The German Power Market – Recent Developments

1. The German Power Market – Recent Developments Lorena Vinueza Stefan Trück Department of Statistics and Econometrics University of Karlsruhe, Germany stefan@lsoe.uni-karlsruhe.de lorena.vinueza@lsoe.uni-karlsruhe.de

2. Contents • Historical overview • Ownership and Market structure • Power Trading in Germany • The Leipzig Power Exchange – a case study • Outlook

3. Dereglation Process in Germany – Historical Overview

4. Historical Overview (I) 1935 “Energiewirtschaftgesetz” State monopoly 1996 The EU-directive guidelines Liberalization of the power markets in Europe 1998 The German Energy Sector law: opened the German power market to competition

5. Historical overview (II) 1998 Verbändevereinbarung I (VV1) Agreement regarding access to and use of the power network 1999 Verbändevereinbarung II (VV2) New competitors CEPI Index

6. Historical Overview 2000 Gridcode2000 DistributionCode 2000 LPX Leipzig, 06/200 EEX Frankfurt, 08/2000 2001 Guidelines for information exchange regarding trading of physical power in Germany

7. Lack of competition – Open Access for everyone? Theory: since 1998 open access for all network users in former Western Germany Practice: many obstacles remain for many network users on low network levels like: • few players with a lot of market power, • rather high prices for consumers remain, • lack of real competition, • open access

8. Electric power prices Source: Bundesministerium für Wirtschaft und Technologie

9. Compared power prices in EU

10. Market Structure in Germany

11. Market Structure and Market Shares Six “super-regional” companies large power plants and regional high voltage grid ~ 50 regional distributors regional distribution grids and smaller power plants ~ 600 municipal utilities regional distribution grids and smaller power plants ~30% ~30% ~40% End user sales

12. Markets – Ownership Structure • Internationalisation of market • Mergers and Acquisitions – some of them • PE + Bayernwerk  E.ON • RWE + VEW  RWE • VEAG  HEW  Vattenfall • Local/regional units  “super-regional”/global units

13. Production Volume - Ownership

14. Power market statistics(year 2001) Source: VDEW

15. International Markets – Trade in the EU and with East European Countries Total Import: 44,9 Billion KWh Total Export: 42,7 Billion KWh Balance: -2,2 Billion KWh Source: VDEW

16. Sources of power production(year 2000) Source: VDEW

17. Consumption of alternative energies (year 2001) Source: VDEW

18. Consumption according to group of consumer Source: VDEW

19. CO2 Emissions Source: VDEW

20. Costs of power generation in cent per kWh

21. Energy Trading Institutions in Germany

22. Energy Trading Institutions in Germany • OTC – Market • Internet Market Places • Power Exchanges (EEX and LPX)

23. Energy Trading – OTC Markets (I) • More than 300 parties registered in German market, about 20-30 active traders • Turnover estimated 50-70 TWh/month • Mainly Bilateral Trades • Also cross-border auctions and active trading with e.g. Denmark, Netherlands, Czech Rep etc.

24. Energy Trading – OTC Markets (II) • Intermediate Brokers often act between Market Participants (~ 10-15 brokers active) • Different sorts of contracts are traded - spot and future products • Transparency is not guaranteed • No real „Trading“ of Energy

25. Energy Trading – Internet Platforms • Alternative Platform to common OTC- Telephone trades • Several Market Places (e.g. EnronOnline, netstrom.de, HEW click&trade) • Only very small proportion is traded via Internet Market Places so far • Poor Liquidity of Internet Markets

26. Energy Trading – Power Exchanges • Offering Standardised Products (Spot and Future Market) • more Transparency in markets than in OTC • many Market Participants • More „real“ Trading • (Especially Futures) Market is rapidly growing

27. Power Exchanges in Germany I Leipzig Power Exchange (LPX) in Eastern Germany - first German Exchange for Energy • Main partner: Nord Pool ASA • Spot market Started 16th of June 2000 60 parties have signed trading agreement • Future market Started in July 2001

28. Power Exchanges in Germany II European Energy Exchange (EEX) in Frankfurt • Main partner: German Stock Exchange • Spot market Started 8th of August 2000 30 parties have signed trading agreement • Concentration on Future market Started 1st of March 2001 24 parties have signed trading agreement Turnover in May-01: 0.6 TWh

29. Base Load – for 24 hours Base Load 24 h Peak Load – from 8 am – 8 pm Peak Load 8-20 h Single hour loads Power Exchanges – Spot Market Products Main Products Use of Spot Market • Portfolio optimization • short term trades for peaks • buy extra capacities • speculative traders • etc.

30. Power Exchanges – Future Market Products • Futures • Options (planned) • Swaps (planned) • Etc. • Traded are mainly long-term futures like monthly, quarterly and yearly products

31. Power Exchanges – Turnover Total Consumption in Germany 2001: ~500 TWh Turnover LPX, 01–06/2001: 5 TWh Turnover EEX, 01–06/2001: 4,36 TWh  only small fraction of Energy is traded at Exchanges

32. Trading / Strategies of Market Participants • Combination of long-term OTC contracts with fixed prices and short-term trades at Power Exchanges as popular strategy • Rapidly Growing Futures Market due to more transparency for complex products at exchanges compared to OTC trades

33. Prices per MWh – 1999-2001 • As the prices for the consumers became cheaper, power is not traded at significantly cheaper prices at the Exchanges

34. Power Exchanges - Developments Merge of LPX and EEX in 2002 – EEX in Leipzig Spot market Turnover in July 02: 2,5 TWh Future market Trading Volume: 30,1 TWh in July 2002 (Yearly Contracts: 21,5 TWh Quarter Contracts: 3,1 TWh Monthly Contracts: 5,5 TWh)  Especially Futures Market is growing rapidly

35. Case Study: The Leipzig Power Exchange (LPX)

36. The Leipzig Power Exchange – Organisation of the Exchange • Public law structure • Exchange as an institution under public law • LPX acts through organs under public law • Supporter • LPX Leipzig Power Exchange GmbH • Private law institutions • Shareholders

37. The Leipzig Power Exchange – Market Participants (excerpt) • Aare Tessin AG • Bewag Aktiengesellschaft • DISAM A/S • EDF Trading Limited • Electrabel • Elektrizitäts-Gesellschaft-Laufenburg AG • EnBW Gesellschaft für Stromhandel • enercity trade • Energieunion AG • EWMR • Entega Trade GmbH • E.O.N. Energie AG • Fortum Energie GmbH • GEW Köln AG • HEW AG • Kom-Strom AG • Kraftübertragungswerke Rheinfelden AG • MVV Energie AG • Norsk Hydro Energy Deutschland GmbH • NWS Energiehandel GmbH • Österreichische Elektrizitätswirtschafts AG • RWE Energie AG • Southern Energy Europe bv • Stadtwerke Düsseldorf AG • Stadtwerke Leipzig, • Statkraft Energy Deutschland GmbH • Südwestdeutsche Stromhandelsgesellschaft mbH • Syneco GmhH & Co.KG • Tiroler Wasserkraftwerke AG • TXU Europe Energy Trading BV • VASA Energy GmbH & Co. KG • VEAG Vereinigte Energiewerke AG • VEW Energie AG

38. The Leipzig Power Exchange – Trading and Entrance Fees • Overview • Trading fees(mutual, i.e. to be paid by both the purchaser and the seller)0.04 Euro/MWh • Annual fee12500 Euro • Entrance fee (one-off)7000 Euro

39. The Leipzig Power Exchange –Auction Bidding • LPX supposes „Auction Bidding“ as best solution • Bundling up of demand and supply • Minimizes Strategic Influences and Market Power • Economical and Simple Solution

40. Time 00:00 06:00 14:00 24:00 10:00 18:00 Block 3 Block 4 Block 2 Block 5 Block 1 The Leipzig Power Exchange – Block Bids Periods Limits for block bids from start • Maximum size for an individual block bid is 50 MWh • A maximum of 3 block bids per block period and participant can be sent in addition to the hourly bid • These limits can change later on and if so LPX will inform its participants no later than on Thursday the week before implementation of new limits.

41. The Leipzig Power Exchange - Trading Volume and Prices I

42. The Leipzig Power Exchange - Trading Volume and Prices II

43. The Leipzig Power Exchange – Trade Data (I)

44. The Leipzig Power Exchange – Trade Data (II) – Anomalies • in December 2001 the „market-clearing-price“ reached a peak with 1000 Euro/MWh • the average weekly price moved to 50 Euro/MWh • ‚prices are economically not logical nor explainable‘ (MVV) • problem: data about production, network problems not available to all traders

45. Conclusions considering Prices (I) • Behaviour of prices suggests challenges associated with modelling these prices, e.g. • Volatility seen in Power Prices is exremely high and • unprecedented in other Commodity Markets • Prices vary substantially by time of day, week or year • Positive and Negative price „spikes“ can be observed • Frequency, Magnitude and complexity of • Fluctuations also unique in commodity markets

46. Conclusions considering Prices (II) • However..... • Prices follow similar daily, weekly and annual patterns • Even the price volatility follows certain patterns, price • volatility is strongly correlated with price levels • Basic relationships between power prices at different • geographic locations show e.g. similar volatility • .....the challenge is to build models that capture this complex behaviour of prices

47. Links in the Internet • www.strom.de • www.eex.de • www.lpx.de • www.bmwi.de • www.finance.wiwi.uni-karlsruhe.de • www.energy-more.de • www.bundeskartellamt.de • www.eu-kommission.de