June 29, 2010 / 12:36 PM / 9 years ago

FACTBOX-Germany: the hub of Europe's electricity

 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.
 
 LOCATION
 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.

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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.
 
 DERIVATIVES
 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.
 
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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.
 
 PROBLEMS
 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)

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