Electricity markets regulations: The financial impact of the global energy crisis

Abstract

Amid the global energy crisis, we examine the impact of electricity market regulations in the European Union (EU). Pursuing an integrated EU electricity market inadvertently heightened the interdependence between gas and electricity prices. The EU energy crisis, triggered by the gas supply shock, amplified power prices and their volatility. These volatility spikes led to substantial margin increases on power futures contracts crucial for mitigating electricity price risks. The increase in margins placed a substantial financial burden on EU power utilities. We document an almost eight-fold surge in required collateral for long positions in front-month EU power futures contracts during the one-year duration of the crisis. Throughout the crisis, EU utilities experienced lower sales and profitability compared to their US counterparts, and a portfolio of EU power utilities significantly underperformed a counterfactual portfolio of US power utilities.