European Power Markets in Transition

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European Power Markets in Transition

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With European energy markets in transition, all market participants now face a number of potentially tricky challenges. A combination of EU initiatives, increasingly invasive regulations and a backdrop of falling and less volatile commodity prices, have precipitated an era of change and uncertainty in which there are fewer trading opportunities and profits are harder to come by. Analysis of the trends and issues impacting European energy markets strongly suggests that these markets are becoming increasingly asset-centric and that the winners will ultimately be those companies that can utilise their assets most effectively. Powel thrives in helping companies extract more value from their complex energy assets and portfolios using its expertise in optimisation, modelling, logistics and trading and is ready to rise and respond to these challenges.

EUROPEAN ENERGY MARKETS IN TRANSITION The European Union continues to promote a single competitive wholesale market for energy with some degree of success. Market coupling is now in place from the Nordics to Iberia along with a common day-ahead price calculation. Despite this, there is still some distance to go to achieve the EU’s ultimate goal. Market complexity remains a challenge for participants who also face issues such as grid congestion, interconnection bottlenecks, security of supply issues and also still have to navigate across the different connectivity standards between TSOs, for example. Meanwhile, an unfortunate consequence of this initiative has been to dampen volatility in traditional day-ahead power markets and reduce opportunities for profitable trading activities there.

Another key EU initiative is around climate change resulting in mandated aggressive reductions in emissions targets for all European nations. This has spurred investment in often heavily subsidised, renewable sources of power including solar, wind, tidal and hydro. In fact, more than 50% of the global investment in renewable energy has taken place within the EU and by 2012 renewables were already an average of 14.1% of the generation mix and often significantly higher in certain countries such as Germany. A side effect of this initiative has been to

contribute to the shutting down of gas-fired base load generation, to increase retail prices for power, periods of negative prices for power in wholesale markets and significant financial losses for the utilities.

This rapid increase in relatively unpredictable renewable generation and the loss of gas-fired (and as a fall-out of Fukushima) nuclear base load has resulted in increased volume and price volatility in shortterm power markets. Short-term power and cross-border trading are now where the biggest opportunities to profit. In Germany, where renewables make up almost 28% of the generation mix, 15-minute intra-day power products tradable two hours before delivery have been introduced. These are already quite liquid and represent about 10%

European Power Markets in Transition

or more of the traded volume in Germany. While only tradable in Germany at the moment, it is just a matter of time before other such instruments are introduced.

At the same time, the industry is facing the challenge of massively increased regulation. Initially in the form of EMIR and now REMIT, these are simply the beginning of a new era of more aggressive regulation and compliance with MiFiD2 already in sight among other new regulations. The effect of these regulations has really been two-fold. First, they have added cost and complexity for market participants who must now report trades, improve risk management and business processes and guard against market manipulation. Second, the effect of

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these and other regulatory initiatives has been to effectively remove many speculative or financial players from the market and from the ownership of assets as well. When you add to that the downsizing of many utilities trading arms, we have seen a major shift in market make up. While liquidity has more or less shifted elsewhere, this has had a major impact on the nature of European power and gas markets.

Finally, while the European economy has been troubled in the past few years, demand for energy has remained fairly static or even declined slightly. A number of energy efficiency programs are also in place and helping to keep demand down. However, should the European economy continue to strengthen, energy demand will rise and this could add further issues to the market going forward especially when combined with an EU drive to reduce coal generation in the future.

THE FUTURE OF EUROPEAN ENERGY A market shift is now occurring in European energy and it is impacting everyone involved. The future for European energy is going to be about optimising assets; not just generation assets, but assets along the value chain including pipelines, grids, border connections, terminals, storage facilities, trade portfolios and so on. There will be less speculative trading partly due to the more invasive regulatory environment and also due to the exit of many speculative players. The lack of trade opportunity in the broader longer-term markets that are now moving inexorably towards an exchange-based and cleared model, is yet another reason. The future players in European markets will largely be asset holders looking to optimise and leverage those assets; whether a portfolio of trades, a generation facility or some other asset.

It goes without saying that ETRM software in Europe is set to change dramatically as well. It has to. European ETRM systems need to move from being essentially ‘after the fact’ transaction management systems to include greater capabilities to optimise assets, manage the business data and communications closer to real-time, communicate effectively with external assets, and provide business intelligence and analysis tools. But most of the current batches of ETRM solutions were developed with an eye on speculative trading and traders. While these solutions traditionally emphasise trade capture, position keeping, risk management, and back office functions, including deriva-

tive trading: they lack many of the tools that are essential to asset holders and physical traders. These include functions like price forecasting, asset optimisation, demand forecasting and, critically, power and gas scheduling and logistics for all European markets. Without these tools, the ETRM solution will not fully support current trade opportunities like cross-border trading, short-term trading, trading around assets and so forth. A major shift is also therefore signalled in European energy ETRM solutions that must meet the shifting needs of their users. That future incorporates shifting the boundaries of what constitutes ETRM to include optimisation and logistics, for example.

Š Commodity Technology Advisory LLC, 2015, All Rights Reserved.

ABOUT POWEL AND DeltaXE Powel already has a 20-year history of helping its customers to monitor, forecast, optimise and manage their complex portfolios of energy assets and trades using its Smart Energy suite of software. Its customers have benefited from increased business agility, flexibility, speed, and optimisation of resources, reduced costs and higher profits as a result. Powel’s DeltaXE software, with its advanced functionality for European logistics, scheduling, position management, market communications, and cross-border capacity handling for both power and gas, is ideally suited to more than meet the challenges of this new European marketplace while offering a complete set of traditional ETRM functionality. DeltaXE already handles the complexities of power and gas across a wide range of European TSOs and networks.

With a focus on physical energy management and seamless communication with European power and gas markets, Powel DeltaXE allows companies to optimise their trade portfolios, capacity and other assets to identify trade opportunities and act on them. Traders can manage and op-

timise all aspects of power generation, trade and dispatch using the Powel software solutions but particularly in short-term trading environments where speed of communication and volume of data are major challenges. Cross-border traders can rest assured that they have an advantage in the market by being on a platform that can quickly and easily schedule power and gas across all European markets and beyond. This is an advantage only afforded to users of Powel DeltaXE as no other solution on the market handles so many power and gas markets across Europe.

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Powel’s history in market forecasting, modelling and planning optimisation for many of the large power producers across Europe demonstrates a pedigree and proven track record on the physical side of the business. Powel is a lead-

er in optimisation solutions for power producers and is set to be a leader in delivering support for short-term, cross border and asset-centric trading activities in Europe. As European markets move towards an asset-centric future where profits are harder to find, Powel has the track record of delivering the solutions needed for participants to excel.

ABOUT Commodity Technology Advisory LLC Commodity Technology Advisory is the leading analyst organization covering the ETRM and CTRM markets. We provide the invaluable insights into the issues and trends affecting the users and providers of the technologies that are crucial for success in the constantly evolving global commodities markets.

Patrick Reames and Gary Vasey head our team, whose combined 60-plus years in the energy and commodities markets, provides depth of understanding of the market and its issues that is unmatched and unrivaled by any analyst group.

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