June 29 (Reuters) - Germany is set to become the centrepiece of an integrated European power market because of its geographical location and active derivatives trading.
"Germany is one of the largest power markets with comparably high liquidity, and in addition to that it is a transit market, which makes it even more attractive," Torsten Amelung, Managing Director and Head of Trading at Statkraft Markets in Germany told Reuters. Owned by the Norwegian state, Statkraft has around 2,000 megawatt of generation capacity in Germany
For financial traders it is the active derivatives market that makes Germany attractive.
"Germany's active forward power market makes it possible for foreign traders to use German futures as a proxy to hedge their own spot trades, or to make an outright bet on euro-based financial products," a London-based bank trader said.
Germany has nine land borders (Austria, Belgium, Czech Republic, Denmark, France, Luxembourg, Netherlands, Poland and Switzerland), and its 80 million population and GDP of over 3 trillion dollars also top the list of the European Union's 27 member states. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For an interactive map of the European Union, click here: here ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Liquidity and transit opportunities were key in boosting Germany's power market after its liberalization a decade ago.
"Power grids look like road networks, and because of its high population and industrial output, nowhere in Europe are roads more interconnected than in Germany, and it's the same with Germany's power grid," one German cross-border trader said. "On the physical market we can use the German interconnectors to direct power flows to where they are needed."
As a result, physical spot traders as far South as Italy use the German market to buy wholesale electricity, and then transport it through interconnectors with France, Switzerland or Austria into Italy. Despite the large amount of interconnectors, Amelung said current capacities were not yet sufficient, "especially with regards to the planned increase of wind power generation."
But should existing plans for more grid capacity be implemented, Amelung said it would be realistic to expect an integrated continental European power market within a few years.
While other European countries also have liquid spot markets, it is the high volumes in forward trading that make Germany's power market stand out.
Annual open interest in German power derivatives trading is around 30 billion euros, according to European Energy Exchange (EEX) data. Adding to this is a comparable amount in the more opaque bilateral trading, the so-called over-the-counter (OTC) market.
This compares to around 2 billion euros of exchange-based open interest in France, Europe's next biggest forward power market.
These market foundations have also led to the arrival of large amounts of financial traders, and today nearly 40 of EEX's roughly 200 members are from London, the heart of European finance. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a graph of EEX membership by country, please click here: here
By volume EEX, which is 10 years old this year, estimates that around 40 percent of all derivatives trading in Germany comes from financial traders.
This was the final step in making German power derivative trading attractive.
"In bringing together the buy side [financial traders] with the sell side [power generators], the German power market transformed itself from being a market for physical delivery in to one that can be used as a financial market to invest into euro denominated energy products," one London-based trader said.
Despite the successes of the past decade, most of Europe's power markets-including Germany's-remain immature.
Only the Nordic NordPool market region is considered mature, as the majority of deals here are conducted through its exchange, and generation information is provided timely and free of charge.
Because of its maturity, NordPool was used as an example by the European Commission in the late 1990s when it drove for energy market liberalisation in the rest of Europe.
In Germany, by contrast, fully covered real-time power generation is still not publicly available and there is no system in place for urgent market messages giving an indication about changes with regards to generation.
Another unsolved problem for all European power exchanges is the failure to attract other energy commodities to trade on its platforms.
NordPool, EEX, as well as Dutch-British APX-Endex, offer other energy commodities such as carbon allowances, natural gas or coal, but no power exchange has so far succeeded to attract significant business in these fields.
Carbon trading has been snatched up by specialised exchanges such as French Bluenext and London's ECX, natural gas in Europe mainly goes through the ICE in London, and coal remains largely OTC-driven.
(Reporting by Henning Gloystein, additional reporting by Vera Eckert in Frankfurt; editing by William Hardy)