From our point of view, obstacles impeding further growth in some European forward markets are foremost related to the underlying physical market structure, misguided policy interventions and stringent requirements stemming from financial regulation. While TSOs may play a positive role in improving hedging opportunities, we recommend that the European Commission assesses the forward market liquidity situation per bidding zone, and on a regional basis where relevant, and considers possible improvements beyond the role of TSOs.
By offering liquidity to the forward market, TSOs effectively hedge parts of their congestion income without a financial need to do so. To ensure that the financial risk TSOs are exposed to is proportionate to the hedging needs they may satisfy, we outline five principles to be considered:
- An objective liquidity assessment method by the relevant NRAs is needed to confirm whether TSOs’ support to hedging opportunities is necessary.
- TSOs should not be forced to support hedging instruments that do not stem from market demand. On the contrary, TSOs’ involvement should focus on enhancing already existing market-based hedging instruments facilitating market participants’ hedging needs over different bidding zones or regions.
- TSOs should enjoy large discretion on how to support forward markets.
- JAO should not have an exclusive monopoly role.
- TSOs should use an efficient methodology to determine the volumes they bring to the market.
We caution against the creation of a regulatory-driven regional virtual trading hub concept as it does not stem from market demand, leaves no discretion for TSOs and requires an exclusive monopoly for JAO. Instead, we should aim for efficient support of existing market-based hedging instruments, rather than a structural revolution of EU forward markets towards an untested regulatory-driven model.
Read our full paper attached.
