The interlinking of the European Energy Exchange in Leipzig and Powernext in Paris was a major step in the consolidation of European energy exchanges. Many other moves are being made, but challenges in market coupling will have to be resolved before trading markets can become truly integrated. 11/2008

 

eex gross - foto bodo tiedemann

 

 

The lift in Leipzig’s “City-Hochhaus” rises up 23 floors before stopping at the floor of the EEX European Energy Exchange AG. Here, 60 employees organise and monitor German exchange trading in power, natural gas, emission rights and carbon. The spectacular view from up here over the historical German trading town of Leipzig is obscured a little by fog on this October morning. But for Toralf Michaelsen, Head of Market Supervision, other issues are more important at present. On September 29 the EMCC (European Market Coupling Company GmbH) together with its five corporation partners Eon Netz GmbH, Energinet.dk, Vattenfall Europe Transmission, NPS Nord Pool Spot AS and EEX coupled together the German and Danish power markets. Such market coupling allows efficient use of the existing cross-border interconnecting lines between national networks and represents an important step towards the integration of the power trading markets in Europe. In so-called implicit auctions the participating exchanges and network operators together give out power supply contracts and cross-border transmission rights.

 

 

Bottleneck management

 

However, the German-Scandinavian market coupling project had to be stopped only a few days after its commencement on October 9. This was because to some extent the market coupling had the opposite effect to that which it sought to achieve. It was in fact intended to ensure that in the event of significant price differences between the market areas as much power as possible at the lowest possible prices could flow out of the lower priced market area into the higher priced market area. In this way the power prices in the day-ahead trading of the two spot markets of the EEX and NPS would tend to converge. This price alignment did not work in all hours of electricity consumption however. ‘ In some hours there were price differences between Germany and Denmark which did not correspond to the direction of the power flows’, Michaelsen says. He believes that this was caused by unexpected deviations in the price and power flow calculation between the different systems of EMCC and NPS.

 

Bottleneck management of the power connections DK1-Eon and DK2-Vattenfall (Kontek) plays a key role in this market coupling. DK1-Eon transports power between Jutland and north-west Germany with a 750 megawatt capacity and in the opposite direction with a capacity of 1,700 megawatts. Kontek conveys power from the Danish island of Zealand to eastern Germany with a 550 megawatt transport capacity. Until now, the operators of DK1-Eon - Energinet.dk and Eon Netz GmbH – had auctioned in so-called explicit auctions the transport capacity at this bottleneck point to market participants who trade power across borders. These market participants rely on their own forecasts and in particular in day-ahead trading these can sometimes be unrealistic. In market coupling these explicit auctions are replaced by implicit auctions where the latest data from the day-ahead auctions are incorporated into the coupled spot markets. In this way an optimal bottleneck price should be assigned automatically to the cross-border power supply.

 

In Scandinavia this system has been operating between the different network areas of the individual countries for years. Here NPS manages the power spot market Elspot in which the individual network areas are treated as separate bidding areas. EEX is currently carrying out a market coupling with Austria, but there are no bottlenecks in this case. EEX treats the Swiss power market as an individual market area without bottleneck management.

 

 

Harmonising the systems

 

Since October 9 DK1-Eon bottlenecks are now once again managed through explicit auctions. The second German-Danish link, Kontek, was already managed previously with an implicit auction by NPS/Elspot. It was reintroduced after October 9. Michaelsen is convinced that it will be possible to resume market coupling soon. ‘I think that we will find a way to harmonise the systems’, he says as he sets off for Hamburg for a meeting with the other project partners. The success of the German-Danish market coupling would also be an important sign for another large project: France, Belgium and the Netherlands, which introduced market coupling last year, want to link their power systems with Germany and Luxembourg as well. The ‘trilateral market coupling’ will become a ‘pentalateral’ one.

 

The more the European energy markets grow together the greater the need for close interlinking of the national energy exchanges. NP Nord Pool ASA which is based in Lysaker, Oslo and which is a subsidiary company of the Swedish and Norwegian power network operators Svenska Kraftnätt and Statnett SF, has already demonstrated how this can work in Scandinavia. There the subsidiary NPS with its physical power spot market Elspot is now operating submarkets in Sweden, Finland and east Germany, in Denmark and in Norway. There is also the intraday market Elbas in Finland, Sweden, Denmark and eastern Germany. NP itself provides market places for international financial electricity derivative contracts and for carbon dioxide emission allowances. However this trade, just like the clearing, is now to be taken over by the US-Swedish stock exchange giant The Nasdaq OMX Group, Inc. which was formed in February 2008.

 

NP arranged this sale in December 2007 with the Swedish OMX AB, however the deal has not yet been completed. The acquired business, except clearing, will form the core of a new energy and commodity business unit within Nasdaq OMX, which will be headquartered in Oslo. Nord Pool Clearing ASA will be combined with the Nasdaq OMX clearing organization. Nord Pool expects the final price to amount to MNOK 2,300 (260 million euros). ‘The ambition is to create a global leader in energy and carbon derivatives by combining Nord Pool´s experience and knowledge of the financial commodity market with Nasdaq OMX’s technology and customer base’, said NP Chief Executive Torger Lien. In the financial derivatives market of European energy exchanges, he sees a natural trend towards consolidation as these exchanges are dependent on economies of scale and liquidity.

 

However, Erik Saether, Chief Executive of NPS, recognizes a different situation for power spot markets: ‘Nord Pool Spot is a regional exchange and we believe there will be several regional exchanges in the future. The trend of consolidation will therefore be less dominant in the physical European power market than in the financial.’ Saether does however believe that it is very well possible to expand the physical markets Elspot and Elbas to include additional European regions. ‘There are a lot of cables connecting the Nordic region with the rest of Europe – east, south and west. It is natural for Nord Pool Spot to seek business opportunities following the cables.’

 

 

Power futures market

 

NP sees itself as a leading European Energy exchange. Thanks to the early deregulation of the Scandinavian energy market it had already started trading in 1996. In continental Europe the APX Amsterdam Power Exchange followed in 1999. In Germany from 2000 the EEX in Frankfurt/Main and the LPX Leipzig Power Exchange initially competed with each another until they merged in Leipzig in 2002. NP played a key role in the development of the LPX and was subsequently involved with the EEX for a long time, but after the merger its influence decreased and it sold its share to Eurex Zürich AG.

 

EEX has now achieved a strong position in continental Europe and wishes to strengthen this further through partnerships with other European energy exchanges. As the initial partner the Leipzig players were able to attract the French Energy exchange Powernext SA. Thus in September EEX and Powernext established the joint spot market company Epex Spot SE based in Paris. All of the power spot trading of both the EEX and Powernext energy exchanges will be consolidated in this company by the end of the year. Each of the partners holds 50 percent of the shares in this Societas Europaea (SE). This legal form makes it possible to merge registered companies or to form holding companies or a joint subsidiary company in various member states of the European Union. Practical and legal limitations arising from different legal systems are thus avoided.

 

Early in September EEX had already branched off its power futures market business into a company of its own - EEX Power Derivatives GmbH, in which EEX initially holds 100 percent of the shares. Powernext is to contribute the French power futures market to this company in the 1st quarter of 2009 and in return it will receive 20 percent of the company shares. The EEX will remain as the majority shareholder with 80 percent.

 

Catalyst

 

By April 2009 Powernext will also begin to clear its exchange trading through the Leipzig EEX subsidiary ECC European Commodity Clearing AG – i.e. to settle and collateralize transactions in terms of money and goods. The ECC will then also take over the clearing of the French power futures which are traded through the futures market company in Leipzig, and of the Powernext gas exchange which is planned for the end of 2008.

The directors of EEX and Powernext see their cooperation as a catalyst for market coupling projects in central and western Europe. The partners already have a declaration from the Belgian Energy exchange Belpex SA stating their intention to participate in a collaboration. The Dutch APX which is itself working on an expansion of its business sector is also seen as a prospective partner. In September it agreed with the likewise Amsterdam based Endex European Energy Derivatives Exchange N.V. to purchase 90.85 percent of the shares of Endex and to merge the activities of both companies. According to the companies, Endex will become a subsidiary of APX and part of the APX Group, becoming the largest European gas exchange. In gas trading the combined exchange operates at Europe’s three most liquid gas hubs: National Balancing Point in the UK, Title Transfer Facility in the Netherlands and Zeebrugge in Belgium.

Stephan Follender Grossfeld, Chief Executive of Endex, said: ‘Merging the activities of APX and Endex is an important step towards the creation of the Dutch Gas Roundabout. The APX-Endex combination will be able to play an important role in the consolidation and integration of the European energy markets.’ This combination also contains a Leipzig element: Since June 2007 all Endex products are cleared through the EEX subsidiary ECC.



Negative prices: power consumers make money

 

The new trading software Comxerv which EEX introduced in September realises a dream of large power customers: They are paid for energy consumption. This can occur on holidays and weekends when power consumption is low and there is a surplus supply of power in the network – for example due to a large supply of wind power. The EEX first observed negative prices for power supply on Sunday October 5, from 5.00 am until 8.00 am. A total of 50,551 megawatt hours were sold at prices between -0.02 and -1.03 euros/MWh.


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