Priced to perfection?

European energy market prospects to 2020

APX-ENDEX Energy Market Summit 20 & 21 April 2010, Brussels

APX-ENDEX Energy Market Summit

Table of Contents
5 6 7 7 9 11 12
Introduction to the APX-ENDEX Energy Market Summit
Bert den Ouden, CEO, APX- ENDEX

Foreword, Session Moderator

Peter Styles, Principal Consultant, Stratos Energy Consulting

Session 1: Energy commodity prices 2007-2011: driven by fundamentals?

Oil prices: speculation and fundamentals
Carlos Lapuerta, Director of Brattle Consulting Group

Trading as a solution for markets in a transition period

Ulrich Woesler, Head of Trading, Electrabel (GdF-Suez)

Session 2: Ensuring market integrity and improving transparency

How much data is needed, for whom, and at what point?
Leigh Hancher, Professor of European Law, Tilburg University and Of Counsel, Allen & Overy Amsterdam

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Supporting market integrity, improving transparency and building trust

Tony Cocker, CEO, E.ON Energy Trading

Ensuring market integrity and improving transparency

Heinz Hilbrecht, Director Security of Supply and Energy Markets, DG Energy, European Commission

19 20 23 25 27

Session 3: Reference prices and investment signals: efficient or distorted?

Can we rely on wholesale price signals?
Peter Kreuzberg, COO Trading, RWE Supply and Trading

Regulatory view with an international perspective

Cecile George, Director Electricity grid access, French Energy Regulatory Authority (CRE)

Are prices giving the right investment signals?

Paul Taylor, Director of Trading, Drax Power

The role of TSOs and of ENTSO-E in enhancing transmission and generation investment signals
Konstantin Staschus, Secretary General, ENTSO-E

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29 30 33

Session 4: Price discovery and transaction platforms: adequate choices?

Recap of market development in the light of the credit crisis
Stephen Asplin, Head of Vattenfall Energy Trading

Why (and how) to regulate power exchanges in the context of EU market integration?
Professor Jean-Michel Glachant, Loyola de Palacio Chair of Energy Economics at the European University Institute, President of the Florence School of Regulation

35 37 38

Reflections on choices about where and how to transact

David Peniket, President and COO, ICE Futures Europe

Preserving platform choices in the face of market coupling

Justin Rowland, COO, EdF Trading

Closing observations
Gertjan Lankhorst, CEO, Gasterra

Disclaimer
This booklet constitutes a part of the proceedings of the APX-ENDEX Energy Market Summit 2010, which is being conducted under Chatham House rules. This means that delegates may not quote from the proceedings nor use them for any other external purpose

APX-ENDEX Energy Market Summit

Introduction
Dear Summit Guest, nce again at this time of year I welcome you to Brussels for our Energy Market Summit. This event was previously known as the Trading Symposium. It is not just the title of the event which has changed in the last year, but also, after a successful integration of APX Group with the Dutch energy derivatives exchange, our company name now APX-ENDEX. So, as an integrated provider of both spot and future products to European wholesale energy businesses, energy suppliers and energy users, we are proud to sponsor this annual gathering, now in its fourth year. Another change is that we have engaged the services of Stratos Energy Consulting to plan, organise, and facilitate the Summit, under the able guidance of Peter Styles, well known to many of you. Peter will also act as the Moderator over the coming two days of a programme, which we have constructed to span a 24 hour period finishing after lunchtime on the second day. We trust this will fit your travel arrangements and better accommodate an all important evening session of our Summit for drinks, dinner and networking. The programme asks us to consider a question: Priced to perfection? European wholesale energy markets till 2020. To help us all debate answers to this question, we are pleased to present to you a series of distinguished speakers and panellists. I expect them to prompt, guide and, dare I say, provoke us into comment! I do appreciate the time and effort that they have all put into preparing for this Summit and I wholeheartedly thank their respective companies and institutions (in order of appearance): Brattle Group, Barclays Capital, GdFSuez, Gazprom Marketing and Trading, Tilburg University, E.ON Energy Trading, DG Energy of the European Commission, WMBA/LEBA, RWE Supply & Trading, the French Energy Regulatory Authority, Drax Power, ENTSO-E, the European University Institute, Vattenfall Energy Trading, ICE, EdF Trading and GasTerra. 5

The success of the Summit though depends primarily on you and all our other invited delegates. We face some challenging topics within our programme, broken down into four sessions. First we are asked to consider to what extent energy prices are now, and in recent years have been, driven by fundamentals; then we shall examine means to enhance market integrity and transparency; thirdly we shall consider whether markets and governance arrangements are delivering efficient price and investment signals; finally we will discuss the adequacy of price discovery in wholesale power and gas markets and choices of transaction platforms. I firmly believe that this years Summit will provide you with an enjoyable and rewarding experience. (Let us know afterwards if your own expectations are met!) On behalf of my fellow Directors at APXENDEX, we look forward to meeting you all over the course of the next two days.

Best wishes,

Bert den Ouden CEO, APX-ENDEX

APX-ENDEX Energy Market Summit

Foreword
Peter Styles
Principal Consultant, Stratos Energy Consulting

t gives me great pleasure to be acting for the first time this year as an advisor for the annual event, where APX-ENDEX (formally APX Group) brings together key actors in European wholesale power and gas markets. I also look forward to acting as your event moderator. This years APX-ENDEX Energy Market Summit is a new event, but arranged in a style and setting familiar to APX symposium invitees in previous years. The main objective of the Summit is to stimulate debate about the future design and framework of traded power and gas markets. Attendance, as you are aware, has been by invitation only. Your fellow delegates are important customers and stakeholders of APXENDEX, including key commercial managers in trading businesses, senior exchange and TSO employees, and officials exerting influence over the shape of North West European energy markets. The Summit features an outstanding array of speakers, commentators and panellists. Their contributions cover a variety of themes pertinent to our overarching title for 2010 Priced to perfection? arranged over four sessions: Energy commodity prices 2007-2011: driven by fundamentals? Ensuring market integrity and improving transparency Reference prices and investment signals: efficient or distorted? Price discovery and transaction platforms: adequate choices?

During the Summit you will be able to participate interactivelythrough electronic voting rounds and panel questions. Your attendance will offer youan excellentopportunity to explore trends in European energy price formation, as well the accompanying evolution of national and regional markets in power and gas, from a variety of angles. You will meet your energy trading peers in an intimate atmosphere conducive to debate and discussion. To enhance your opportunities to engage with each other we have this year organised our middle evening as a drinks reception followed by a buffet dinner in the Amigo Hotel. I look forward to talking to you then or at our lunch on the second day prior to departure. The Summit will be held under Chatham House rules, therefore not in the presence of journalists. We ask you to respect the rules, by not disseminating this booklet, nor other materials you receive nor views you hear during the Summit.

APX-ENDEX Energy Market Summit | 20 April 2010

Session 1

Energy commodity prices 2007-2011: driven by fundamentals?

n this session we have asked our speakers, commentators and panellists to reflect on the following issues: Following the volatility of oil and other energy commodity prices in 2008-9, where does fair value lie, given supply and demand fundamentals? Has demand recovered sufficiently to re-focus doubts on the sustainability of supplies and the accessibility of reserves? Do power, coal and gas prices in Europe remain coupled to international crude oil benchmarks, or are currency and demand fluctuations shifting the relationship? Has the imposition or the threat of heavier regulation of the financial sector driven significant speculative activity out of energy commodity trading? If so, will this diminish the likelihood of violent peaks and troughs in prices in the coming years? To the extent speculative financial trading and investment fund buying of commodity contracts continue, do they contribute positively or negatively to price and investment signals in the physical markets?

Oil prices: speculation and fundamentals

Carlos Lapuerta
Director of Brattle Consulting Group

wo recent oil price episodes have prompted complaints over the role of speculators. The run-up in oil prices in the first half of 2008 has prompted a series of studies and investigations. Oil prices then collapsed to lows in February 2009, followed by another run-up. Some observers break down the recent history into three phases: a speculative increase, followed by

a collapse, and then the return of speculation. If fundamentals refer to the interaction of supply and demand, then a key fundamental of 2009 is a significant reduction in oil consumption relative to 2008. The reduction would appear to justify a commensurate reduction in oil prices. While the average oil price in 2009 is indeed much lower than in 2008, the increase in prices relative to February lows has not followed any marked increase in demand or curtailment in supplies. A cynic might say that speculation must play a role somewhere- if we cannot blame speculators for the recent increase from lows of $40 per

The recent behavior of oil prices has a logical

explanation. It reflects the markets anticipation of possibly serious increases in inflation, and the devaluation of the currencies of the major oil consumers
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barrel, then perhaps we can blame them for the previous collapse down to $40. The recent behavior of oil prices has a logical explanation. It reflects the markets anticipation of possibly serious increases in inflation, and the devaluation of the currencies of the major oil consumers: the United States, Canada, the United Kingdom and the European Union. These countries have expanded their money supplies aggressively in response to the credit crisis. Monetary expansion creates the prospects of inflation and currency devaluation. If a barrel of oil is to retain its ability to purchase real goods in exchange, then it must sell at a much higher price as the currency of the importing country devalues.

If we classify this temporal arbitrage as speculation, and pass regulatory measures to impede it, then the primary consequence would be economic harm. The temporal arbitrage has no doubt raised current oil prices, but an abundance of oil in storage will serve to moderate subsequent price increases. If instead we head into 2011 or 2012 with depleted inventories, then the oil price may rise far more to the consequences of inflation and devaluation. Similarly, the price rebound in 2009 supports investment that will bring incremental supplies to the market in 2011 and 2012, moderating any future price spikes. Temporal arbitrage is in essence an efficient and mitigating response to the macro-economic policies of major governments. Comparing the oil market to the gas market shows the effect of temporal arbitrage. The costs of storing gas are far higher than storing oil. Investors therefore do not have the same possibility to store gas today as a temporal arbitrage against the future consequences of current macro-economic policies. The absence of the temporal arbitrage explains the recent break in the link of oil and gas prices. Gas prices are now depressed relative to oil when calculated per unit of energy. If ill-founded speculation were the primary driver behind commodity prices, then we would expect to see equal speculative optimism in oil and gas markets, or equally speculative pessimism. Instead we see one market buoyed by a doubling of prices over the past year, and another in which prices remain depressed. These are the signs of intelligent market responses, not ill-founded speculation.

If we classify temporal arbitrage as speculation,

and pass regulatory measures to impede it, then the primary consequence would be economic harm
In June 2009 the market foresaw inflation and devaluation over the next two years, but the ability to store oil created the possibility of temporal arbitrage: storing oil today for sale in the future. The key costs of implementing the arbitrage are the costs of storage and the time value of money. Both fell dramatically. Storage costs fell as the economic crisis created a surplus in tanker capacity. The time value of money fell as major governments throughout the world reduced interest rates. As the costs of the temporal arbitrage fell, a strategy of oil storage became particularly attractive, and helped prompt a rebound in oil prices.

The price rebound in 2009 supports investment

that will bring incremental supplies to the market in 2011 and 2012, moderating any future price spikes

APX-ENDEX Energy Market Summit | 20 April 2010

Session 1

Trading as a solution for markets in a transition period

Ulrich Woesler
Head of Trading, Electrabel (GdF-Suez)

his decade started with a worldwide financial and economic crisis. That crisis may affect energy supply and demand fundamentals, and thus price formation, for years to come. The ten years commencing this year will be characterized by many other important changes in the energy sector. In Europe ambitious targets have been set for 2020 after the adoption of the EU renewable energy directive 2009/29 and the rest of the environment and energy package. Meeting the 20/20/20 targets implies tremendous changes to the current market environment; not least because intermittent renewable sources will become a substantial component of power supply. Today, although only one third of the expected wind generation capacity has been connected to the grid, we already see the meshed high voltage system reaching some of its limits. Connecting the other two thirds will only be possible if its dispatch is accompanied by the creation of additional flexibility, backup services and storage facilities.

In the absence of these, we will be unable to cope with the intermittency. On top of that, the grid infrastructure will need an overhaul, to deal with completely new requirements. These will include de-localizing injection of wind production and facilitating additional flexibility on the demand side via smart grids. Other fundamental changes, notably the recent delinking of from oil prices for some contracted gas imports into Europe, are having a major impact on price discovery in the market. These two primary energy sources are no longer substitutes for each other. While oil supply has started its declining phase, gas supply has become subject to worldwide competition, thanks to growing LNG transportation and booming production from unconventional gas sources. Adding the fast growing energy demand from emerging markets, currently largely met by coal, makes the picture even more complex and global in nature.

Meeting the 20/20/20 targets implies

tremendous changes to the current market environment; not least because intermittent renewable sources will become a substantial component of power supply

APX-ENDEX Energy Market Summit

In dealing with these challenges, a state-of-the art approach to risk assessment, comprising portfolio management, asset optimization and investment evaluation, will be a key success factor. Such a sophisticated approach will be possible only in well-functioning wholesale markets, where trading can be used as a major tool. Trading will be helping us to discover the value of the flexibility needed to cope with intermittent renewable power production, and to adapt during a transition towards a gas value chain, where contracts will no longer be indexed to oil prices.

An appropriate market design is essential to achieve a well functioning wholesale market with price formation based on fundamentals. While moving in the direction of a harmonized European market design, we need to keep in mind, in particular during this transition decade, that too many regulatory changes would be dangerously disruptive.

Trading will be helping us to discover the value

of the flexibility needed to cope with intermittent renewable power production, and to adapt during a transition towards a gas value chain, where contracts will no longer be indexed to oil prices

APX-ENDEX Energy Market Summit | 20 April 2010

Session 2

ENSURING MARKET INTEGRITY AND IMPROVING TRANSPARENCY

n this session we have asked our speakers, commentators and panellists to reflect on the following issues: Can market abuse rules applicable to markets in financial instruments readily be adapted for implementation in commodity markets? To the extent G20 policymakers have determined that derivatives transactions require closer regulatory oversight, is it necessary to capture the use of derivatives by non-financial players in new regulatory controls? Should the European Union create a tailor-made integrity and transparency regime for wholesale markets in power, gas and emissions? If so, should this encompass physical as well as financial transactions? Should traders or brokers be expected to report transaction details to a regulatory agency or to a repository? How could this be realistically coordinated on a pan-European basis? What are the next steps required in the improvement of the transparency of data relating to the use and availability of power and gas sector infrastructure (including production assets) in Europe? How can the transparency and integrity of global OTC markets in oil, LNG and coal be enhanced?

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Power and gas markets: How much data is needed, for whom, and at what point?
Leigh Hancher, Moderator
Professor of European Law, Tilburg University and Of Counsel, Allen & Overy Amsterdam

stablishing liquid wholesale electricity and gas markets remains an elusive goal for Europes regulators. Unlike oil and LNG and coal, which function as global commodity markets, wholesale markets for the power and gas sectors do not extend across Europe, even if some regional progress has been made. To tackle this challenge, far-reaching new legislative instruments are now being contemplated (and drafted) at European level.

But what can we learn from the past - why, when and how did oil, LNG and coal markets go global? What can we learn from power and gas markets in other jurisdictions - particularly the USA? And what should we learn from past experience? What are the pitfalls of stimulating more data transparency in concentrated markets - including the dangers of collusion - and how can we address them? How do we guarantee legitimate demands for confidentiality especially when TSOs are not fully unbundled?

What can we learn from power and gas markets

in other jurisdictions particularly the USA? What are the pitfalls of stimulating more data transparency in concentrated markets? How do we guarantee legitimate demands for confidentiality?

APX-ENDEX Energy Market Summit | 20 April 2010

Session 2

Supporting market integrity, improving transparency, and building trust

Tony Cocker
CEO, E.ON Energy Trading

hree years ago, E.ON made the decision to create a new trading business designed to take advantage of opportunities presented by the ongoing liberalization of Europes energy markets. The result of that decision was E.ON Energy Trading (EET), a strategically focused business with an integrated view of Europes increasingly interconnected energy landscape. As the commercial heart of E.ON, EET is responsible for optimizing the operation of the widest and most diverse portfolio of assets in Europe - and for managing the majority of the risks, such as credit and commodity risks, associated with running those assets.

As one of Europes leading energy traders, we believe that well functioning markets will play an important role in delivering secure energy supplies at fair prices, while helping to encourage much needed investment in the next generation of climate-friendly technology. We therefore feel it is vital to support increased market integrity and greater transparency, to ensure that governments, regulators, industry and consumers have more trust in the market and have more confidence in the markets ability to help meet the significant energy challenges that we are now facing. Ensuring competitive, well-functioning markets There are a number of steps that can be taken to ensure that markets function well, encouraging the optimal and most efficient use of power plants and providing secure supplies of energy for end customers. Establishing harmonised rules across Europe will create a level playing field and help to increase competition and liquidity. Market integrity and transparency are prerequisites if we are to build trust and foster further market development. Any new market integrity and transparency regime should be tailor-made to ensure that the specific dynamics of the electricity, gas and emissions markets are taken into account. Measures should aim to further improve the reliability of open and competitive energy wholesale markets. They should improve the trust that participants have in the market and its price building mechanisms. Existing rules applicable to markets in financial

It is vital to support increased market integrity

and greater transparency, to ensure that governments, regulators, industry and consumers have more trust in the market
Since EETs creation in 2007, a number of significant events have had a dramatic influence on financial and energy markets around the world. In response to public and political fallout from the financial crisis, great efforts are now being made in the US, Europe and Asia to reshape the legislative and regulatory frameworks governing financial markets including, to a certain degree, the energy markets.

Any new market integrity and transparency

regime should be tailor-made to ensure that the specific dynamics of the electricity, gas and emissions markets are taken into account

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instruments cannot be extended to cover electricity, gas and emissions, as there have to be clear sector specific definitions of transparency requirements and insider trading. This tailor made regime should cover physical as well as financial transactions. A financial futures contract relates to a physical underlying and depends on the transparency of the physical market. Also, similar products, such as physical forwards and financial futures, should not be treated differently. The regime should include transparency of fundamental data as well as trade data. Trades at broker platforms should be reported by brokers, as this would be the most efficient solution. Furthermore, a market participant should not be exposed to several sets of regulation on transparency and market integrity.

specific production outage is of less importance compared to an outage of a major electricity generation unit. European LNG terminals should be included in any tailor made regime as they are part of the European gas market. New measures must be proportionate to the inherent risk Following the financial crisis, there is strong political pressure to ensure a safer financial system. E.ON understands this and would like to contribute to the development of a solution which ensures a safer financial system, while taking the concerns of end users of OTC derivatives into account. We see advantages in exchange trading and clearing as a means of increasing efficiency and mitigating credit risk. However, the proposed mandatory clearing and exchange trading of standardised OTC derivatives would be a significant burden to end users of OTC derivatives. Furthermore, it would not be proportionate as the systemic risk is lower for products linked to the non-financial sector compared to those used by financial institutions. End users of OTC derivatives hedge their inherent business risk, be that exchange rate risk for companies which export or import goods/services, commodity price risks for energy companies or interest rate risks on the financing side. This hedging activity is part of the main business and stabilises the earnings of a large part of European industry. In our case, E.ON needs to stabilise earnings to ensure that its investments obligation can be fulfilled. In doing so, the price risk, credit risk and cashflow risk have to be managed in an integrated way; a focus on credit risk only would be at the expense of either cash-flow risk or price risk. End users of derivatives have strict credit policies in place, which ensure that credit risk is kept at an acceptable level.

Proposed mandatory clearing and exchange

trading of standardised OTC derivatives would be a significant burden to end users of OTC derivatives
Transparency should be mandatory and on a European level Any new tailor made transparency regime should make use of existing infrastructure. E.ON is one of the initiators of a German transparency regime for fundamental data, where EEX publish transparency data. This regime was put in place several years ago, but so far other continental markets have not provided the same level of transparency. We therefore see a need for a mandatory European transparency regime. Oil, LNG and coal markets are global and transparency and market integrity is therefore more difficult to regulate. Oil and coal markets are less dependent on transmission and a

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Session 2
Mandatory clearing could reduce investments in Europe Introducing mandatory clearing of OTC derivatives would increase the cash need for European industry because margining requires significant capital. Most end users of OTC derivatives are one-sided due to the nature of the business, in contrast to banks which have a neutral position and therefore will benefit from netting different exposures. The term one-sided here is used to mean, for example, a company which has its income in EUR and costs in USD and therefore needs to post more cash for margining in the case that the EUR strengthens against the USD; in the same way, an electricity producer has to post increasing cash for margining in the case of increasing electricity prices. As price development can have very different outcomes which cannot be predicted, cash needs to be reserved for worst case scenarios. This cash will be diverted from the main business, giving less room for investments. Alternatively, exposures would be hedged to a lesser extent giving a higher price risk to the business. In the context of the ongoing economic crisis, mandatory clearing of OTC derivatives could lead to a reduction in investments in European industry. As end users of OTC derivatives imply less systemic risk compared to financial institutions, the introduction of mandatory clearing of standardised OTC derivatives would not be proportionate.

APX-ENDEX Energy Market Summit

Ensuring market integrity and improving transparency

Heinz Hilbrecht
Director Security of Supply and Energy Markets, DG Energy, European Commission

n liberalised energy markets, prices charged to final customers are a direct function of wholesale price developments. Therefore, there is an eminent regulatory interest in ensuring that market participants and the general public equally trust the proper functioning of traded markets. This can in turn be achieved if there exist: Sufficient information made available to all trading participants, Appropriate rules in place governing market conduct, Regular monitoring of wholesale transactions by authorities, and Clearly defined regulatory enforcement and sanctioning powers.

level legally binding data disclosure obligations1 may also not be complete. In order to improve the situation the Commission has recently asked ERGEG to take a closer look at the framework of existing rules and make concrete proposals for their amendment by the end of this year. Apart from incomplete fundamental data, EU energy markets also lack comprehensive rules applicable to wholesale trading. Currently, EU level market conduct rules addressing insider trading and market manipulation2 cover only a fraction of standard wholesale transactions in electricity and gas. Also, the definition of inside information is not tailored to energy markets. Therefore the Commission is designing a dedicated market integrity regime, covering all relevant trades. This would potentially include specific disclosure obligations and would seek to prohibit market manipulation and trading on insider information, including exclusive information on generation and transmission outages. In principle, economically comparable transactions should be made subject to the same market misconduct rules, irrespective of whether they went through a regulated or a nonregulated market, whether they were bilaterally traded or brokered, or whether they will be physically or financially settled.

There is an eminent regulatory interest in

ensuring that market participants and the general public equally trust the proper functioning of traded markets
Currently, the above listed conditions are only partially met. As for the first condition, we observe that the level and quality of fundamental data about the availability and use of infrastructure differ greatly throughout EU energy markets. While this is partly due to TSOs and generators reluctance to share such data, EU

The Commission is designing a dedicated market integrity regime, covering all relevant trades
1 2

Congestion Management Guidelines (Annexed to Regulation 1228/2003) Market Abuse Directive

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Session 2
The application of comprehensive rules can only be successful if market misconduct has a chance to be detected. We believe that this can be best ensured if wholesale transactions are regularly monitored. This is currently only the case for regulated energy exchanges, while OTC transactions remain largely unnoticed, even though in most of the Member States standard OTC transactions make up the majority of the trades. One option to alleviate this shortcoming is to establish a unique monitoring function at the European level. To serve its purpose, the central market monitor would need to receive relevant details of all standard wholesale transactions on a regular basis. Such data could arrive directly from market participants or indirectly, using the services of third parties. Centrally organised transaction reporting would also yield benefits to traders who are active Europe-wide . In the absence of a European level framework, there was a potential for Member States to develop national rules, eventually resulting in a patchwork of different reporting and monitoring schemes. In an extreme case, traders would find themselves submitting data in different format and sequence to 27 different regulatory authorities. Because traded electricity and gas markets are strongly interlinked, any manipulation occurring on one market would automatically impact the other. Since these commodities and their derivatives are often traded in parallel in different Member States via different trading channels, any manipulation involving a combination of different commodity transactions and/or platforms can only be effectively detected if monitoring is organised centrally. With the introduction of the EU ETS, carbon became central to European electricity markets. The supply of EUAs impacts generators fuel choice and, with that, the demand for different fuels; just as relative price developments of fuels influence plant dispatch decisions and, as a result, determine the demand for carbon. This means that consideration may be given to including EUA transactions in the scope of the market monitoring exercise. In case the central market monitor detects potential market misconduct, there is a need for an authority (or authorities) with sufficient powers to enforce the rules. Since market misconduct may well involve transactions already covered by existing regulatory supervision, the tailor-made regime will have to carefully define institutional competences. This would, on the one hand, help avoid overlaps, on the other, ensure consistent and effective jurisdictional coverage.

One option is to establish a unique monitoring

function at the European level. To serve its purpose, the central market monitor would need to receive relevant details of all standard wholesale transactions on a regular basis

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APX-ENDEX Energy Market Summit | 21 April 2010

Session 3

Reference prices and investment signals: efficient or distorted?

n this session we have asked our speakers, commentators and panellists to reflect on the following issues:

Can we yet rely on wholesale price signals on a cross border basis? Are market participants able effectively to hedge their transmission basis risks when transacting in power and gas across international borders in Europe? To help traders deal with transmission risks on a forward basis, what instruments and rules still need to be developed? Even if transmission risks can be hedged, are national market distortions (e.g. regulated prices, export fees, licensing rules) still significantly limiting cross border market liquidity? Are prices giving the right investment signals? Do current wholesale prices truly reflect the long run marginal costs of production and shipping? How do tariffs, which RES power producers receive, or total costs, which they recover and/ or avoid taking account of the value of priority connection and dispatch rights and system balancing exemptions compare with wholesale market electricity prices? Are resulting comparative investment incentives transparent and fair? Does the EU ETS yet function reliably enough to give investors a clear signal of the future dark and clean spreads which could inform their choice of technologies and fuels? In order to function better as investment-signalling mechanisms, do power and gas market designs need to incorporate capacity payment elements as well as pure energy payments? Are TSOs in a position to judge the desired or required locations for new-build production facilities based on their own market analysis, in order to add certainty to their own transmission investment plans?

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Can we yet rely on wholesale price signals?

Peter Kreuzberg
COO (Trading), RWE Supply and Trading

It was the best of times, it was the worst of times... (Charles Dickens) he single EU gas market is finally emerging from the shadows; we witness the multilateral integration of electricity markets; and the ink is only just drying on the third IEM and 20/20/20 legislative packages. Thus at this juncture the EU power and gas markets have never showed more promise of delivering on the ultimate goal of competitive, secure and sustainable supplies. At the same time, however, the global financial crisis and concerns about gas security to the East have left many prominent economists and regulators increasingly questioning the markets very ability to deliver the investment required to take us into the low-carbon future. Just as we approach the culmination of a twenty year journey toward competitive EU power and gas markets, theres a real danger that we just turn our backs and return to a world of quotas, plans and procurement: in this context will we display pragmatic realism or a bewildering loss of nerve?

Its nonetheless true that, despite impressive recent progress, several significant challenges remain: Regulated end-user prices continue to prevent and distort competition within the French, Spanish, Italian and many Eastern European markets System operators are limiting the scope for effective, dynamic competition across borders by not selling sufficient capacity forward for market participants to hedge the transport basis risks between national markets and by failing to make enough capacity available to the market Regulators are failing to provide system operators with the correct incentives to cooperate with neighbouring system operators and to provide the efficient, dynamic transport service that market participants urgently require Export fees and exit charges (eg, Triad in the UK; special levies in Bulgaria) continue to distort the efficient flow of power between Member States; The design of renewable subsidies remains patchy and some schemes actually distort power markets significantly and unnecessarily (e.g. German TSOs arbitrarily limiting sales orders for wind power at the day ahead spot exchange)

Regulated end-user prices continue to prevent

and distort competition within the French, Spanish, Italian and many Eastern European markets
The glass is half full . Were making real progress on the vision of competitive, integrated EU power and gas markets. Gas market liquidity on the continent is hitting record levels. There has been massive investment in gas deliverability (LNG) and storage capacity. Gas and power market zones are being consolidated into broader more liquid markets: in electricity were apparently on the verge of market coupling from Oslo to Madrid.

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Session 3
The absence of smart metering undermines the demand sides response to price signals and the extent to which the value of capacity to consumers is properly reflected in prices Mandatory standards for transparency of fundamental data on supply and demand as well as clear rules for disclosable information are still largely missing, thus reducing incentives for new participants to enter some geographical markets Unlike the previous 10 years, however, there finally seems to be remedial regulatory action in train to address all of these shortcomings, with the EC Sector Enquiry having swept some of the inertia away, the third-package increasingly bridging the gaps in a hitherto national system of regulation, and massive progress on the ground in delivering investment and market integration. to put it mildly, given that the reasons the EU chose emissions trading as a carbon reduction mechanism were: To let prices float, to ensure the credible delivery of a determinate environmental target i.e. 20 per cent reductions by 2020 To avoid picking winners in terms of specific forms of abatement To allow flexibility in the timing of abatement - through limited banking and borrowing to ensure an optimal trade off between operational reductions and investments in more enduring solutions To allow the mechanism for international abatement credits to provide a pressure valve for potentially unduly high carbon prices in Europe Indeed EU ETS prices are doing precisely what one might expect them to do: falling as the constraint becomes easier to meet because of the recession and amid pessimism on a wider, binding international agreement. No doubt prices will rise again as we emerge from the recession to send the signal for new investment in low carbon technologies in the future. It is not that the ETS isnt working, but that its success has created the space for policy-makers to change their minds and to use the opportunity presented by the recession to accelerate the delivery of the long-term targets. Again, the real solution is not to turn our backs of the market but to redouble our efforts to fill the gaps in the market framework. We need to push for an international agreement We also need to get the EU Phase 4 in place now, so as to take up the slack created by the recession, and to support the markets ability to deliver the price signals and investment which will help achieve the ultimate 2050 target.

System operators are not selling sufficient

capacity forward for market participants to hedge the transport basis risks between national markets
A sustainable future built on international carbon markets The positive story at least for the EU continues when we consider the sustainability of those supplies. Specifically, the EU ETS is proving remarkably robust in the face of the challenges confronting it and remains completely on track to deliver its stated ambition of a 20% reduction in CO2 emissions by 2020. However, theres an increasingly popular view that its now failing; that prices of around 14/tonne are too low to deliver the unprecedented level of generation investment required to deliver 80% cuts by 2050; and that therefore additional support mechanisms are required for a range of different technologies. This is debatable

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The right question is whether the alternatives would work any better The progress and the indicators of success in our energy and carbon markets will never be enough for some people. To those touting their own pet technology or cause, it will never be possible to prove that the market will deliver a target 40 years hence better than subsidies and intervention ever would. However, we need to remember that the instruments now being advanced as pragmatic solutions to the challenges we face whether quotas, subsidies, price floors etc have never worked and are never going to allow societies to achieve their environmental targets efficiently. The reason we liberalised power and gas markets and adopted a carbon market in the first place was precisely to avoid the sorts of decisions that are now presented to us as inevitable by some lobby groups. Schizophrenically enough, it is the very instruments preferred by those groups, applied outside and supposedly in addition to the carbon

trading scheme, which effectively prevented the carbon price from increasing towards higher levels they now argue to be desirable. At those higher prices the same overall abatement in the power and heat sector could have been achieved at significantly lower cost. In spite of all prevailing difficulties we have more reason now than at any time in the past 20 years to believe in the ability of open energy markets to deliver secure, sustainable and efficiently priced supplies of power and gas in the EU. As we stand on the precipice of unprecedented investment, we need to give markets space and time to deliver to their full potential to preserve and focus on the best, forget the rest and not second guess!

The design of renewable subsidies remains

No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.(Winston Churchill, 1947)

patchy and some schemes actually distort power markets significantly and unnecessarily

APX-ENDEX Energy Market Summit | 21 April 2010

Session 3

Regulatory view with an international perspective

Cecile George
Director, Electricity grid access, French Energy Regulatory Authority (CRE)

ne of the ultimate objectives of the creation of a Single European Market is to provide accurate and reliable reference prices, capable of delivering effective investment signals and incentives for more efficient use of energy. The reliability and accuracy of price reference points are still far from being evident in a majority of European countries. The long-lasting debate around firmness of allocated crossborder transmission capacity rights illustrates the - sometimes strong reluctance of transmission system operators and regulators to use existing reference prices to compensate potential curtailments of capacities. The relatively low occurrence of curtailments on a majority of European interconnections (see table 1 in annex) only highlights this reluctance.

Optimizing the utilisation of existing cross-border transmission capacity As constantly emphasized in CRE reports on the use and management of electrical cross-border capacities which are now replaced by four regional reports for each regional initiative in which CRE is involved in electricity existing crossborder capacity is still by no means being efficiently used. The recent consensus at European level about moving towards target congestion management methods among which the generalization of implicit allocation methods for shorter timeframes should facilitate the development of cross-border trade and further improve the degree of integration between markets. Developing new cross-border capacities In the medium term, more attention should be paid to the hardware issues (i.e. development of new network infrastructure) in order to realize the benefits of more efficient congestion management methods. In that respect, the adoption of the EU third IEM legislative

The reliability and accuracy of price reference

points are still far from being evident in a majority of European countries

In my remarks I will focus on three important measures, which could promote the development of efficient price signals:

Existing cross-border capacity is still by no means being efficiently used

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package, including stricter obligations for TSOs to coordinate for instance, the elaboration of a 10 year transmission investment plan - should provide both more transparency in the development of the European network and, potentially, better location signals to investors on the generation side.

Increasing the elasticity of the demand curve The creation of an effective electricity market pre-supposes that there is a real bringing-together of supply and demand. In that respect, consumers should not only be able to react to prices but also be incentivized to do so. The development of smart metering, if complemented by adapted tariff measures, could incentivize consumers to be more reactive. The introduction of adequate remuneration for voluntary load reductions could also incentivize consumers to develop processes to make their consumption more flexible.

Stricter obligations for TSOs to coordinate should

provide more transparency and better location signals to investors on the generation side

Annex Table 1 - Capacity curtailments in 2008 at the Continental borders, and the cost of compensation Average amount of reduction (MW) Export Belgium Germany Italy Spain Import Export Import Export Import Export Import 0 0 0 0 644 0 205 155 Average share of long-term capacity 0% 0% 0% 0% 28% 0% 57% 76% Number of hours affected in the year 0 0 0 0 151 0 98 207 Total: Compensation cost using the 110% ruke (Ek) 0 0 0 0 1668 0 70 474 2210  Compensation cost using the price differential (Ek) 0 0 0 0 389 0 51 609 1049

Sources RTE, Powernext, OMEL and IPEX; Analisys CRE

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APX-ENDEX Energy Market Summit | 21 April 2010

Session 3

Are prices giving the right investment signals?

Paul Taylor
Director of Trading, Drax Power

he UK faces significant challenges in ensuring that the drivers of climate change, security of supply and affordability of power are efficiently balanced. The British market for wholesale energy is open and competitive, but with some particular features. Power interconnections and gas storage are limited, while wind conditions are good for renewable production. . The British retail market meanwhile is dominated by six vertically integrated companies. (See Figure 1 on page 26 showing these six companies generation portfolios, compared with the volume each supplies to final consumers.) The challenges facing Drax Group bring those faced by the UK as a whole into sharp focus. Drax is an independent generator owning the largest, newest and most efficient coal fired plant in the UK. We are seeking to develop at least 900MW of new dedicated biomass plant and a retail business. In order to meet the new IED gaseous emissions limits in 2016, Drax would be required to make significant investments in desulphurisation technology (SCR) over the period 2012-2015. To develop our new dedicated biomass plant, we will need to make significant investments in the period 2011-2014.

The current UK market structure does not serve Drax well for these purposes. The wholesale power market is illiquid more than three years forward. The long term markets for both power and renewables certificates are dominated by the six vertically integrated companies. (See Figure 2 on page 26 showing comparative power wholesale churn rates in Britain and four other European markets.) So, what could this mean to our business? It is possible that the lack of clear market signals will preclude Drax committing to SCR: so either no plant or less efficient plant investments. Consequently, either there would not be enough base-load capacity in Britain by 2016 or some of the plants run as base-load would be less efficient; in both cases prices to consumers will be higher. Furthermore, it is possible that a lack of liquidity will preclude Drax building our dedicated biomass plant. This would mean British RES generation investments will continue to be predominantly in wind farms, which bring with them huge intermittency issues. An exclusive focus on wind generation as a renewable source will render the UK less likely to reach its 2020 renewable targets and force consumers to pay more on average for renewable power.

The challenges facing Drax Group bring those faced by the UK as a whole into sharp focus

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APX-ENDEX Energy Market Summit

The wholesale power market is illiquid more

than three years forward. The long term markets for both power and renewables certificates are dominated by the six vertically integrated companies
So what can be done? Options include measures to encourage greater transparency and to improve price signals.

To ensure optimal longer term use of efficient generation assets, we believe a market in capacity (in contrast to just output) could be introduced. New obligations on participants to bring supplies onto the wholesale market, and thereby ensure a larger volume is traded through it , could be introduced. Ultimately some form of central buying and optimisation may have merit.

n Nuclear n Coal n Gas n Interconnector n Oil n Other n Supply - Domestic n Supply - HH n Supply - mHH u Self-Supply Capability (%) 120 120%

100

100% u

80 u TWh 60

80%

60% u

40

40%

20

20%

0 Generation Supply Generation Supply Generation Supply Generation Supply Generation Supply Generation Supply SSE 2008

0%

Centrica

EDF

e.On

RWE npower

Scottish Power

Figure 1
Germany France GB Netherlands Nord Pool

10 9 8 7 6 Chrun 5 4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007

Figure 2

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APX-ENDEX Energy Market Summit | 21 April 2010

Session 3

The role of TSOs and of ENTSO-E in enhancing transmission and generation investment signals
Konstantin Staschus
Secretary General, ENTSO-E

Role of ENTSO-E according to the EU 3rd Internal Energy Market (IEM) legislative package he new Regulation 714/2009 on cross-border electricity trade demands that European TSOs form ENTSO-E and jointly take on important new tasks related to European energy policy goals. In particular we are expected to draft network codes in twelve important IEM implementation subject areas, and preparing non-binding, EU-wide Ten-Year Network Development Plans (TYNDP).

Goals supported will include notably security of supply, market integration and integration of renewable energy sources. In examining some highlights from the Plan, I will address during the Summit discussion the question: How do estimates of future market prices impact upon transmission planning decisions, both those already in preparation leading up to this years TYNDP, and even more so in the case of decisions affecting future releases of the Plan? Market integration Apart from the beneficial market integration effect of having, for the first time, a panEuropean network development plan, ENTSO-E also contributes to market integration with its network code work. Among several urgent framework guidelines (primarily elaborated by ERGEG or ACER) and network codes (primarily elaborated by us), some will address capacity allocation and congestion management. Such ENTSO-E network codes should lead over the next years to a Europe-wide harmonization and clarification of capacity allocation and congestion management mechanisms. One of the beneficial effects should then be clearer investment signals for both transmission infrastructure and new generation.

Apart from the beneficial market integration

effect of having, for the first time, a panEuropean network development plan, ENTSO-E also contributes to market integration with its network code work
The TYNDP On 1 March 2010 ENTSO-E published for public consultation its first pilot TYNDP, showing how almost 500 transmission infrastructure projects will combine, to help support the European energy policy goals for 2020 and beyond.

ENTSO-E network codes should lead over the

next years to a Europe-wide harmonization and clarification of capacity allocation and congestion management mechanisms

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APX-ENDEX Energy Market Summit | 21 April 2010

Session 4

Price discovery and transaction platforms: adequate choices?

n this session we have asked our speakers, commentators and panellists to reflect on the following issues:

Do market participants have confidence in liquidity, depth and reference prices in key product and geographical markets? Are there reasonable prospects of developing liquidity in regions or countries where it has been difficult to trade gas hitherto? Do you foresee continuing geographical variations in the choice of trading venues, especially as far as exchange based trading is concerned? Will a continued drive to mitigate credit risks lead market participants to move ever more of their transactions onto exchanges and/or through central clearing counter-parties (CCPs)? Will a trend towards ever more market coupling schemes push more day-ahead power transactions onto the coupled exchanges? What are the cost and governance implications of exchanges capturing the day-ahead spread on larger proportions of cross border trading? Are the costs involved in transacting in OTC power and gas markets still relatively attractive to market participants, taking account of increasing needs to provide collateral or guarantees? Are standard master contracts used for wholesale dealing standing up under the pressure of credit worries, price spikes and more regular occurrence of negative prices in wholesale power?

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APX-ENDEX Energy Market Summit

Recap of market development in the light of the credit crisis

Stephen Asplin
Head of Vattenfall Energy Trading

uring the economic and credit turmoil of the last 18 months, power and gas markets have proved to be robust. During the height of the gloom one might have expected stress, but the markets did not suffer. Liquidity was picking up through the course of 2009, as not all banks were holding back from committing risk capital and energy companies stepped in for those financial institutions in retreat mode. Though, looking at the main European trading hubs and comparing the development of power and gas markets, the picture is fragmented. Power markets Whereas total volumes (exchange and brokered/ OTC taken together) on the German and Benelux markets have been quite stable in 2009 compared to 2008, the Nordic market, which is purely financial, suffered a substantial drop, by nearly 15 %, see Figure 1. This reflects the sharp decrease of underlying demand, but presumably also an enforced pullback of pure financial players. However, the distribution of turnover on clearing and exchange platforms remained nearly unchanged within the last two years. A different situation is evident in Germany: The turnover on the exchange came down to the level of 2006, implying that the EEX futures market could not keep its share in an overall firm market. OTC cleared volumes continuously decreased during the last three years.

APX-Endex however managed to maintain its position, actually attracting additional volumes and slightly increasing its market share, see Figure 2. Emerging gas markets Gas trading has been hit neither by the credit crisis nor the economic downturn. Turnover at all main gas hubs has risen, with TTF showing considerable growing volumes and liquidity, managing a rise by nearly 70 % within one year. Expansion of trading TTF futures on the APXEndex platform was even steeper, doubling volumes from year to year, see Figure 3. Was this due to attractive product offerings by the exchange or more a reflection of the overall creditworthiness of the OTC market participants through the credit crisis? Choice of transaction platforms What conclusions can we draw from the statistics regarding the choice of transaction platforms, or should we rather say: regarding tools to mitigate risk? The assumption, that transactions would migrate onto power exchanges or towards increased OTC-clearing, as safe havens in the light of the credit crisis, is not borne out by the statistical evidence. In the gas markets the flight to quality may be more substantiated. Is it justified to look to the exchanges as providers of liquidity and confidence when, in reality, their success is a function of the underlying market structure and fundamentals?

During the economic and credit turmoil of the

last 18 months, power and gas markets have proved to be robust. Not all banks were holding back from committing risk capital

30

APX-ENDEX Energy Market Summit | 21 April 2010

Session 4 Gas trading has been hit neither by the credit

The diversity of circumstances requires a diversified set of instruments. In a highly professional credit environment, standard master agreements for OTC dealing have proven a strong complement to exchange-based trading. An advantage of exchange-based trading remains its anonymity, i.e. the possibility to place large offers and bids. For smaller players with less significant volumes the entry barriers at exchanges, i.e. costs, registration and systems, might be too high; whereas hedge funds, as a rule, prefer clearing. Trading companies such as ours would like to see one central clearing mechanism for all commodities and products, so as realize the potential of netting effects and reduce administrative processes. Conclusion The markets development in 2009 on a statistical and trend analysis (see above), and the evolution of exchange-based volumes in particular, can shed light on the preferred direction for the future from a markets participant perspective.

crisis nor the economic downturn. Turnover at all main gas hubs has risen
What drives the different players such as energy companies, banks, utilities, funds or industrials, bigger and smaller, to choose amongst exchanged-based trading, cleared OTC deals or a standard master agreement with a collateral support annex? Is it the relative cost of transactions, the relative cost of credit as initial margin and collateral requirements, the simplicity or user-friendliness of systems, the ease of entering contracts or the range of products you would like to trade, which drives the choice?

The assumption, that transactions would migrate

onto power exchanges or towards increased OTC-clearing, as safe havens in the light of the credit crisis, is not borne out by the statistical evidence

Power Volume Development Futures Market

Volume per Market 2007-2009 [TWh]

Source: EEX, NordPool, APX Endex

Figure 1

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APX-ENDEX Energy Market Summit

Power Volume Development Spot Market

Volume per Market 2007-2009 [TWh]
Germany - EEX Nordic - NordPool Benelux - APX & Belpex -

2007

2008

2009

2007

2008

2009

2007

2008

2009

Source: EPEX Spot, NordPool, APX, Belpex

Figure 2

Volume Development Power & Gas

Volume per Market 2007-2009 [TWh]

Source: APX Endex

Figure 3

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APX-ENDEX Energy Market Summit | 21 April 2010

Session 4

Why (and how) to regulate power exchanges in the context of EU market integration?
Professor Jean-Michel Glachant
Loyola de Palacio Chair of Energy Economics at the European University Institute, President of the Florence School of Regulation

ower exchanges (PXs) are key market institutions in open and market-based electricity industries. This paper aims at contributing to the ongoing debate on why and how to regulate them in the context of EU market integration. Two different types of PXs have to be distinguished, i.e. Merchant PXs and Cost of Service Regulated PXs.

In the EU market integration context, the question

why and how to regulate PXs can be provocatively rephrased as why and how to regulate a closed cartel of incumbent and merchant PXs, which is proposing to monopolize the organization of trade across borders
Merchant PXs: These are for-profit market institutions, whose income depends on the users they have (i.e. user registration fees, and annual membership fees) and the volume of trade executed by the PX for its users (i.e. commissions on the traded volumes). Merchant PXs are mostly private initiatives that compete with other exchanges and bilateral or over-the-counter markets (OTC). Providing trade services is their core business. Examples of Merchant PXs include APX-ENDEX (the Netherlands and the UK), Belpex (Belgium), EPEX (Germany and France), Nord Pool (Nordic region), OTE (Czech Republic), PolPX (Poland.

Cost of Service (CoS) Regulated PXs: These are not-for-profit or regulated-profit market institutions whose income depends on approved costs for approved tasks. Like Merchant PXs, some of them charge fees to their members, but these fees are approved by the regulator or the ministry. CoS regulated PXs are typically public initiatives designed to perform several tasks. For instance in Spain, OMEL has the additional task of allocating capacity payments, which is a public incentive scheme designed to promote generation adequacy. In Italy, GME has the additional task to manage internal congestions in the country. In Greece and Ireland, the CoS regulated PXs are dispatching power plants.

The analysis now proceeds to a comparison of the typical incentives of these two types of PXs to perform the basic PX tasks in an isolated national market and in a market integration context. The conclusions are that in the EU market integration context, the question why and how to regulate PXs can be provocatively rephrased as why and how to regulate a closed cartel of incumbent and merchant PXs, which is proposing to monopolize the organization of trade across borders.

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A joint venture or merged institution is likely

to be the only institutionally feasible way to eliminate the significant cross-border trade inefficiencies that Europe is currently experiencing

However it will require having all of them perfectly regulated, while coordinating and harmonizing across borders is far from just another regulated task in a mainly national regulatory frameworks. It is not an accident that merchant PXs are already organizing trade across borders in some parts of Europe. And there are several promising regulatory actions that could help prevent Europes increasingly monopolistic market infrastructure giving rise to new trade inefficiencies. First, the price properties of the cross-border PX coordination initiative could be regulated, to make sure that the potential benefits from coordination materialize. Second, the long-term rights to trade across borders (i.e. longer maturity physical or financial transmission rights) could continue to be auctioned separately, to temper the reinforced PXs market power. Third, netting of expected cross border flows at the day-ahead stage would make sure that these auctions for long term rights do not reduce the benefits from coordination. Fourth and last, enhanced transparency requirements and external market oversight could also help temper the reinforced PX market power.

Even though building such a cartel is questionable from an economical point of view, a joint venture or merged institution is likely to be the only institutionally feasible way to eliminate the significant cross-border trade inefficiencies that Europe is currently experiencing. It is true that a theoretical alternative could be to adopt the CoS regulated PX model all over Europe, because such a PX has no profit incentives to abuse the monopoly of cross-border trade.

The price properties of the cross-border PX

coordination initiative could be regulated, the long-term rights to trade across borders could continue to be auctioned separately

APX-ENDEX Energy Market Summit | 21 April 2010

Session 4

Reflections on choices about where and how to transact

David Peniket
President and COO, ICE Futures Europe

lthough energy markets around the world functioned well during the financial crisis, they have not been excluded from the broader debate about financial market reform particularly in Washington and in Brussels. US regulators have proposed a new regime in which major swap participants are regulated directly, the great majority of OTC derivatives are cleared and, in some cases, trading is forced onto regulated platforms. Here in Europe, the European Commission is considering a similar framework, with compulsory clearing for a number of derivative contracts and a new set of rules and standards for clearing houses.

We have seen the benefits of competition between various execution platforms within the European gas and power markets. All the major geographic markets are served by a number of competing brokers, most of whom have used a combination of voice brokering and screen trading to build liquidity. A number of exchanges also serve the gas and power sectors, with NordPool, EEX and APX-ENDEX having been successful in European power markets, and these companies and ICE all working hard to deliver solutions to the gas trading community. Are these choices sufficient? Considering the fragmented nature of Europes power markets, the range of choices provides a competitive field. Where they may become insufficient, there are many brokers and a number of exchanges who are happy to provide services, which fill any gaps. Our customers are not telling us that lack of choice is the problem. Their principal issue is liquidity. Brokers, trading platforms and exchanges can help build market liquidity, but more important is the structure of the market itself. Compare and contrast the relative liquidity in the UK natural gas market, for example, where liberalisation created an open market with incentives for firms to trade, and in the UK power market, where substantial re-verticalisation has arguably limited potential liquidity.

We have seen the benefits of competition

between various execution platforms within the European gas and power markets
ICE was a pioneer in the development of electronic trading capabilities to increase transparency in the energy markets, and has also led the development of clearing solutions for OTC markets. As an exchange and clearing house operator, we potentially stand to gain from changes in the regulatory landscape. But we are not enthusiasts for a regime that prescribes how market participants transact to manage risks and exposures, and we have warned of the hazards of forcing trading positions into a clearing house, where this may not be appropriate.

Our customers are not telling us that lack of

choice is the problem. Their principal issue is liquidity

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APX-ENDEX Energy Market Summit

These structural issues go beyond the remit of exchanges and trading platforms and even of market participants themselves.

Structural issues go beyond the remit of

exchanges and trading platforms and even of market participants themselves

Progress in increasing liquidity in European power markets may well depend on changes to the structure of the European power industry, which look relatively unlikely at present. I am more optimistic for European gas. Gas markets are globalising, and the combined impact of the growth of LNG, together with the development of shale gas prospects around the world, means that trading opportunities and liquidity are likely to increase. This development may take some time to emerge globally, but you only need to look across the Atlantic to see the potential of a truly integrated gas market.

APX-ENDEX Energy Market Summit | 21 April 2010

Session 4

Preserving platform choices in the face of market coupling

Justin Rowland
COO, EdF Trading

he European energy market has evolved over the years since initial liberalisation in the late nineties and now offers many different and complementary ways to trade. In EdF Trading we transact power and gas across the continent using a number of marketplaces and platforms. EDF Trading alone executed well over 750,000 transactions in 2009.

If market coupling becomes a monopoly function, it will be vital that this change does not affect traders choices and flexibility about how, where, and when they trade. We believe that artificially skewing the means, by which trading must take place, one way or the other, would be detrimental to the efficiency and functioning of Europes energy market. Free choice and competition between means of transacting are vitally important. The coexistence of many marketplaces is not a problem. We still have one market. And proprietary as well as off-the- shelf information technology means integration at an individual company level is simple and already nearly ubiquitous. Respecting and preserving choice will help ensure that the European wholesale power market will become even more liquid, competitive and efficient than it is today.

Artificially skewing the means, by which trading

must take place, one way or the other, would be detrimental to the efficiency and functioning of Europes energy market
Whilst there is significant momentum behind implementing market coupling to optimise cross border day-ahead power flows, the largest, and arguably most important part of the wholesale electricity market is continuous trading, both on an OTC/ brokered basis and on exchanges. This continuous trading enables market participants to manage positions from several years ahead of physical delivery right through to intraday.

Free choice and competition between means

of transacting are vitally important. The coexistence of many marketplaces is not a problem. We still have one market

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APX-ENDEX Energy Market Summit

Closing observations
Gertjan Lankhorst
CEO, Gasterra

n GasTerra we support the continuing liberalization of the European gas market. Exchanges play a key a role in this context. We prefer trading through exchanges, because deals are anonymous, transactions are cleared, and trading through exchanges offers maximum transparency compared to other forms of deal.

Transparency of trading via brokers is nonetheless acceptable, since brokers do publish deal information. Over-the-counter trading without involvement of brokers has the same disadvantage. Since pricing information is not published, there is less transparency. The advantage of no additional transaction costs does not offset the unattractiveness of transparency and counterparty risk involved in pure OTC deals.

Trading through exchanges deals are

anonymous, transactions are cleared and we get maximum transparency

However, it is imperative that the exchange is sufficiently liquid. If the markets are not liquid enough, brokers are needed to bring supply and demand together. Trading via brokers generally means more counterparty risk, because normally deals are not cleared.

If the markets are not liquid enough, brokers are needed to bring supply and demand together

APX-ENDEX Energy Market Summit

Disclaimer
This document was published by APX-ENDEX free of charge and is provided on an as is basis for general information purposes only. The information provided is of a general nature, not intended to address specific circumstances of any individual or entity and does not contain professional or legal advice. While APX-ENDEX undertakes every effort to provide accurate and complete information, it may not necessarily contain comprehensive, complete, accurate or up-to-date information. It is not intended to constitute and should not be relied upon as advice to the merits of investment in any commodity, market, contract or other product and may not be used for advertisement or product endorsement purposes. APX-ENDEX makes no representations and disclaims all express, implied and statutory warranties of any kind to the recipient, and/or any third party including warranties as to its accuracy, completeness, usefulness or fitness for any particular purpose. The exclusion of liability includes any consequential damage, loss or additional costs of any kind suffered as a result of any material published in this document unless caused by intentional default or gross negligence on the part of APX-ENDEX employees. The layout of this brochure, graphics and pictures used and the collection of third party contributions are protected by copyright. APX-ENDEX reserves all rights in respect thereof. The reproduction of pictures, graphics, information, text and extracts from this document shall be allowed upon prior consent of APX-ENDEX only. APX-ENDEX has no influence on the contents or reliability of information or opinions contributed by third parties. Such third party contributions do not necessarily express opinions of, or information generated by, APX-ENDEX. APX-ENDEX disclaims all express, implied or statutory liability for third party contributions and provides such information or opinions for general information purposes only. Any claims or disputes arising by virtue of the use of this document shall be exclusively construed in accordance with and be governed by the substantive laws of the Netherlands.

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