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APX Group:gas and electricity exchanges

European electricity market: Improvement potential in market structure and quality Bert Den Ouden CEO, APX Group EPFSF Annual conference 15 May 2007. APX Group:gas and electricity exchanges. APX Gas NL (TTF) APX Power NL APX Gas UK (NBP) APX Power UK APX ZEE (Zeebrugge HUB)

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APX Group:gas and electricity exchanges

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  1. European electricity market: Improvement potential in market structure and quality Bert Den OudenCEO, APX GroupEPFSF Annual conference 15 May 2007

  2. APX Group:gas and electricity exchanges • APX Gas NL (TTF) • APX Power NL • APX Gas UK (NBP) • APX Power UK • APX ZEE (Zeebrugge HUB) • Market Coupling together with other exchanges NBP TTF APX UK APX ZEE Bel- pex

  3. Overview of APX Group activities Operations: • 5 markets on line • 4 service activities • 206 gross memberships Traded (2006): • 178 TWh of energy • € 5.3 billion of contracts • 10% of UK gas demand • 18% of NL power demand Corporate: • Anglo-Dutch management • Positive financial results • Shareholders TenneT (74.5%, Transmission System Operator NL) and Gasunie (25.5%, Gas infrastructure company NL) Development of APX Group Members per Market, 1999 to March 2007 Gas NL 200 20 Gas Zee 19 11 Gas UK 9 15 Power UK 8 70 11 67 Power NL 5 58 54 Number of Members 54 100 52 46 54 51 41 36 36 34 39 27 27 51 48 41 40 38 36 36 31 21 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 www.apxgroup.com

  4. ? European electricity market Achievements • Free customers • TSO tasks • Efficiency of utilities • Role of regulators Shortfalls • Volatile prices • Low liquidity • Transparancy issues • Inefficient use of transportation • High level of concentration • Market power issues  Fragmented market

  5. Some available solutions Infrastructure • Build more capacity….and/or • Make better use of existing capacity! • Market Coupling Market organization • Transparency • Carbon market regulation Transport limitation Integrated market

  6. APX APX APX 1. 2. Bel pex Bel pex Power next Power next Power next Market Coupling Netherlands-Belgium-France Before • Fragmented 2-step operation • 2 capacity auctions on each border • 2 electricity spot markets After • One integrated system, 1-step operation • Daily allocation of transmission capacity between 3 countries • Generating spot market prices • 3 exchanges working together • Political will • Start: 22 November 2007 TenneT Elia RTE

  7. Achievements of market coupling:utilisation of transmission market coupling 22 Nov 06 • Upper graph: Average utilization as % of available 30  60% after MC • Lower graph: time-percentage of full usage 0  25% after MC

  8. Achievements of market coupling:price convergence market coupling 22 Nov 06 Upper graph: APX Lower graph: Powernext • Before MC: correlation, no convergence • After MC: strong convergence(>70% of time) • Some price differences remain

  9. Old situation • Either prices will converge 100%, or prices diverge –but then the transmission capacity used for 100% • Better price index • Better efficiency and better economic results • Better basis for long-term contracts & investments 2% 100% of time 19% 73%: “Copper plate” 6% Achievements of market coupling: integration of price areas Shown are the data for January 2007 Percentages vary each month

  10. Achievements of market coupling: Price difference Netherlands-France Hourly price difference, €/MWh 9% ∆P > 10 € 19% ∆P 1..10€ 40% ∆P > 10 € 4%∆P < 1 € ∆P >10 € ∆P 1-10 € ∆P <1 € Equal price “copper plate” 51% ∆P 1..10€ 68% ∆P=0 Equal price “copper plate” 8% ∆P < 1 € Before Market Coupling Winter 2006 After Market Coupling Winter 2007

  11. Price convergence simulation for coupling in “Pentalateral” region (NL-Be-Lux-Ger-Fr) Hourly price difference, €/MWh Results Historically Simulated coupling 15% 19% 24% 33% 35% 38% 14% 12% 3% 2% 19% ∆P >10 € 3% ∆P 1-10 € ∆P <1 € Equal price “copper plate” 58% 56% 52% 68% 66% 54% 9% 9% 9% Fr-Nl Fr-Ge Nl-Ge Fr-Nl Fr-Ge Nl-Ge * by APX ** simple daily ATC capacities like used in the explicit auctions (not flow-based)

  12. European copper plate is possible Utilize existing transport capacity Integrated market Better index, better liquidity, reduced market power Better basis for financial market and investments Conclusions market coupling • Market Coupling is proven solution, yields: • Better use of transmission capacity • Im/exports always in right direction • Removal of im/export barriers • Prices converge when there is no constraint: “copper plate” • More market parties, better liquidity, reduction of market power in the bigger area • Creation of NW-European market • European market perspective

  13. Market transparency • Report EC competition highlights market information • Information on availability of power plants: scheduled maintenance and (non-scheduled) unavailability • May have high impact on (spot) market price  derivatives • Information held by parties having generation assets • Transparency important for new entrants, financial market parties

  14. Supply curve offers Demand curve bids price Transparency regarding price calculation on the spot markets Publication bids/offers (anonymous): important for index used for futures APX web site example

  15. Publication of power plant availability UK, Nordic (Regulated) • Complete • Accurate • Compliance • Sanctions Continental Europe (Voluntary) • Growth model • Accuracy issues • No strict compliance • No sanctions • Compliance is needed for accuracy of data • Important role for regulator • Important for financial market and investments Regulated Voluntary

  16. Carbon trading and electricity price • Strong correlation between rising prices for CO2-allowances and rising electricity prices since the beginning of 2005* • The strong price increase in e.g. the German market during 2005 on can be explained exclusively by taking into account the effect of CO2* • After decrease of carbon price, power prices dropped too • Huge movements in carbon prices after publishing of carbon data • Uncertainties * Source: VIK-Opinion on the Preliminary Findings of the Energy Sector Inquiry (VIK, April 2006)

  17. Needs of the carbon market Achievements • CO2-driven market • Recognition • Reductions Shortfalls • National bias • Market distortions • Contribution to power price volatility • Publication issues • Political uncertainty • Lower liquidity in long-term contracts (forwards) • Effect on investments Currently: carbon market not supervised by regulators (both financial and energy) Needed: • Harmonization • Transparency rules • Regulation • Political stability • Role of regulators in carbon market needed • Important for long-term markets, investments

  18. Better prices Better efficiency Economic results Investment climate Security of supply Effort in market structure / market quality Summary Huge potential for structural improvement in the power market • Better use of existing infrastructure: market coupling • European “copper plate” • Better efficiency, better economic results • Better market liquidity, better price index, reduction of market power • Transparency: compliant publication of generation availability • Better role for financial parties and new entrants • More liquid and reliable daily prices • Regulation of the carbon market • Decrease of uncertainties • Better liquidity in the forward markets

  19. A VITAL LINK IN ENERGY TRADINGb.denouden@apxgroup.com

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