IPE pulls ‘premature’ power contract

London’s International Petroleum Exchange (IPE) has suspended trading on its electricity futures contract. The instrument, which has traded only 70 lots since its launch in March last year and nothing since the five lots it traded in January, has generally been regarded as a risky venture.

But the exchange said it is hopeful of reviving its contract. “We are looking at redesigning the contract, but what form it will take is as yet undecided,” said an IPE spokeswoman.

The news came as no real bombshell for one London-based UK power broker: “It’s no surprise that they stopped it,” he said. “I looked at it when the contract opened but basically forgot about it pretty soon afterwards, like many other people in the market.”

The new contract was launched alongside the UK’s New Electricity Trading Arrangements, and some critics felt the IPE may have been too hasty in bringing such a product to market. “I think they should have waited a little longer to see how the market would work out. They had waited so long and wanted to get something out there,” said the broker. The same source also suggested most of the volume is still in the over-the-counter (OTC) market and traded through brokers.

The IPE spokeswoman conceded the timing of the contract may not have been right: “Futures generally aren’t trading in the market,” she said. “For a good futures market you need a strong OTC market, and we didn’t have that. The contract was probably a bit premature.”

A trader at a London-based US trading firm agreed that the structure may have been flawed. “The problem with this contract is that it was trying to mimic the forwards,” he said. “While it was a brave attempt to get a contract out from day one, it didn’t suit the market’s requirements, so we’ve been looking at forwards. Also, the commission and clearing fees were very high.”

The IPE plans to move its trading onto electronic platforms by the end of the year, following its takeover by the IntercontinentalExchange. A new version of the electricity futures contract could be launched then, said the IPE spokeswoman.