Interview: EEX market shares climb as traders move to limit counterparty risk

EEX's German power derivatives market share exceeded 50% for the first time in 2021 as traders moved from over-the-counter trading to cleared transactions on the exchange, CEO Peter Reitz told S&P Global Commodity Insights April 13.

While overall traded power volumes in the market decreased in 2021, EEX data for the group's annual financial results briefing showed the exchange's market share had increased in France and France as traders sought to avoid counterparty risk in OTC markets.

"Usually volatility is good for trading, but only to an extent. If volatility exceeds a range where it correlates with higher volumes, then you see the opposite effect and people become scared to open any new positions. We are seeing some of that in the current environment," Reitz told S&P Global.

Some 10 years ago EEX's German power derivative market share was around 10%, he said.

"For the first time more than half the market is cleared and we are seeing that trend continue in the first part of this year."

EEX's Q1 2022 European power derivative volumes were up 9% on last year's record quarter to 1.154 TWh.

A similar move to cleared trades in the gas market saw EEX's share of volumes climb across four European hubs.

Q1 2022 gas spot volumes on EEX increased 48% to 704 TWh and gas derivatives more than tripled, also to 704 TWh.

Market holding up

There was no map to show what lay ahead because current conditions were unprecedented, Reitz said.

"I believe the friendly co-existence of OTC and cleared markets will continue for power and gas, but in other commodities we have seen markets go completely cleared. There will always be room for an uncleared OTC market in my view, but over time clearing will increase because of the risk management benefits."

Reitz did not think the market was broken.

"It is working pretty well. Even at these prices levels we are matching buyers and sellers in a secure way. Obviously margin requirements have increased significantly. We have seen a major shift in additional margins that had to be placed with the clearing house, but all were fulfilled overnight."

As such, Reitz cautioned against simplistic interventions in Europe's power markets that could have unintended consequences.

"Easy answers can create more problems than they solve in a complex system based on price discovery through supply and demand. Having said that, there is a case to be made that some of the consequences of high prices [for retail investors, industrial users and those on social tariffs] should be managed by governments, but only after price discovery."

Reitz believed European regulatory body ACER's electricity market design report for the European Commission, due in April, would recognize the dangers of tinkering with the marginal price method.

"Price discovery does not work if you set a price for one element of a coupled market [market coupling now covers almost all of Continental Europe and Scandinavia]. An artificial price in one market disrupts management of cross border flows and creates additional costs," he said.

Carbon reach

Meanwhile, the exchange was building out its environmental markets offering, extending its reach in the US via Nodal Exchange's emissions and guarantees of origin and helping New Zealand set up a carbon market.

"We plan to launch a European-wide trading market this year for Guarantees of Origin offering a spot instrument. We want to concentrate liquidity because the GO market is still very fragmented," Reitz said.

The exchange would also look to support the EU's 'Fit for 55' drive to apply carbon pricing to other sectors.

"Last year we introduced the nEHS emissions trading platform for Germany's heating and transportation sectors. This could be the nucleus for European plans to cover these sectors," Reitz said.

10-year view

The current crisis would accelerate renewables not least because wind and solar brought independence, Reitz said.

"At the current price level renewables are just about the best investment you can make. You can sell your production for the next 10 years secured by a clearing house. We expect interest to climb in our hedging instruments on the back of increased power purchase agreements," he said.

The exchange has recently introduced 10-year power futures for Germany, Italy and Spain.

Company revenue for 2021 climbed 11% to Eur363 million ($394 million), EEX said in a results note. Earnings before interest and tax were up 36% to Eur138 million.

EEX: TRADING VOLUMES (TWh unless otherwise stated)