The Impact of the New Wave of Financial Regulation for European Energy Markets

Energy Policy 47 (2012) 468–477

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The impact of the new wave of financial regulation for European energy markets
Luuk Nijman n
School of Public Policy, University College London, London, WC1H 9QU, UK

H I G H L I G H T S c c c c c

The European Commission has put forward a set of financial legislation to stabilize both financial markets and energy prices. This article assesses the impact of this financial regulation on energy markets. It shows that the theoretical and empirical effects of key elements in this legislation are ambiguous. It argues that, if enacted, particular market parties such as energy companies should not be exempted. It concludes that this set of legislation will not necessarily bring about the effects the Commission desires.

a r t i c l e i n f o
Article history: Received 9 November 2011 Accepted 14 May 2012 Available online 31 May 2012 Keywords: Financial legislation Regulation European Union

a b s t r a c t
As the financial and physical markets for energy have increasingly become intertwined, energy trade is also covered by financial legislation. The European Commission wishes to strengthen this financial regulation of energy trade. It has put forward a set of regulatory proposals aimed at stabilizing financial markets and limiting volatility of energy prices. The most noteworthy are EMIR, MAD, REMIT and the revised MiFID. Key elements are transparency, new trading venues, central clearing obligations and mandatory transaction reporting. This article evaluates the likely outcomes for energy markets, given the new incentives for market parties. It argues that although there is no ground to exempt particular energy market participants such as energy companies from financial legislation, increased regulation will not necessarily bring about the effects the Commission desires. The causal link between derivatives trading

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First, if the Commission wishes to strengthen the regulation of trade in energy derivatives, it should extend this regulation to all market participants. There are no compelling arguments to exempt non-financial institutions, such as energy companies. Second, it would be misguided to expect that stepping up regulation of energy derivatives trading automatically reduces volatility; neither in the financial, nor in the physical energy markets. The precise link between derivatives trading remains unclear, the political discourse itself has added to volatility and this legislation may have some ambiguous and unintended effects. Therefore, it would be advisable to take a more cautious stance and carefully weigh the various costs and benefits. If the Commission decides to push through with the whole package, a few caveats are in order. First, overlaps and gaps between the several regulations should be avoided. 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