European Power Markets Integration and Convergence

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1 European Power Markets Integration and Convergence Dr. Hans-Bernd Menzel CEO, European Energy Exchange AG, Leipzig Vattenfall Electricity Market Day Stockholm, November 16 th,

2 Europe Without Borders 2

3 Political Decision and Market Activity EU-liberalisation package directive regulation national legislation Convergence through market activity players fundamentals infrastructure 3

4 EU-Liberalisation Package Integration through political decisions DIRECTIVE 96/92/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 19 December 1996 concerning common rules for the internal market in electricity DIRECTIVE 2003/54/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC REGULATION (EC) No 1228/2003 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity 4

5 Regional Markets According to EU Strategy Paper Source: EU Commission 5

6 Price Zones Across Europe Nord Pool oriented prices EEX oriented prices CEE-North: Exports EEX oriented prices DE minus CB costs Powernext; corr. with EEX Italian market HU, HR & SL: Imports EEX oriented prices DE plus CB costs (APG) plus transit 2nd UCTE-Zone / Balkan Iberian market 6

7 The European Energy Exchange Overall 128 members from 16 countries Members at Spot Market 56 Members at Derivatives Market 3 63 Participants of OTC Clearing 11 General Clearing Members Brokers Market Makers TSOs

8 Clusters of EEX-Members 16 Banks 11 Industrial Consumers 51 International Traders / Utilities 24 National Traders / Utilities 21 Municipalities 5 Brokers 1 8

9 Multi Exchange Memberships

10 Convergence Through Cross Border Activity Countries, where Vattenfall Trading Services has offices Exchanges, where Vattenfall Trading Services trades (Nord Pool, EEX, APX, Powernext) Source: Vattenfall Trading Services 10

11 Physical Energy Flows in 2004 NL NORDEL 4784 CENTREL B F L D CH A ELES (SLO) UK E I HEP (HR) BiH Source: Atel, UCTE 11

12 EUA Prices as Convergence Factor EU-Allowances Futures, Forwards (Expiry Dec-05) and Spot Market Date EEX ECI ECX Carbon Powernext Carbon Nordpool EU-Allowances EEX Spot /EUA

13 EU-Allowances Futures, Forwards (Expiry Dec-05) and Spot vs. Phelix Future Baseload Date /EUA /MWh EUA Prices Driving Power Prices EEX ECI ECX Carbon Powernext Carbon Nordpool EU-Allowances EEX Spot Phelix Future Baseload 2006

14 Juli Convergence of Power Prices APX Ost-Dänemark Nordpool Schweden Powernext Comel Omel EEX EXAA Belgien IPEX Source: EWI 14 Juli 2001 Oktober 2001 Januar 2002 April 2002 Juli 2002 Oktober 2002 Januar 2003 April 2003 Juli 2003 Oktober 2003 Januar 2004 April 2004 Juli 2004 Oktober 2004 Januar 2005 April 2005 Januar 2001 April 2001 je MWh

15 Convergence Through Infrastructure Power Exchanges are also likely to have a key role in developing the Single European Electricity market by providing transparent, non-discriminatory access to electricity trading in the European Union, insuring the proper functioning of electricity markets. Power exchanges will provide their services within the framework approved by the regulators and the guidelines emerging from the Comitology procedure. It is expected that Power Exchanges will harmonize trading arrangements so as to facilitate the final single electricity market objective. DG ENERGY AND TRANSPORT WORKING PAPER STRATEGY PAPER MEDIUM TERM VISION FOR THE INTERNAL ELECTRICITY MARKET (2004) 15

16 Energy Exchanges: Key Success Factors Members follow, or even motivate growth and convergence stand for different views on the market Products secure attractivity and liquidity stretch across various commodity markets cover spot and futures market Technology is scalable allows integration of different products allows integration of front, middle and back office applications (e.g. risk management, margining and clearing) Efficiency in processes Trust enhances speed, security and reduces costs for members calls for transparency is deserved through reliable, representative and fair price building mechanism 16

17 Cross Margining Sample Portfolio 25 MW Long Phelix Base Year Futures 25 MW Short French Baseload Year Futures Additional Margin for spread position 25 MW x 8.760h x 1,50 /MWh = ,- Additional Margin [Mio. ] 0,750 0,500 0,250 0,000 with cross margining w/o cross margining 17

18 Cross Margining (2) SPOT MARKET DERIVATIVES MARKET Current Liquidating Margin (Credit) ,- (Sale of MW for 32,80 ) Additional Margin (Requirement) ,- 25 MW Long Phelix Base Year Futures 25 MW Short French Baseload Year Futures TOTAL MARGIN REQUIREMENT 0,00 18

19 Cross Marging (3) Integration of Products SPOT MARKET DERIVATIVES MARKET POWER EMISSIONS FUTURES OPTIONS Current Liquidating Margin Current Liquidating Margin Additional Margin Additional Margin Additional Margin Spread Margin Additional Margin + + +/- +/- 100% offsetting between all EEX markets and products 19

20 Conclusions 1. Power markets in Europe are leaving the local level and moving towards regional level. And further? 2. There still are different price zones, but the correlation between them is strongly growing. 3. This seems to be reinforced by pan-european influences like CO 2 -trading. 4. There is convergence although new grid capacities to overcome congestion are missing. 5. This means: Pan-European trading is faster than transport technologies. 6. Energy exchanges which can provide corresponding underlying technology will be better off in the future. 20

21 Mina damer och herrar, jag tackar så mycket för uppmärksamheten och besvarar nu gärna alla era frågor (på engelska) 21