Europe's energy crisis has seen liquidity dry up in the over-the-counter power market but cleared exchange-based activity has held up remarkably well, EEX CEO Peter Reitz told S&P Global Commodity Insights.
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Trading volumes on the world's largest electricity exchange fell 17% in August on last year's record volumes, but were up 7% on July and remain above the five-year average, Reitz said in an interview Sept. 8.
"Actually, we are not seeing a drying up of liquidity as some people say. We still have a liquid market on the exchange. In OTC liquidity is drying up with the overall market shrinking," Reitz said.
"In all the major European markets our market share is above 70% now," he added.
This reflected an acute awareness of counterparty risk due to price volatility.
"A lot of people have decided to use the exchange and the clearing house mechanism when it comes to hedging their position," he said.
Massive margin calls have seen even big market participants struggling with collateral management.
German power for year-ahead delivery, the benchmark Cal contract, hit Eur985/MWh on Aug. 26, EEX data show.
Europe's gas benchmark, the TTF front-month contract, was assessed by Platts at a record Eur319.98/MWh on the same day, S&P Global pricing data show.
"Even at these very high levels of volatility we see high volumes going through the exchange despite overall trading shrinking," Reitz said.
EEX GAINS MARKET SHARE IN EUROPEAN POWER DERIVATIVES
EEX backed the idea of temporary liquidity support measures, which were certainly preferable to direct market interventions.
"If you don't allow price discovery in the market, than you can't be surprised that there is no liquidity," Reitz said, noting a sharp decline in Spain's traded volumes in August after introduction of a cap on the price for gas used in power generation.
While there was no upper limit to the volumes EEX could take on – "our model to take on risk via margins is scalable" - nevertheless to improve the general situation "a recommendation by the EC for national state-backed guarantee schemes is key," Reitz said.
Provision of liquidity support in Germany, Austria, Finland, Sweden and Switzerland were good mechanisms and should be available Europe-wide.
"One additional initiative is to broaden regulation so clearing houses can accept bank guarantees as collateral in addition to cash," he said.
Off exchange platform
Meanwhile EEX on Sept. 13 launched a new off-exchange trade registration platform, Touchpoint, allowing for registration of OTC trades for all EEX markets and asset classes (power, gas, emissions dry freight and agriculturals).
The free service provides a range of trade registration, risk management and analytics functions, allowing EEX customers to better control their OTC trade workflow.
"We have a state-of-the-art solution which will undoubtedly make OTC trading much easier and more efficient for traders, brokers and clearing members," Reitz said.
THE gas gains
In Europe's gas markets, meanwhile, EEX had seen a tripling in derivative volumes year on year as power market participants sought to reduce margin requirements on their gas positions.
Another driver was establishment of Germany's new THE gas hub as united and now major trading venue.
"TTF remains the most liquid [hub], but THE is the clear second if we look at Continental Europe," Reitz said, noting improved hedging opportunities against a common gas price.
It was too early to say, however, if Germany's efforts to fast-track LNG infrastructure would have impact on volumes overall, he said.
LNG offerings on the exchange remained on the watchlist, with nothing planned for the coming months.
Hydrogen and GOs
For hydrogen, the exchange planned to launch a price index sometime in 2023 based on offtake price surveys and other calculations and as a hydrogen market evolved from small regional clusters.
"I don't expect a liquid futures market [for hydrogen] any time soon," Reitz said.
"Our focus is on how to best develop those markets in terms of trading. That's why we decided to develop an index on hydrogen pricing in discussion with market participants."
Another EEX growth initiative focused on Guarantees of Origins (GOs), with a first pan-European auction on spot GOs set to take place in late September.
"We might increase the frequency of these auctions and then develop a derivative market, but let's see how the new offering is established," Reitz said, noting the current GO infrastructure was somewhat opaque and non-standardized.
The auction would allow specifications on technologies or countries, while focusing liquidity on a single sale.
The concept was scalable to hydrogen, where EEX was also focused on the registry side.
S&P Global Commodity Insights assessed the price of EU wind GOs for 2022 at Eur3.60/MWh Sept. 14, up 46% since early August.
Future market design
In line with much of the trading community, as well as regulatory body ACER, Reitz warned of the unintended consequences of market intervention.
"With the political decision makers we are talking to, the focus has been on how to protect the most vulnerable consumers, redistributing wealth post market close. So while you can't rule it out, I'm not too concerned for the wholesale market," Reitz said.
While applying revenue caps to inframarginal generators sounded OK in theory the devil was in the detail, he said.
"Power is hedged years in advance. The spot price may be Eur600/MWh today, but a generator may have sold all its production in the derivatives market at Eur80/MWh a year ago. You will need a mechanism that allows participants to show what is hedged, otherwise it's going to be difficult to ascertain who exactly has benefited from these high prices," he said.
Proposals to split the wholesale market, meanwhile, would simply not work.
"Why would you sell power from a coal or nuclear plant at a different price than from a gas plant that may well be in the same portfolio? It's one common good that has one price. If you split them someone will arbitrage it, so ultimately you end up with the same price again," he said.
Looking ahead, Reitz said power market design in the years to come "will not be that different from what we are seeing today.
"Merit order is the best mechanism to allocate which source of electricity runs. There is wide consensus among the industry and academics on that," he said.
Finally, Reitz remained confident the current market crisis would accelerate the energy transition so that, "when we look back in five or ten years' time, it has become clear that renewables are the solution."
EEX POWER TRADING VOLUMES (TWh)