around 100 euros per megawatt hour on the Dutch benchmark hub TTF was “extremely high”, Stracke said.

“I don’t think it’s really sustainable for Europe because industries can’t afford it and people can’t afford it either,” he added.

Current high prices are also a problem for gas storage, Stracke warned.

“If you now need to store gas, and you have a storage volume of 10 terawatt hours, that’s 1 billion euros of working capital that you need to store,” he said.

In the past, this was partly funded by commercial banks, but they were now reluctant to invest more money in the energy sector, and government funding might be needed, he added.

Germany, which has the largest storage capacity in Europe, has signed a law ensuring underground caverns are 80% full by October 1, when the winter season begins.

Filling that storage capacity alone would require 25 billion euros, Stracke said.

The European Commission has also this year proposed legislation requiring gas storage operators to fill sites to at least 80% capacity by November 1.

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