Energy Risk Awards 2016
Europe's power sector is in the throes of a wrenching transformation as it weans itself off fossil fuels. Germany, where the term Energiewende or ‘energy transition' was coined to describe the shift, has built 72 gigawatts (GW) of wind and solar power, comprising nearly 40% of the country's total generation capacity. Such huge investments have raised concerns about the security of power supplies because of the intermittency of wind and solar power.
Intermittency is also a problem for developers of renewable energy projects, because uncertain cashflows can undermine their ability to raise financing. Moreover, some European countries, such as Germany and Spain, are starting to shy away from subsidies and price guarantees, leaving new projects exposed to the open market.
All of this has created demand for products that allow buyers and sellers of renewable energy to manage the volumetric and price risks of wind and solar power. Several years ago, such clients might have reached out to a bank, but now that many financial institutions have exited European power, renewable energy firms and utilities are increasingly turning to non-bank players such as Engie Global Markets (EGM), the trading arm of French power and gas giant Engie.
"We see the role of Engie Global Markets as addressing this issue," says Mark Konijnenberg, the Paris-based head of origination at EGM, which until March was known as GDF Suez Trading.
As a huge physical player with counterparties across Europe, EGM is uniquely positioned to help firms manage renewable-related risks, says Konijnenberg. For owners and developers of renewable energy projects, "we offer to be off-takers, to buy their production, securing the volume risk of their production in the market", he explains.
EGM can offset its position in the market with fixed sales contracts, often complementing these with Engie generation or other supply bought in the market. The unit then hedges the price risk, relying on the depth of its trading operations. In 2015, EGM traded 1,250 terrawatt-hours of power.
Konijnenberg says these are long-term, customised transactions that do not lend themselves to easy standardisation. Still, EGM was able to replicate them, closing several such deals last year.
Although EGM is the in-house trading and hedging unit of Engie, it has developed its own client franchise and does much more than serve its parent company. Unusually for a subsidiary of a European utility, EGM is registered in France as an investment service provider and regulated by the country's banking authorities. This, along with the backing of Engie's strong credit rating, enhances EGM's ability to provide its clients with a range of credit and risk management solutions. Customers range from major utilities to many of the smaller, independent entities that have emerged to develop renewable power projects in Europe and beyond.
"As the financially regulated trading platform of a global energy player, our business model is unique and allows us to provide risk management, asset-backed trading and risk-warehousing services globally," says Konijnenberg.
EGM is active in 40 countries, overseen from trading floors in Paris, Rome, Brussels and Singapore. It established its platform in Singapore in 2012 and began trading power derivatives there and in Australia and New Zealand in 2015. Looking ahead, the unit plans to use Singapore as a base for expansion into Japan to serve that country's liberalising market. Next year, EGM plans to enter India's power market, says Konijnenberg.
Since 2013, EGM has used its historic base in Western Europe to expand eastward. Last year the unit boosted its power and natural gas activities in the region, developing new businesses in Slovenia, Hungary, Romania and Bulgaria.
One client in the region praises EGM for its customer service. "The key is the personal contact and quick and simple procedures that are effective," says a finance manager at an Eastern European power company. "Smart and kind people make co-operation much easier."
Another recent effort at EGM, which also touches on the Energiewende, is the build-out of its demand-response portfolio. The unit has agreements with counterparties that are willing to curtail their energy use for a price. As in an options trade, the counterparties can receive an upfront premium to allow them to monetise the value embedded in their portfolio. "It acts like the inverse of a virtual power plant," says Konijnenberg.
Such products illustrate EGM's innovative and client-oriented approach, he says, adding: "It is also an indication of how the business is evolving. Along with asset optimisation and market risk management, EGM puts a strong focus on delivering services fully in line with clients' changing needs."