Preserving and Refining the Best Features of the European Wholesale Power Market Design

EFET recognizes the need to develop, harmonise and unify the European electricity and gas market.
Published: Wed 24 Sep 2014

The European Federation of Energy Traders (EFET) is well known throughout the European energy industry, government energy policy circles, in Brussels’ energy regulatory services and national energy regulatory circles.

EFET was established at about the same time as EMART Energy in 1999 which happened to coincide with the commencement of the liberalization of the European electricity and gas sectors.

The existence of EFET and the organisation of EMART Energy have gone hand in hand right from the beginning and both were conceived to serve the needs of energy traders and principally, electricity and gas traders.

It is this close partnership that prompted Engerati to contact Peter Styles who is a member of the EFET Board and Chairman of the EFET Electricity Committee, for an exclusive interview. Styles plays an important role in the development of the EMART Energy conference programme, putting together key note topics and power trading sessions.

Energy trading – facing up to the challenges

First and foremost, we wanted to get Styles’ take on the challenges that energy traders face today and how these can be overcome.

He says that the challenges, faced by the electricity and gas traders in the current period over the last few years, have been the subject of an in-depth brainstorming by the EFET board in August. “Board members view the challenges as relating to now defending what has been achieved in Europe over the last 15 years, as well as, moving on with the development of the internal electricity and gas markets in the European Union. So, we don’t like to think of ourselves as being on the defensive. Rather, we are obliged to defend what has been achieved already.”

There are three main challenges, according to Styles:

 

  1. The accommodation of renewable electricity within the overall energy market. Over the last five years, there have been large volumes of renewable electricity accepted onto the networks. This energy has been delivered to consumers but without necessarily being subject to the discipline of the market and being sold through market-based mechanisms

  2. Europe faces perceived security and adequacy difficulties. In gas, the dispute between the Ukraine and Russia is perceived as a risk to energy security in Europe although physically, it may not turn out to be so. In addition, there is a perceived inadequacy of generation capacity (especially true when it comes to the intermittent nature of renewable sources). While this may not be a reality, it is a perceived inadequacy.

  3. A new wave of regulation of trading and marketplaces has in the past few years impacted commodity markets, including wholesale markets in power and gas, as much as the financial sector. This is threatening to impact on wholesale energy markets in a way in which they perhaps cannot withstand if the regulation is not well designed and proportionate.


Says Styles, “With these challenges in mind, we have to justify the needs for the market and the role of energy traders. We have to take up this challenge in the next couple of years, as well as continuing the offensive to help develop, harmonise and unify the European electricity and gas market.”

The liquidity challenge

Liquidity in gas has historically been more limited than liquidity in power. Liquidity in the periphery of Europe (particularly the southern and eastern peripheries of Europe) in both electricity and gas has always been more limited than the northern and western parts of Europe, explains Styles.

“In gas, if liquidity is viewed in terms of spot and forward markets, the forward liquidity in gas, even in the hubs like Britain and the Netherlands and elsewhere in Northwest Europe, is limited when you go more than three to six months out.”

Similarly in electricity, there has been an expansion in exchange based spot trading with the advent of more widespread market coupling. This linking of national and regional markets in the day-ahead timeframe via power exchanges has tended to increase spot liquidity throughout western Europe. It has certainly made new market entry simpler.

When it comes to forwards and futures in electricity, the liquidity of forward markets remains limited in some regions. Forward liquidity in southern and eastern Europe is poor and work must be carried out on the application of the target model for market design in those regions and countries, as well as defending the liquidity that has been attained already, explains Styles.

“While the market is not on the bridge of catastrophe, we don’t think the situation is great. The progress on the harmonization of markets has slowed and we have to meet these challenges. We must defend what we have and we know we need to explain the need for proper functioning of the market. Perhaps this must be done more carefully and more fundamentally going forward.”

Accommodating flexibility in the market structure

There is a definite need to create a market model design in European wholesale electricity that will value flexibility and accommodate flexible sources, especially accommodating them nearer to real time.

Says Styles, “There are now large volumes of renewable sources of power and the widespread involvement of demand sources in the peak market. There is an evolution of forward products and futures on exchanges.”

He adds, “Increasingly, the day-ahead trading of peak and base load profiles is actually not enough on its own to enable market participants and especially new types of market participants such as aggregators and large consumers to bring their power to market in a way in which realizes value and allows them to keep their generation capacity open or to get value from their demand source.”

In response to this, EFET wants to discuss the prospects for more liquid intraday markets in electricity at the conference and will be looking at prospects for more harmonized and accessible balancing markets across Europe in the period near to real time. “We are going to look at the types of contracts that TSOs procure to help them balance the system which may be called upon close to real time. We are also going to look at demand side management and the more general inclusion of more flexible sources in the market near to real time. These products and market places and the product trading may need to change over time so this is partly a design, partly a policy, partly a regulatory question.”

In conclusion

“I look forward to conversations with people who are actually in the centre of the market ie. traders, power sector analysts, the logistics people, and the people who are working on real contracts. This is so that those of us who are are more involved in the work in Brussels that EFET does and more involved perhaps in big questions in market design and European level discussions can learn more about what companies are doing. We want to know what issues traders are facing, how transactions are being adapted, and what the latest trends and concerns are. It is more about learning from eachother. Listening will be key – this cannot be emphasised enough.”