The European Commission has introduced new rules in the energy markets called Regulation in Energy Market Integrity and Transparency (REMIT) in an effort, it claims, to overcome what it views as rigging in the market. The results will be a squeeze on efficiency seeking and therefore higher prices.
Power companies split their business between generation (asset) and market access (trading). As you would expect the job of generation is to burn fuel and produce electricity. Trading is there to optimise the asset, in other words apply market efficiency and get the best possible combinations of power, fuel and emissions. The markets for electricity, gas, coal and emissions are highly liquid, efficient, and visible and the role of trading is to reduce inefficiencies and get the best return.
At the core of REMIT is that trading will have to prove that it has no knowledge of any forward intentions of what the asset is going to do. For example, periodically the asset will need to place buy orders in the market to, say, buy coal for the month’s requirements. There are strict Chinese walls between asset and trading, and the latter has no knowledge of when these orders are going to come to market. If the trader is holding a speculatively long position (power companies also involve themselves in speculative trading) when the order from asset comes to market and the price of coal rises and making money for the trader’s speculative position he will have to prove that he had no prior knowledge of the order. In other words, trading will have to prove its innocence, rather than the regulator having to prove guilt. As well as the Commission having full access to all trade details (endangering the power companies confidential information), emails, SMS and messenger chat for an indefinite period, REMIT even makes the trader prove that he had not had a chat with someone from the asset business and even prove that he had not overheard two people from the asset business discussing their future plans. This flies in the face of any sense of natural justice. Furthermore, the fear of having to disprove guilt will act as an incentive for the trading side of the business from any trading at all, and this will reduce market efficiencies, and will lead to higher prices.
REMIT is yet another point in case of how the EU hates free markets, and imposes its will in an effort to broaden and deepen its control. The EU does not care that prices will rise, it only cares about suppressing markets and choice.