EEX chief executive Peter Reitz believes

CUSTODY DERIVATIVES EEX

EEX looks to the long-term for renewable growth

The European Energy Exchange is positioning itself to support the long-term shift to renewable sources of energy amid increasing pressure on the European market due to the war in Ukraine, writes Radi Khasawneh.

Peter Reitz, chief executive of EEX Group and European Commodity Clearing, told Global Investor that the current market stress reinforces the need for products geared towards renewable energy producers, and the exchange has positioned itself to benefit from that trend.

The exchange in September launched extended maturity power futures, with ten-year German, Italian and Spanish power futures offered to match the duration of renewable power projects in the countries.

Demand for these products has so far been affected by market volatility but the concept is one Reitz believes will bear fruit once long-term hedging demand returns to the market.

“When we introduced the ten-year product we saw initial trades in the markets with the highest natural demand for those renewable project hedges, but with all the volatility in the electricity markets, the focus has shifted to what you might call the shorter end of the curve,” Reitz said.

“Liquidity has concentrated recently within a three-year horizon. On a long-term basis the demand will re-emerge.

“This is the cheapest way to provide additional capacity, and this will need to be hedged in some shape or form and the ten year product is a very good mechanism to eliminate Reitz: “Liquidity has concentrated recently within a three-year horizon. On a long-term basis the demand will re-emerge.”

counterparty risk for these projects. Our customers are telling us that it is the right instrument and they will use it when they build new capacity.”

EEX reported in August a 17% yearon-year decline in trading activity to 259.1 million Megawatt Hours (MWh) against a busy August last year, but its EPEX European spot market was flat by the same measure at 50.4 million MWh, including a 13% boost in Intraday volume. That is partly down to changes the exchange has already made to increase flexibility and adapt to the fact that renewables have variable supply levels built into their operating systems.

“In the intraday market we shortened the period of time between trading and production all the way down to five minutes,” Reitz said. “That is all the flexibility that you need when you run a wind farm or solar plant, so the exchange offering that we have created is especially catered towards the producers of renewable

When we introduced the ten-year product we saw initial trades in the markets with the highest natural demand for those renewable project hedges, but with all the volatility in the electricity markets, the focus has shifted to what you might call the shorter end of the curve

energy who want to trade on that end of the curve.”

The Leipzig-based exchange has seen impressive growth in its natural gas complex, across both spot and derivatives markets, rising 216% year-on-year volume in August to 575 million MWh. Reitz says clearing has become a good solution for counterparty risk and margin pressures in the over-the-counter markets.

“The EEX gas market has more than doubled compared to last year, so that’s where a lot of the action is right now, a lot more of the gas derivatives trading is moving from OTC to exchange cleared,” Reitz said. “One of the biggest drivers for that is margin efficiency. People that do have a power position in the clearing house can actually reduce their overall margin by netting against gas holdings. We only look at the overall risk of the position, these markets are correlated, so the resulting position is much lower than the sum of the two and in many cases even lower than just the power position. That is what is driving this big move from OTC onto exchanges in the natural gas derivatives market.”

In advance of this trend, EEX in December agreed a deal to acquire trading analytics provider Lacima Group, offering real-time risk and margin functionality to clients ahead of the disruption this year.

“That focus on efficiency, and managing the blended cost of trading has informed the way we design and develop the functionality of our platform,” Reitz said. “The acquisition of Lacima at the end of last year is a good example of that. They have comprehensive tools to allow clients to simulate positions real-time, and understand the margin and execution costs in one place. Introducing that to our existing European client network has complemented the EEX Group offering in a big way.”

Speaking to Global Investor in September, fintech ION Markets said there has been a spike in demand for its real-time risk analytics service since the pandemic related market At present the voluntary carbon market is fragmented, on a group level we have launched products on our US Nodal exchange, including nature-based products, and we intend to launch a similar set of contracts on EEX next year. This will mean we cover the two major time zones within our product offering

disruption in March 2020, which accelerated through the extreme price moves in European power markets observed in recent weeks.

EEX also has ambitious plans to grow its sustainability-linked product suite to take advantage of long-term trends in those markets.

Reitz says he expects the voluntary carbon markets to come together and embrace standardisation. It is planning a series of product launches to position itself for that shift.

“The voluntary carbon market is completely separate to the emissions trading schemes for now but ultimately they will come together at some point,” Reitz told Global Investor. “At present the voluntary carbon market is fragmented, on a group level we have launched products on our US Nodal exchange, including nature-based products, and we intend to launch a similar set of contracts on EEX next year. This will mean we cover the two major time zones within our product offering.”

EEX-owned Nodal more than doubled its trading of environmental futures in July, up to 21,693 lots from 10,684 the year before. It extended its collaboration with IncubEX in June, launching a series of voluntary carbon offset, renewable natural gas certificates and renewable energy credits.

“We have different approaches looking at how we can bring liquidity together in a set of standardised products, that is what everyone is trying to do right now and when it is successful it will boost the size of that market,” Reitz said. “We need to move away from individual deals to a standardised product that people can use interchangeably.”

EEX has been central to the development of the ETSs in many regions, including the EU ETS, and in North America through Nodal which it added in 2018. More recently, it has finalised its project with New Zealand Exchange to develop a New Zealand ETS first announced in October 2020. Reitz sees significant room for growth in established and new regions.

“Existing ETS schemes only cover about 20% of overall emissions, so they need to be expanded,” he said. “The first way that needs to happen is to extend regional coverage, so we are helping others to develop ETS auctions where they don’t exist today. The recent introduction of auctions in New Zealand is a good example of that, we are also cooperating with Chinese exchanges to help establish a national market.

“The second expansion is to increase coverage in existing markets. The EU ETS, to take one example, only covers around 40% of the emissions in Europe – major sectors are not part of it. Transportation and heating are not covered. Those two together cover another 40%, and the German government has instituted a national scheme with the intention to also move that to a European level. The Commission has also made that part of their program and it is currently discussed with the

CUSTODY DERIVATIVES EEX

There will be times where there is not enough wind and not enough sun, but embedded demand that cannot adjust to that supply. The gas network, the huge storage caverns that we are now filling, can also be used for hydrogen

European Parliament. We are already seeing moves to include areas like the maritime sector, which represents a big change for those who are directly involved in those markets.”

“In the coming weeks, the exchange will further develop its sustainable products suite with a Guarantees of origin will be a key component to a sustainable energy world,” Reitz said. “We are also engaging in that evolution, partly because we are running the registries for several of these instruments and now we are also introducing a European auction for guarantees of origin at the end of this month.

“This will be another event to pool liquidity, and you can specify several factors; whether it’s cheapest to deliver, country of origin, or technology (such as solar, wind). All of that will be pooled in one auction that will determine the prices for guarantees of origin. We see a lot of interest in that market, and even have some new participants that are joining the exchange so that they can take part in this new market.”

Looking to the long term, Reitz says that the process of converting natural gas storage capacity to hydrogen must be informed by trading needs of the market at an early stage to ensure a successful transition when global pricing emerges.

“As we move ourselves into a completely decarbonised world, you need to have some element in the energy production mix that is storable,” he added. “There will be times where there is not enough wind and not enough sun, but embedded demand that cannot adjust to that supply. The gas network, the huge storage caverns that we are now filling, can also be used for hydrogen.

“That infrastructure still needs to be built, so we are in the very early days of that process but we need to consider the trading elements for that market right from this point. That is why we are engaging with all of the people involved in the physical side to create a mechanism where we can start providing transparency. We are working on a hydrogen index to provide a mechanism to track price discovery and development, and from there we can think about trading products.”

Much like its role in the ETS space, Reitz sees an opportunity to guide market development while adapting to evolving client needs.

“At this stage it will be focused on local, regional markets where there is enough supply and demand to create a trading infrastructure which will then grow over time and emerge,” Reitz said. “In many ways, it is similar to the development of the gas infrastructure, where we had very small market segments which then grew significantly. We want to be part of this process early on to make sure that market design will support the parallel development of trading markets.”