Bank exits boost utilities, funds in Europe gas and power trading

Wed Feb 19, 2014 10:46am EST
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By Henning Gloystein and Vera Eckert

LONDON/FRANKFURT (Reuters) - Tougher European financial regulations have prompted banks to leave power and gas trading, meaning greater dominance by utilities and trading houses and less appeal for investors.

The global commodities market for banks has shrunk to about $4 billion from as high as $12 billion at the end of the last decade, partly as a result of reflecting stricter restrictions on banks trading with their own money.

JP Morgan (JPM.N: Quote), Deutsche Bank (DBKGn.DE: Quote), Barclays (BARC.L: Quote), Bank of America Merrill Lynch (BAC.N: Quote) and Morgan Stanley (MS.N: Quote) have all either reduced or closed their European power and gas trading units.

"Liquidity is sinking and at the same time capital requirements are rising. The financial market is realizing that there are no good margins to be made here," said Stefan Dohler, senior vice president for optimization and trading at Swedish utility Vattenfall VATN.UL.

Financial sector derivatives trading on Germany's European Energy Exchange (EEX) EV6U.DE fell to 40 percent of overall volume in 2013 from 50 percent a year earlier.

Analysts warn that with the resultant rise in the role of utilities, which own most of Europe's power and gas assets, Europe's energy markets are growing less attractive for investors.

Dieter Helm, an energy expert at Oxford University, said in a research paper published this month that a market dominated by a small number of producers would deter necessary investment in the power sector which is needed to upgrade ageing power plants and networks.

"Monopolies and collusive oligopolies can maintain their market power if they can deter entry - and then extract monopoly rents if they then keep the market tight by themselves limiting investment," Helm said.   Continued...

A sign is seen on the Canary Wharf offices of JP Morgan in London September 19, 2013. REUTERS/Neil Hall