European power trade volume outlook unpredictable after 2012 drop trend

5. May 2013. / SEE Energy News

Trading volumes in Europe’s major wholesale power markets dropped 12 percent in 2012, and nearly four months into 2013 the direction of the market is too uncertain to predict, research company Prospex said on Friday.

Trading volumes dropped to 8,534 terawatt hours (TWh) in 2012 in France, Germany, Italy, the Netherlands, Spain, Britain and the Nordic region from 9,645 TWh in 2011, according to estimates in a Prospex study due to be published on April 29.

The decline was due partly to the growth of renewable power output, which can swamp the market with midday solar supply, for example. This evens out previously volatile within-day prices and reduces the potential for shortages, which makes hedging and speculative activities less necessary.

The study also blamed uncertainty around new EU regulations for undermining market confidence. A partial withdrawal of banks and utilities from energy trading has also cut into volumes.

As for 2013, Prospex said that confidence in the market was in a delicate state that made estimates difficult.

“It is too soon to be sure which way the market will go this time,” Ben Tait, the UK-based firm’s director, said.

If top utilities and banks further reduce their activities, other operators might also cut down on involvement.

On the other hand, if the market overcomes the current turbulence, players may decide it’s safe to return, which is what happened following previous trading crises, including after the 2009 global financial downturn and after the collapse of trader Enron in 2004.

“The end of this year or the beginning of 2014 should be a better time to draw longer-term conclusions,” Tait said.

The depressed economic environment in the euro zone already reduced volumes in 2011 by 12 percent from their all-time high in 2010 of 10,925 TWh.

Trading volumes in 2012 in the over-the-counter (OTC) market, which has been forming since 1999, fell by 18 percent in 2012. It maintained a share of 68 percent of all trading volume, a figure that has been roughly consistent for years.

On exchanges, the trend in power trading volumes differed between futures, which fell 6 percent, and spot business, which increased by 14 percent, Prospex noted.

Germany and the Nordic countries kept their prominence as the major trading centres due to easy trading systems, the number of players and good interconnection capacity.

In Germany’s centrally located and liquid market, the calendar-year power contract is the benchmark for the continent as a whole, used as a proxy by neighbouring countries.

The German market trades 7.1 times its national consumption of electricity, which is called the churn rate. The rate in Nordic countries is 5.0 times, while the average of the major markets is 3.4 times.

Major utility players in the sector include France’s EDF

and Germany’s E.ON and RWE , driven by their need to protect commercial positions and hedge output.

Prospex noted that while the amount of OTC trades that were financially cleared rose by 4 percentage points to 23 percent of the total in 2012, this was down from a rate of 30 percent in 2008.

“Plainly many European power traders still prefer straight bilateral deals without any support from exchanges or clearing service providers,” it said, adding the tendency was strongest in Britain, where 81 percent of OTC trades were not cleared.

Source; Reuters

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