APX Group:gas and electricity exchanges

European electricity market: Improvement potential in market

structure and quality

Bert Den OudenCEO, APX Group

EPFSF Annual conference 15 May 2007

APX Group:gas and electricity exchanges

NBP

APXUK

Bel-pex

APX

APX Gas NL (TTF) APX Power NL APX Gas UK (NBP) APX Power UK APX ZEE (Zeebrugge HUB) Market Coupling together with

other exchanges

ZEE

TTF

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)

Overview of APX Group activities

Development of APX Group Membersper Market, 1999 to March 2007

21 31 36 36 38 40 41 48 5127 34 36 36 41

51 54

2739

46 52 54 54 5867 705

8

9 11

1115

1920

0

100

200

1999 2000 2001 2002 2003 2004 2005 2006 2007

Num

ber o

f Mem

bers

Power NLPower UKGas UKGas Zee Gas NL

www.apxgroup.com

European electricity marketAchievements 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 ?

Transport limitationIntegrated market

Some available solutions

Infrastructure Build more capacity….

and/or Make better use of

existing capacity! Market Coupling

Market organization Transparency Carbon market

regulation

Market Coupling Netherlands-Belgium-France

RTE

Elia

TenneT

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

1. APX

Powernext

2. APX

Belpex

Powernext

APX

Belpex

Powernext

Utilis a t io n % B e lg ia n-D utc h bo rde r10 - d ay mo v ing ave rag e

0%10%20%30%40%50%60%70%80%90%

100%

10 Nov 10 Dec 9 Jan 8 Feb

Average border utilization

Full utilisation time

Achievements of market coupling:utilisation of transmission

market coupling 22 Nov 06

Upper graph: Average utilization as % of available30 60% after MC

Lower graph: time-percentage of full usage0 25% after MC

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

Daily average prices for TLC countries

0

20

40

60

80

100

120

Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07Date

Price (Euros/MWh)

PowernextBelpexAPX

Achievements of market coupling: integration of price areas

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%

6% 73%:“Copper plate”

100% of time

Old situation

Shown are the data for January 2007Percentages vary each month

19%

Achievements of market coupling: Price difference Netherlands-France

68% ∆P=0Equal price

“copper plate”

8% ∆P < 1 €

4% ∆P < 1 €

51% ∆P 1..10€

19% ∆P 1..10€ 40% ∆P > 10 €

9% ∆P > 10 €

Before Market CouplingWinter 2006

After Market CouplingWinter 2007

∆P >10 €∆P 1-10 € ∆P <1 €

Equal price “copper plate”

Hourly price difference, €/MWh

Price convergence simulation for coupling in “Pentalateral” region (NL-Be-Lux-Ger-Fr)

Results Historically

9% 9% 9%

56% 52% 58%

35% 38% 33%

Fr-Nl Fr-Ge Nl-Ge

68%54%

66%

3%

3%

2%

14%

19%12%

15%24% 19%

Fr-Nl Fr-Ge Nl-Ge

Simulated coupling

* by APX ** simple daily ATC capacities like used in the explicit auctions (not flow-based)

∆P >10 €∆P 1-10 € ∆P <1 €

Equal price “copper plate”

Hourly price difference, €/MWh

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

European copper plate is possibleUtilize existing transport capacityIntegrated marketBetter index, better liquidity, reduced market powerBetter basis for financial market and investments

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

Transparency regarding price calculation on the spot markets

Supply curve offers

Demand curve bids price

Publication bids/offers (anonymous): important for index used for futuresAPX web site example

Publication of power plant availabilityUK, 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 investmentsRegulatedVoluntary

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*

* Source: VIK-Opinion on the Preliminary Findings of the Energy Sector Inquiry (VIK, April 2006)

After decrease of carbon price, power prices dropped too

Huge movements in carbon prices after publishing of carbon data

Uncertainties

Needs of the carbon marketAchievements 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

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

Effort in market structure / market quality

Better pricesBetter efficiencyEconomic results Investment climateSecurity of supply

A VITAL LINK IN ENERGY TRADING

[email protected]

APX Group:gas and electricity exchanges

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