Once emergency measures are enacted in the energy markets "the danger is they stay", which would have negative long-term effects, European energy traders' association Efet's chief executive Mark Copley has warned.
Speaking to Argus at the sidelines of the Energy Trading Day event in Zurich on 21 September, Copley expressed his concern that "the short term becomes the long term", and that some of the emergency measures designed to bring down energy costs for consumers on a temporary basis "stay around for a longer period of time".
The head of the trading association suggested instead thinking about "how to improve the market design we have, to try to learn lessons and to be conscious of the long term and short term". He stressed all parts of the energy trilemma remain important. "We still have to decarbonise and decarbonisation means a huge amount of investment, particularly to electrify heat and transport", and this is legally binding, Copley said.
According to the Efet chief executive, any delay in progress towards decarbonisation poses a "big risk", and a European approach is required to tackle what is "a global challenge".
Returning to the short term, Copley said that energy demand reduction is a "no-regret" measure, and it is "sensible" to try to give people information to allow them to save energy and to ramp up investment in energy efficiency.
Considering how to manage a potentially difficult winter, he also set out the importance of effective co-operation between grid operators and the need for emergency plans to be stress-tested and co-ordinated.
But according to Copley, the root cause of the current energy crisis is "scarcity in gas and scarcity in electricity". Managing that needs a focus on both reducing demand and increasing supply. "There are limited options in the short term and more options in the long term", Copley said. "But again, we need to co-ordinate and start thinking about those now." Copley stressed that there is no single solution and that it will require a broad range of actions to increase the ability to deal with future shocks. "That will involve everything from insulating homes, to increasing demand flexibility, to upgrading networks, to promoting research and development and to investing in a broad range of new technologies — the vast majority being renewable," Copley said.
And price signals can help the market to adapt in the short and long term, according to Copley. In the short term, high energy prices prompt consumers to use less energy and provide strong incentives to find more innovative ways of using energy. In the long term, carbon prices provide "incentives to be greener" and attract investments in the renewable technologies that will drive prices down, Copley added.
Copley outlined that the European energy markets have coped with huge demand falls during the pandemic, followed by severe shortages in gas and power. He recognised the huge challenges high prices are creating, but cautioned against seeing these prices as a reason to move away from markets.
"The market is not going to solve every problem, but market forces are going to help you solve your problems if you let them," he said, and the right way forward is a co-ordinated approach rather than a patchwork of national measures.
Copley expressed concerns about some emergency measures discussed at an EU level such as wholesale gas price caps, which according to him, would discourage additional supply from coming into Europe in a period of scarcity.
Questioning one EU proposal to replace the TTF hub with indexation to an LNG price, he argued that the TTF is "quite liquid", with most trades made by European firms. By contrast, most LNG trades are made by global firms and there are far fewer trades per day. "People that want to sell gas to Europe want to do that at a liquid hub, and they don't want to sell gas using an illiquid benchmark," he said, arguing that it is not sensible to split liquidity when it is already in decline.
The European gas and power markets are some of the "most heavily regulated markets you will find anywhere", Copley argued. As an ex-regulator, Copley expressed frustration about the lack of analysis supporting several claims of speculative activity at the TTF.
He also warned about the level of complexity involved in designing clawback measures in a way which does not affect forward market liquidity, lead to losses for companies who have hedged in advance and cause a fragmentation of the European market.
Copley suggested that moving forward there is a need to learn from recent experiences and make "some tweaks" to Europe's energy market. "Europe should be really proud of the market it has created," Copley said. "This is probably the biggest and most competitive energy market anywhere in the world. We need to be careful not to throw it away."
