CEE Energy Trading – The Land of Big Opportunities (and Even Bigger Challenges)

The Central and Eastern European energy trading is an interesting, fast-maturing market.
Published: Mon 27 Apr 2015

Electricity and gas trading did not develop in parallel in Central and Eastern Europe (CEE): electricity was liberalized first (late 1990s), and gas only followed recently.

While the CEE electricity markets have matured significantly during the last few years, gas trading is currently offering the best opportunities in the region. Cross-border arbitrage, importing gas from CEE to Ukraine and booking gas storages are examples.

This is according to Jozsef Balogh, senior business developer at Axpo , who will be speaking at ETCSEE2015.

Opportunities in CEE energy trading come with challenges. Balogh highlights two problem areas:

  1. Administrative and regulatory barriers to trading still exist in the CEE. For example, licensing for wholesale only energy traders (i.e. no sale to final customers) should have been abolished a long time ago; and

  2. Data publication remains an issue. Electricity and gas grid companies have (or should have) online data about generation, demand, cross-border flows, etc. “However, some of this data is not made available to traders at all, while other data is published ex post only. There is no logical explanation for withholding information from traders,” he argues.

Ukrainian cross-border energy trading

The history of cross-border electricity trading in Ukraine could be divided into three sub-periods:

The first stage was the so-called Political Monopoly (until 2009): few, politically appointed "traders" were exporting Ukrainian electricity to CEE. This was the period of no-transparency, friends-only business.

Cross-border auctions were introduced in 2009. One single entity took control of the Ukrainian export business and hence the area of Practical Monopoly started (2009-2014). This company owned coal mines and generators: the Practical Monopoly reflected this vertical value change. Compared to the 'Political Monopoly', this was a great improvement: some transparency was introduced and competition was de iure possible.

Finally, from 2014 onwards, we have the period of Zigzag' Regulation. The intention, on paper, is to increase transparency in cross-border electricity trading. "Reality is slightly different, though," Balogh notes. For example, cross-border auction procedures have changed very little during the last six years; and also important price regulatory decisions are announced only two to three days before the start of the new regulatory period.

According to Balogh, Ukrainian electricity exports will remain a price driver in the CEE region: “Whether Ukraine defaults or not, it is important to maintain the Ukraine to Hungary electricity flow. Traders and regulators must work together to keep Ukraine exporting electricity to CEE.”

Balogh adds that the CEE to Ukraine gas business got off the ground only in 2013, yet there are great opportunities in this sector. He is quick to note that the gas export business is politically over-charged and there are some administrative challenges. "Compared to an EFET confirmation, managing a Ukrainian gas contract takes more time and more back-office resources. The Gas Market Law was passed in mid-April 2015 and this should help to bring Ukrainian gas trading standards in line with EFET."

Balogh will be discussing in detail the story behind Ukrainian cross-border energy trading in his presentation at ETCSEE2015.

Pressing topics to discuss at ETCSEE2015

Balogh says there are many important topics that need to be addressed at the event. He lists these as follows:

  • Comparative analysis of gas storage costs in CEE. What is the actual cost of storage in the various CEE countries? How many contract(s) a trader needs to store gas? And how many local companies (gas grid, gas storage company, etc.) are involved?

  • Cross-border trading of green certificates. “This is a grey (as opposed to green) area." Balogh notes. Is it possible to transfer green certificates issued in one CEE EU country to another? If yes, what is the procedure and which bodies are in charge? Will a regional green certificate market emerge in CEE?

  • Credit support for heating plants. “Central heating is big business in CEE. For example, Warsaw has one of the biggest central heating networks in Europe." Heat is usually generated from gas; yet some heating plants are not credit-worthy. This was not an issue before the days of liberalization: state owned gas companies sold gas to state/municipality owned heating plants. Credit standing is a big challenge now. How could heating plants be restructured into credit-worthy (virtual or real) entities? What credit supports, if any, are available from the local/national governments, banks, etc