Q&A with EEX CEO Peter Reitz: 'We've offered a safe haven in difficult times'

London — Peter Reitz, chief executive of the world's largest power exchange EEX, took an hour in July to answer S&P Global Platts' questions on coronavirus impacts, and recent developments in carbon, power and gas markets, future electricity demand, PPAs and the changing face of hedging.

S&P Global Platts: How has lockdown been for EEX?

PR: Actually, it has been a lot smoother than we could have expected. If somebody had told me half a year ago that within a few days, we'd be able to run the exchange and the clearing house completely remotely from our home offices, I would not have believed it. But we were able to provide our services without interruption, offering a sort of safe haven in insecure times, especially with regard to clearing, which is even more important in times of crisis. We saw big jumps in prices and in volumes in March and April -- so it was also a test of our infrastructure.

Platts: What impacts have you seen on power market fundamentals in Europe?

PR: We've seen significant shifts in the generation mix, mainly driven by the price levels in the CO2 emissions market. On the demand side, obviously, we had a big impact with factories shutting down, especially at the beginning of the crisis. It's slowly coming back, but not to pre-crisis levels yet. All this had a significant impact on prices, but more on the short end of the curve. For the first time ever [in the German market], we had negative prices for a whole day during the week. But even there, the price level is back to where it was before.

Platts: Gas prices have also been volatile. Is this a trend you see continuing?

PR: It's difficult to predict. There are so many influencing factors going in different directions. In terms of price volatility, some people have predicted we might even see negative prices in the short end of the gas market. We could see something similar to what we had in the US oil market earlier this year, where it was more of a squeeze on storage. On the other hand we are seeing increased demand, with gas increasingly replacing coal in the generation mix. It will depend on how the pandemic develops, and whether we see a second wave of infections across Europe.

Platts: What impact on the gas market in Germany could the merging of the two hubs have? Is there a chance a united German gas hub could become a much bigger player in the wider European market?

PR: I think that's the hope some people have, and it may actually happen on the very short end of gas trading. In the spot market, just because of the physical size of it, this will be the biggest market in Europe. So on the spot end, which is very much physically delivered and related to actual consumption, I think there is a chance the importance of that market will grow bigger. I don't expect a major shift in liquidity in the derivatives market. TTF [the Dutch hub] has established itself as the benchmark for Europe. I don't see a united German hub replacing that anytime soon.

Platts: Is there any evidence that power hedging strategies are shifting due to central plant closures?

PR: Let me start with the very short end of the curve. We're seeing a big increase in intraday trading because of the increased level of renewables in the market. In the first half of this year our intraday volumes grew by 23%. At the long end of the curve we have facts that go in different directions. Yes, there is less hedging for coal-fired plants out to 2026 or so, just because if you look at what's happening in the real market, coal generation is down by 30% for the second year in a row.

At the same time, there's a lot of interest in hedging new renewable capacity. The main market for that is Spain, which has reached a level where renewables are the cheapest form of production and are subsidy-free. The easiest way of assuring financing for projects is signing a PPA [power purchase agreement] that generates a predictable income stream and reduces your risk.

A 10-year PPA brings huge counterparty risk, however -- 10 years out, it's difficult to know whether that counterpart you signed with will still be there to fulfill its obligation. And that's why a market like Spain is particularly interested in clearing these long-term exposures. The clearing house guarantees the physical delivery and the payment to both sides. Currently we're offering out to six years, but we will expand that so people can hedge the whole decade until 2030.

The other two markets of interest here would be Italy and, to a lesser extent, France. In Italy we're at a stage where solar and/or wind are the cheapest ways to produce energy even without subsidies. You can see there is a line that has reached Southern Europe and is moving step by step. It is difficult to predict when it will reach Northern Europe, but it should be in the next five to 10 years.

Platts: Do you have a view on electricity demand growth to 2030?

PR: I'm actually quite skeptical that we will see a huge increase in demand. If we look at the full picture, there will be shifts in demand but the overall amount I don't think will grow significantly. There have been a number of studies and forecasts that demand may grow by 10% over the next 10 years or so. That will not have a major effect on the trading volume, but the mix will change, and that may be the bigger effect on trading volumes because we are moving into a more decentralized world.

In turn, that has some effects on how people hedge and how broad the trading community is. So we see a growing number of participants in that market. Smaller players are becoming direct exchange members so they can participate in price determination. That will be a bigger driver of increased trading volume in the long run -- a more decentralized, more diverse set of market players rather than a much higher overall demand.

Platts: Can EEX get involved in the design of those decentralized markets or is that a competitive threat?

PR: I don't see it as a threat. It needs to be side by side with what we do, and we are involved in designing some of these markets with the ultimate goal of linking them up. You start with a microgrid in the neighborhood and try to match supply and demand at that level. What cannot be matched, you move to a regional level, where there is another platform, and what cannot be matched there is then put on the wholesale market. But this won't move liquidity away from the wholesale market, I think it's complementary to that.

Platts: You were early in the energy transition space with product offerings. Are they gaining traction?

PR: I think we were a bit early in some cases. We have tried to establish a market for Guarantees of Origin, for instance, but the market is not standardized enough to allow for a critical mass of players with interest in the same instrument. But we will continue to innovate in that field and look for products that have the potential to combine interest in one pool of liquidity. In general, the Guarantees of Origin market is going to grow. We have one side of that activity in Grexel, where we provide services for registries in many countries. And we also have a trading offer, especially in France, where we run auctions for the government to bring these Guarantees of Origin into the market. So we're looking at the whole value chain here.

Platts: What new initiatives can we expect to see from EEX over the next two to five years?

PR: We've been involved in the emissions market in Europe for over 15 years now, so we have a lot of experience. We are the auctioning platform for 27 of the European states and we know how to build the infrastructure and the community around it to make these markets work. That expertise is more and more needed in different parts of the world as different countries or regions build cap-and-trade mechanisms to give a price to CO2. So we are involved in helping to build cap-and-trade mechanisms and designing them in a way that they can be connected later on because ultimately, we're addressing a global problem, and the long-term goal needs to be a global price for carbon. We're engaged in Europe, we have a broad set of products in the US and we're also engaging in other parts of the world.

The same thing is true for our power offering. We have an exchange in Asia, in the US and then obviously our core business is still in Europe. So we're well set up to take advantage of any opportunity in power markets that occurs globally. The best example for that is what happened in Japan recently. Our decision to establish a power derivatives market there was driven by deregulation, which happened in the last couple of years. We see huge potential there. In terms of consumption, the Japanese market is twice as big as the German market, but it is where the German market was 20 years ago. There is a need for hedging prices and a need for hedging counterparty risk, those are the tools we can provide. And as we've done several times in Europe already, bringing together an existing international community with the local players is what we're doing in Japan.

Platts: Do you see any opportunities developing in hydrogen?

PR: I think in the very long run this could become another global commodity that is traded on exchanges. But it will take a while. We have several steps to take in terms of standardization of what can be traded, where we can build a critical mass of people interested in that, and there are regulatory hurdles that need to be removed. But a lot of things are happening there at the moment. We are in discussions with those setting the regulatory infrastructure but in some cases, it is even laws that need to be changed so that we can create this market.

Platts: Finally, you have clients in the UK -- what is the outlook for them in terms of the Brexit negotiations?

PR: Market participants are preparing for a hard Brexit in the worst case. Even if that happens, I think we will not see a breakdown of the market infrastructure because all [affected] participants have taken steps to make sure they still have access to all major exchanges and clearing houses. We're not concerned about that. Whether Brexit will have a long-term effect on trading volumes, that is difficult to say. It will be different from market to market. In emissions certainly, it will have an impact if the UK decides to have a separate market not linked to the EU ETS. On the gas and power side, I don't see a major impact. These markets are linked today and will continue to be linked by trading activities. We're far off from that copper-plate vision where we have just one price for Europe, but new [interconnector] infrastructure will support steps in that direction, increasing trading opportunities and volumes.