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Introduction to EFET

Introduction to EFET. Represents around 120 energy trading companies, operating in 26 countries Main activities include: Promotion of Wholesale Energy Trading through advocacy with European Institution and national Governments

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Introduction to EFET

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  1. Introduction to EFET • Represents around 120 energy trading companies, operating in 26 countries • Main activities include: • Promotion of Wholesale Energy Trading through advocacy with European Institution and national Governments • Promoting Legal standard documentation for physical OTC market (www.efet.org) • -www.efetnet.org, service company operating the EFET-standard, IT-standardisation and electronic reporting service (eRR) • -EFET Academy and Education European Federation of Energy Traders (EFET)

  2. The vision of Europe’s energy traders EFET Vision We foresee sustainable energy markets throughout Europe, in which traders efficiently intermediate in the value chain on the basis of clear wholesale price signals,  thereby optimising supply and demand and enhancing security of supply, to the overall long-term benefit of the economy and of society.

  3. Overview • Value of the wholesale market? • Exchange based gas-trade vs.OTC-Trading • Formation of Markets • Gas-Trading at Physical and Virtual Hubs • Germany: Gas Market and Fundamentals • What are the consitions for building a market? • Secondary Capacity Markets • Current EU Issues • Lessons Learned & Challenges for TR Market The European Federation of Energy Traders (EFET)

  4. Nuclear Coal Gas Oil Mix Hydraulic Wind European Energy Mix

  5. Why is the wholesale market important? (I) • For electricity: • Supply = Demand at all times • Limited storage (pump storage in CH and N) • Trading optimizes supply according to the location and time of demand and creates a wholesale-tier • Cross-border wholesale transactions help efficient price finding over regional area • Seasonal variations in availability of production sources reflected in efficient peak-pricing • For natural gas (specific): • Storage is game changer for planning cost/supply • Trading enables optimatisation of LT Agreements

  6. Why is the wholesale market important? (II) • Thus trading can optimize the market by creating: • Efficiencies across regions and countries • Efficiencies between fuels used in generation • (gas, coal, hydro, nuclear, wind, etc.) • Efficiencies by virtue of play of inter-related products(e.g. weather derivatives; emission allowances; transmission rights) • Efficiencies through financial markets and derivatives • Efficiencies stimulated by price signals of new products

  7. fully integrated energy company „old world“ „new world“ Generation Trading Sales Distribution Transport Market regulated Grid Market Power Exchange OTC (Broker/bilateral) Liberalisation: Formation of markets • Consumer has free choice of supplier • Supplier can supply consumers outside their supply area • Development of Markets to organize and match these

  8. Trading on an Exchange ADVANTAGES • Fewer contractual relationships • No credit-risk through Clearing • No performance-risk • Guarantee & margin needed only by central counterparty • Simplified invoicing & admin • High degree of automasation and standardisation

  9. Freedom to engage in OTC transactions restricted … DISADVANTAGES • Trading Fees • Inflexibility • Lack of competition • Complexity in rules • Only Standard Products traded • Financial Regulation

  10. Exchange Traded Products • Physical OTC-Market First • OTC markets should develop first as bi-lateral trading exposures create the market for financial hedging products which are traditionally mirroring physical gas products, or cater for specific delivery risks • Financial (Exchange Traded Markets ) Next • OTC-Markets at Exchange markets complement eachother, • market participants use advantages from both systems

  11. Characteristics: Exchange vs. OTC Exchange OTC Auction Continuous Trading direct contact Voice-Broker Broker-Platform Spot Market Futures Market Spot Market Forward Market physical settlement financial settlement physical settlement financial settlement Spot Market Futures Market  interdependency between Spot and Term Markets: e.g. EEX & NP Futures contracts are settled on the basis of the spot market prices

  12. Competition between trading platforms ENERGY TRADERS TRADING PLATFORMS TRANSACTIONS

  13. Germany: European Gas-Wheel • Central geographical situation • Big gas-market supporting the largest economy in Europe (No. 4 world-wide) • Multiple access & long-term supply from Russia, Norway, Netherlands • State-of-The Art Infrastructure • High Transit-volume (EastWest) • Biggest Storage capacity in Europe • Experience with Power Liberalisation as Reference for Gas Market Liberalisation • Banks active in Energy Markets offering Financial Products

  14. Germany: Initial Problems • 1996: Energy Act provided for gradual market opening • Fully vertically integrated structure of gas importer and regional distributors represented efficient market barrier for any newcomers • Complete Lack of Transparency of Supply/Import Prices • Anti-competitive behavior of incumbent companies • Territorial Approach -> No competition • Market Opening Did not immediately happen • Need to challenge incumbents in court

  15. Drivers for Change • EU Institutions declared “ destination clauses” as invalid and pursued historic incumbents • New Market Players (US) entered German market as of 2000 • Electricity Utilities started selling outside their “territory”, mergers leading to gas release • Break-Through: abandon negotiated access, unbundling, intro entry-exit system, transparent congestion management etc.

  16. Storage Germany 60% Main storage regions are: • Northern Germany (salt domes and former gas fields) • Eastern Germany • Total 20.8 bln m³ ~20% of annual German consumption 20% 2% Source: http://www.lbeg.niedersachsen.de/live/live.php?navigation_id=797&article_id=898&_psmand=4 19%

  17. Storage access regulation • Access to storage/grid is based on the Energy Act had to be provided at reasonable and non-discriminatory technical and economical conditions, if the access is technically or economically necessary for efficient system access with a view towards supplying customers. Operators have to provide transparent information on which locations are open for access and at what conditions. • Tariffs are mainly derived from historical investment and actual cost of operation or just benchmark basis and compared to narrowing summer winter spreads often in the same range seen from a trading perspective.

  18. 20% x 2 yrs Potentially available ~½yearimplementation 15% x 4 yrs 65%untouched Capacity Contracts • Initially No changes to contract framework (Entry, Exit, Balancing Account etc) • Capacity contract length at (market area and national) borders: not more than 65% beyond 4 years, 20% less than 2 years • Applicable to contracts after Gas Access Regulation was implemented • Major legal issues: revision of existing capacity contracts

  19. Characteristics mature wholesale market • Standard-Products and Standard Contracts:Base: Mo-Su: 0:00 – 24:00h Peak: Mo-Fr : 8:00 – 20:00h • Physical:Master Contract EFET • Financial: Master Contract ISDA Standardisation Example: EEX-Futures Market • multiple x consumption in DE • 5 Market Maker: continuously simultaneous bids & offers Liquidity Trading data: Prices & Volumes  PXs & Broker Fundamental data: Generation data (incl. RES)  e.g. EEX Transparency Platform; Nordpool; Grid data: transmission data  ENTSO-Vista Transparency

  20. Conditions for Developing Gas Trade • Diverse product-offering matching market-needs • Unbundling of Pipeline-Transport and Supply • Transparent and Non-discriminatory Access and Usage • Standardised Products  Liquidity • Multiple Market-Participants • Diversified Market Participant-Structure • Transparent Price-Discovery-Mechanism • Price-Volatility and reliable Price Reporting • Aceptance of price-building by Market-Participants • Credible Platform Operators & Regulatory Oversight

  21. What does a spot market do? Spot Market Functionality: • Allows short-term sale or purchase of missing amounts for nest day delivery • Allows short-term optimisation of flexible LT-Contracts or Supply-Contracts • Multiple Savings through portfolio or asset optimsation • Allows independence in supply-chain

  22. Futures-market Functionality Futures- market functionality: • Futures Market allow hedging of price risks resulting prom physical supply positions. Managment through Derivatives. Theses are Financial Instruments and are subject to regulation. Products are Forwards and Futures. • Market particpants can have different motivations and underlying drivers for becoming actice, hedging, speculationg, arbitrage takers (optimisers) etc.

  23. Example: Structured Portfolio Optimisation of a Flex Gas Supply Agreement

  24. Physical and Virtual Trading Hubs GUD NCG GUD NCG = Fixe Handelspunkte = Virtuelle Handelspunkte = Interconnector = BBL Quelle: Vortrag E-World 2008, Klaus Schüßler, novogate GmbH, Namen der Handelspunkte aktualisiert

  25. Hubs Comparison

  26. Gas-Trading HubsEarly Years Market-Liquidity: Spot Quelle: www.gaspool.de/fileadmin/download/information/GASPOOL_Kunden_Forum_2_Teil3.pdf

  27. Gas Trading LiquidityEarly Years Market-Liquiditity: Forwards Quelle: www.gaspool.de/fileadmin/download/information/GASPOOL_Kunden_Forum_2_Teil3.pdf

  28. Initial Volumes NCG-Hub – GWJ 2008/2009 2009/2010

  29. Initial Churn-rate NCG-Hub (2009/2010)

  30. Historic Market-Liquidity TTF <-> NCG * Handelsvolumen nur EGT /NCG VP bzw. TTF

  31. Secondary Capacity • Starting Point: Availabilities of Capacities is limited, Incumbent companies holding LT-capacities, independent of their actual use • In order to utilisise commercial opprtunities (example: spreads between specific VP and physical supply in different area) it is required to buy/sell capacities • The smaller the number of market-participants at VP, the more important is need to have firm capacities available  Chicken and Egg Problem

  32. Standard Trading Products • Trader is a Seller/Buyer of fixed priced standard and bespoke volumes at the UK and European Virtual Points for both Prompt and Curve products. • On the curve side prices can be quoted up to Balance of the Year + 4 years. Longer term products outside this time corridor can be looked at on an individual basis • Trader is a Seller/Buyer of monthly or seasonal shaped base products • Trader can offer a variety of virtual and physical capacity products between the various points in its capacity portfolio

  33. Contractual Standardisation = Condition For Market Development • EFET Standard Agreement enjoys market acceptance in Europe

  34. EFET General Agreement (Natural Gas)Contractual Structure General Agreement (“main body”) General Agreement (“main body”) Election Sheet Election Sheet Annexes & Appendices Individual Contract Annexes & Appendices Election Sheet Individual Contract Individual Contract Individual Contract Individual Contract priority (§ 2.2)

  35. EFET General Agreement (Natural Gas)Essential Risks Legal RISKS Operational Credit

  36. Transparent Price Discovery • Offer = price dependent, demand is not price dependent • Decision which gas to use should be based on good information of different prices for own supply (Left Column), Gas Storage Use (Central Column), or Purchase of Short-Term Gas Nachfrageszenario 2 Nachfrageszenario 1

  37. Criteriafor Positive Market Development • Any action creating market confidence within companies such as reliable price discovery, neutral price reporting, entry of new and diverse market particpants will help liquidity. A market cannot develop based on incumbent and vertically integrated stryctures as they hamber choice and flexibility. Market Confidence Entry New Players Diverse Players 1 2 4 Standard Products Standard Contracts 3 Liquidity and Choice of Products

  38. Current European Challenges • Implementing the 3rd Gas Directive • Progress in European Gas Hub Development • Achieving an EU Gas Target Model • Implementing EU Gas Network Codes

  39. EU ChallengesImplementing the 3rd Gas Directive

  40. Progress in European Gas Hub Development  Liquid gas market in NW Europe, slow progress elsewhere (Assessment based on ISIS data & LEBA reports) See EFET Guide on features of a successful Virtual Trading Point http://www.efet.org/EnergyMarkets/Gas-Position-Papers/2005-today

  41. Access across Europe is addressed

  42. Achieving an EU Gas Target Model (GTM) • GTM1 three pillars: • New issues for Gas Target Model review (GTM2): • Interaction of gas and power markets • EU-wide regulatory and political oversight • Investment signals and use of infrastructure • Retail competition • Consistency of EU Gas Network Codes

  43. Implementing EU Gas Network Codes (I)

  44. Implementing EU Gas Network Codes (II) • Gas networks should have entry/exit systems that each give direct access to a single Virtual Trading Point (VTP). • TSOs should provide real-time information on all aspects of their regulated infrastructure. • TSOs should make all entry/exit capacity available to market participants using consistent processes and consistent capacity contracts. • Underlying terms and conditions should enable market participants to have a single bundled capacity contract. • Market participants should have the right to make re-nominations at short notice to enable a rapid commercial response

  45. Implementing EU Gas Network Codes(III) • Congestion management processes should converged on a single approach • The way pipeline tariffs are set should ensure that the short-term and long-term markets are efficient and sustainable. • Interoperability and data exchange for the whole gas grid by all TSOs should, from a system user’s perspective, be as if the whole EU gas transmission network were operated by a single TSO. • Essential transitional arrangements need to be correctly identified, managed sensibly and phased out.

  46. Conclusion – EU Gas Market • Need more focus on establishing gas trading throughout Europe • EU Gas Network Codes should help, if they are written to meet the needs of market participants and are implemented consistently • Dangers of over-regulation and national fragmentation • Policy must ensure that gas is not unduly squeezed out

  47. Challenges for the Turkish Gas Market? • Accelerate the draft Gas Market Liberalisation Act • Complete the transparency initiative for TR gas market. Without liberalising the gas market, the recent electricity initiatives have no use • Achieve Gas Market Design for better Price Formation at all levels starting from the MENR all the way to the EPİAŞ-structure • Build to operate balancing market, this is usually the first point to start OTC and Liquid market. • Finalize Operational Standards • Utilize EFET-Gas-TR standard-contract; Standardise products • Develop a national balancing point (UDN) for price formation • Continue Volume Releases - BOTAŞ portfolio • Finalize BOTAŞ Unbundling Process and Open Grid Access • Learn from Experience – do not repeat Mistakes made elsewhere! • Build Confidence!

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