Looking to the east

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Electricity trading entities in the 10 new European Union countries (see map)are looking to boost potential power volumes both at home and in other, moreestablished markets. The Czech Republic, Slovenia and Poland all have eitherexchanges or market operators seeking to increase electricity trading volumes,while Romania, which hopes to join the EU in 2007, has also had a competitivewholesale market since September 2000.

As in any new energy markets, these organisations must compete with bilateralcontracts and established exchanges – particularly Austrian energy exchangeEXAA and Germany’s European Energy Exchange (EEX). To achieve sufficientliquidity, the Slovenian and Czech power market operators are both making movestowards building up regional energy markets encompassing several countries, amongother efforts (see box, page 51). One big obstacle is that they will have tolure the many big state-owned companies away from their routine practice of buyinglong-term power supply contracts.

Nonetheless, the potential volumes are certainly there, says Stefan Niessen,head of corporate communications at the EEX in Leipzig, the biggest Europeanelectricity exchange in terms of traded power volumes after Oslo-based Nord Pool.Of the 117 EEX participants, only one direct participant on the exchange is basedin one of the 10 new EU states: Holding Slovenske Elektrarne, Slovenia’sbiggest electricity supplier. The company joined in November 2003, before theEU expansion, says Niessen.

Other companies from the accession countries also trade on EEX, but either throughaffiliates based in western Europe – mostly in Germany – or via currentexchange members that act as intermediaries, he adds. “There are at leastcompanies from Poland, Czech Republic, Hungary and Yugoslavia active on EEX inthis way,” says Niessen.

The exchange would seem well placed to expand its business in eastern Europe,he adds. “From a geographical point of view it would be very natural tosee market participants from our eastern neighbours,” says Niessen. “Howeverthe number of potential participants is perhaps not so big, because in many ofthe new EU states there is just one former-monopoly company, and often the regionalsuppliers have been bought by western European utilities that are already activein our market.

“But one thing is clear: in the new member countries the trend can only go inthe direction of more liberalisation, and this means more market participants,” hesays.

System operators and exchanges within the new member states expect to increasetheir share of the traded market. For example, the Czech electricity market operator,OTE, only has a 1% share (480 gigawatt hours (GWh)) of the total traded electricityin the country. Like the Slovenian market operator, Borzen, OTE only offers spotand day-ahead contracts, because there is insufficient liquidity for futuresor forwards.

Liquidity lacking
Indeed, lack of liquidity is the main obstacle to the development of the eastern European markets. Not only is a critical mass of spot trading volumes needed if exchanges are to be able to publish realistic prices for futures or forward contracts, but also if they are to offer other services, such as clearing.

Damjan Stanek, director at Borzen in Ljubljana, says: “We only trade spot electricity at the moment – we’ll need more liquidity before we trade futures and forwards. The power exchange clears its own contracts. With regard to clearing over-the-counter contracts, we carried out market analysis last year and concluded that more liquidity is needed.” Last year, Borzen’s share of the traded market was 3% of overall power consumption.

One problem with attracting participants, says Stanek, is that the big state-owned companies tend to buy big yearly contracts from large incumbents. “What’s more,” he adds, “big state-owned companies are less likely to need clearing services – there is little risk with such firms.”

Ludwig Niessen, a director at EXAA, the Austrian energy exchange, makes a similar point. “We have had plans to offer clearing, but the risk management procedures and facilities of members are already very sophisticated.”

Even EXAA, a well-established exchange, finds it difficult to achieve strong enough liquidity to guarantee fair and accurate price calculations for a futures market, says Niessen. Indeed, the exchange has not started one as yet. It is the fifth largest power exchange in Europe in terms of volumes – after Nord Pool, EEX, Paris-based Powernext and APX in Amsterdam – but only trades 5 GWh a day, a fifth of that of its nearest rival, APX.

Yet EXAA is seeing strong growth this year – first-quarter volumes in 2004 (642 GWh) were more than double those of the same period in 2003 (287 GWh), and much of this growth has come from participants outside Austria. Nineteen of the exchange’s 28 members are foreign companies, and they trade 64% of its volumes.

MVM-Adwest, the Austrian subsidiary of Hungarian power wholesaler MVM, was the most recent member to join EXAA – it started trading in mid-June. And EXAA aims to gain more new participants both from the new EU countries and from other countries, particularly southeastern countries such as formerYugoslavia.

Regional markets
As for the accession markets, some plan to attract liquidity by developing regional markets covering several countries. EEX’s Niessen says: “Markets that comprise several countries have a greater chance to develop the critical mass of natural liquidity – therefore, such regional cooperation would clearly be a good thing for further development of a liberalised European electricity market. The ideal solution would be a cooperation of local spot markets that use the same trading and clearing infrastructure, due to the synergies involved.”

A central European regional power market certainly seems to be emerging, which could – given its size and geological situation – compete with the German market, , says a senior trader at a major energy company who asked not to be named.

Both the Czech Republic and Slovenian market operators are looking at establishing international markets. Borzen’s Stanek says the Slovenian exchange is looking eventually to develop a southeast European trading market covering power and other energy commodities. “Our plan is to create a Balkan market, as is supported by the Athens Process1,” he says. “There is no congestion between former Yugoslavian countries, so a single price zone is possible. We have received a lot of positive signals in response to the suggestion,” adds Stanek. “We will have more details on this around September.”

Stanek says Borzen will have competition for business in this region, but feels the Slovenian exchange has a good chance of success. “As for EXAA, since the Slovenian and Austrian border is congested, it could be difficult for EXAA to expand southwards,” he says. “The Austrian exchange could also have difficulty competing with EEX – I see potential for consolidation there.”

And Opcom – the Romanian market initiative – is not yet operational as an exchange, adds Stanek. “It’s only a settlement agent at present. There could be a place for both a Romanian and Slovenian exchange in the southeast region, or possibly they will cooperate to run different functions of the market,” he says.

Meanwhile, Czech market operator OTE has started talks with the Slovak grid operator, Slovak traders, government officials and banks about launching a joint day-ahead market for the Czech and Slovak Republics. OTE hopes to make this a “simple and cheap” trading reality by January 1, 2005, and it would mark the first step towards a regional electricity market, building on what was once a unified Czechoslovak grid.

Both markets would benefit from a common market, as Slovakia has no spot power trading, and OTE is struggling to trade more than 1% of national electricity consumption. OTE chief executive Miroslav Marvan says he does not expect a true regional market, incorporating Poland and Hungary, to develop for at least two or three years.

Cross-border issues
Yet if regional markets are to succeed, cross-border trading issues will have to be ironed out among the new member states. It is not all that simple for companies to engage in cross-border trading, even between countries within the EU, says the senior trader.

Before the EU expansion, cross-border trading was done via local auctions – contracts were negotiated bilaterally by local companies. But post-May 1, market players must participate in a transparent auction – yet these auctions do not seem to work too well, says the trader, underlying legal and regulatory rules are not perfect and do not create a trader-friendly environment. One way of remedying this is to derive a contract price for the relevant region from the German market price, he adds. German prices seem to have a fairly close correlation with those on other markets.

Moreover, for a foreign company to trade on a local market, it should have a branch based in the country it wants to trade in, even though such a requirement is contrary to EU law, says the trader. For example, a company based in London looking to register in any new EU state would be told to set up a branch in that country, even though EU legislation prohibits such discrimination against companies from other member states.

However, the consensus is that spot markets tend to be in competition more with their own over-the-counter markets than with exchanges in other countries. Either way, as Borzen’s Stanek says, “the market will decide inthe end – we must just offer the best and cheapest service we can”.

Moves to boost trading volumes

European exchanges and system operators are making strong efforts to enhance their offerings and thereby attract more participants. Leipzig’s EEX will launch electricity options contracts in November and a daily price determination for emission certificates by the start of 2005, says head of corporate communications Stefan Niessen. Next spring, the exchange will integrate the auction and the continuous trading of the spot market on one trading and clearing platform. “There are other projects on track that we will talk about once the time has come,” says Niessen. Meanwhile, Slovenian market operator Borzen charges a lower level of fees to those trading less than three megawatts an hour (72MW daily), with the aim of bringing smaller companies on board. “We’re aiming particularly to attract more foreign members and end-users,” says Damjan Stanek, director at Borzen. “We’re doing a lot of marketing and offering seminars seeking to educate companies – particularly energy users. We are targeting mainly companies from Italy, Switzerland and the Balkans.” Elsewhere, the Austrian energy exchange, EXAA, gained liquidity from the abolition of cross-border transmission fees at the start of this year, supporting the country’s energy market liberalisation, says chief executive Ludwig Niessen. The European Transmission System Operators organisation had previously had charged a cross-border transmission fee of E1/MW between Germany and Austria and all other control areas – a big charge, he says. “So there were systematic price differences between control areas, even though there was no physical congestion between them,” says Niessen. “But now the price can harmonise between Germany and Austria to an extent.”