www.eex-group.com 07.03.2017

Hedging in the European Energy Markets

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1.EEX Group

2.Why do consumers in the European energy markets hedge? Example of a power retailer

3.Why to producers in the European energy markets hedge? Example of a utility

4.Conclusion

Overview

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The markets of EEX Group

3

Exchange tradingTrade Registration/ Clearing

German, French, Dutch, Belgian, UK & Italian Natural Gas

Power spot markets in Germany, France, Austria, Switzerland, Belgium, the UK and the Netherlands

Austrian Natural Gas

Danish Natural Gas

Clearing for partner exchanges

EEX group companies and partner exchanges

European Power Futures & Options; GoOs; Emissions; Coal; Oil; Agricultural; Freight;

Energy Power Natural Gas Coal Oil price formulas

Environ-mentals

Emission Allowances Guarantees of Origin

Freight Dry Bulk Freight Container Freight

Industrial Metals

Iron Ore Steel Scrap Metal

Agri-culturals

Fertilisers Dairy Potatoes Meat

Product overview Markets

Czech, Slovakian, Hungarian, Romanian,

Polish PowerCzech Natural Gas

Hungarian Power

Serbian Power Spot

Freight; Fertilizer; Fuel Oil, Steel;

Iron Ore

Pulp and Recovered Paper Futures

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EEX at a glance

The European Energy Exchange develops, operates and connects secure, liquid and transparent markets for energy and related products.

EEX is a regulated market according to the German Exchange Act and is supervised by state authorities

EEX is the majority shareholder of Paris based EPEX Spot SE which operates the spot market for power delivery in Germany, France, Austria and Switzerland

Furthermore, EEX organizes trading markets for natural gas, emission allowances, coal, guarantees of origin, freight as well as agricultural products

Clearing and settlement of all transactions is done by European Commodity Clearing AG (ECC), the clearing house of EEX and its partner exchanges.

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Market Growth

0

20.000

40.000

60.000

80.000

100.000

120.000

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

2015 2016

Number of contracts Number of traded contracts for Phelix Futures (Exchange + TR)

Days Weeks Months Quarters Years

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1.EEX Group

2.Why do consumers in the European energy markets hedge? Example of a power retailer

3.Why to producers in the European energy markets hedge? Example of a utility

4.Conclusion

6© 2016

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Definitions

• Spot transaction:  Agreement today to buy/sell commodity immediately

• Forward transaction: Agreement today to buy/sell commodity at a predetermined price at a predetermined time in the future

• Swap transaction:  Agreement today to buy/sell commodity at a predetermined fixed price over a predetermined period of time.  (Often financial)

• Option: pay a small fee today (a “premium”) for the right (but not the obligation) to buy/sell a commodity at a predetermined price at a predetermined point in the future

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Forward vs Future

• Both are standardised contracts – specific quality/quantity/location

• A future is a standard contract traded through an exchange (e.g. Nymex, LME, IPE, CBOT)

• A forward is an “over the counter” instrument (OTC) (i.e. not traded on an exchange)

• An exchange has a trade‐clearing system and “margining” (manages credit risk)

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Consumer Risk Profiles

Hours in the day0 24

Capacity in M

W

Spring

Capacity in M

W

Summer WinterAutumn

Daily Load Profile: 50% swing (up or down)

Seasonal Load Profile: 30% swing

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Retailer Hedging

Power

Fixed price

PHELIX index

Market CustomerRetailer

Power

• Retailer buys at index in the spot market, ie every hour has a different price• Retailer has to sell at fixed price in the retail power market because consumers to not 

accept floating prices• Retailer has a fixed vs floating exposure: if his floating “buy prices” increased above is 

fixed “sell price” the retailer operates at a loss.• Daily risk where the daily demand can vary by 70% and seasonal risk as the seasonal risk 

can vary by 30%• Do I only by spot? What happens if the market spikes? What if I sign on customers now for 

in 4 weeks time and the spot prices increases steadily because of less supply?

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Retailer Hedging

Power

Fixed price

PHELIX index

Market CustomerRetailer

Power

EEX

Fixed pricePHELIX

index

• Retailer pays fixed price for 4 quarterly futures contracts to EEX and receives the daily spot price for the physical market

• Retailer has hedged their index vs floating and their seasonal volume risk. They can hedge the daily volume risk closer to delivery

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1.EEX Group

2.Why do consumers in the European energy markets hedge? Example of a power retailer

3.Why to producers in the European energy markets hedge? Example of a utility

4.Conclusion

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Overview

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Utility Hedging

Hours in the day0 24

Capacity in M

W

Spring

Capacity in M

W

Summer WinterAutumn

Daily Load Profile: 50% swing (up or down)

Seasonal Load Profile: 30% swing

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The risk exposure of a utility or generator is far more complex

• Generator needs to buy fuel (gas, coal, pellets, uranium etc) to generate electricity

• Buys at different times to when they sell electricity• Might have to buy at gas spot market index and sell at 

electricity market index in the spot, very volatile markets, no certainty or margin or cash flows

Gas Generator

UK electricity index

UK Electricity Market

e‐

Gas Market

Gas

PEGAS

Gas Index* + £5.00

Electricity Index

*Gas Index and Electricity index need to be on same basis I.e £/MwhAgree a conversion factor (efficiency)

Gas index

A “gas only” generator: life is simple!

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Uranium

Bio Fuels

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The risk exposure of a utility or generator is far more complex

• But most utilities have 4 or more different fuel sources, sell in more than 1 electricity market with more than 1 currencies

• Multiple risks to margins and cash flows• MORE BOXES!!!

Gas Generator

UK Electricity Market

Gas Market

PEGAS

Coal

EEX

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Uranium

Bio Fuels

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The risk exposure of a utility or generator is far more complex

• Whilst there are 5 major utilities in Europe, they all hedge because they need to lock in their margins

• They give upside of lower fuel prices away in return for downside protection• Hence in the energy markets suppliers are by far the biggest hedgers in the market

Gas Generator

UK Electricity Market

Gas Market

PEGAS

Coal

EEX

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1.EEX Group

2.Why do consumers in the European energy markets hedge? Example of a power consumer

3.Why to producers in the European energy markets hedge? Example of a utility

4.Conclusion

17© 2016

Overview

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Conclusion

The European energy market has developed into a liquid financial and physical market where market participants can hedge their exposure.

The market was initially started by consumers because they wanted price transparency and choice.

Today, generators/suppliers of energy products are by far the largest users of the market to de-risk their business.

Liquid commodity markets attract financial investors and traders which in turn provide more liquidity. More liquidity always reduces the cost of trading therefore the cost of hedging.

A liquid commodity market is therefore in the interest of both consumers and producers of that particular commodity