Trading green energy

The rapid growth of renewables over the coming years will increase the need for PPAs and related products. 

This week we discuss what the changes mean for an energy exchange – is the difference between peak and baseload still relevant? 

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guest: 

• Peter Reitz, CEO European Energy Exchange. 

Transcript

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:05

Hello listeners and welcome to the Montel Weekly podcast, bringing you the most topical energy matters in an informal setting. And joining me, Richard Sverrisson is Peter Reitz, who's the CEO of EEX, the European. European Energy Exchange. It's a great pleasure and honor to have you here, Peter. Welcome.

Peter Reitz, CEO European Energy Exchange: 0:22

Thank you very much. Nice to be here.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:24

I thought, Peter we could start by talking about how was last year for the exchange in terms of volumes, how you evaluated, you know, the price, movement, uh, and and, and the activity. On your exchange, mainly in power and gas.

Peter Reitz, CEO European Energy Exchange: 0:38

Happy to do so. Yes. It was a fantastic year for us. Last year. It was another record year for ex group and the growth that we have seen was in basically all the markets we're active in. So this is true geographically, so we have. You know, a big power exchange in the US with Nodal exchange, and that volume grew by 80% and now we are almost 50% of the open interest of the US power market. So that's a big driver of our growth was in the us but we also entered the environmental markets in the US and now also the gas market. So that's one element. The second element is Asia. Where our exchange in Singapore has a clear focus on the freight market and we more than doubled the volume of freight contracts traded on our exchange in 2019. And there's a big movement at the end of the year because we took over the NASDAQ business in freight and are now clearly the number two with almost half of the open interest of the global freight market. So those are two elements of the Asian strategy and the US strategy that we have. But closer to home here in Europe, we also enjoyed tremendous growth, both in the power as well as the gas markets. Both actually grew by about 30% last year in power. That is true for the spot market, which grew, especially the very short end of the curve, the intraday market, double digit growth in the intraday. Volume, but especially in the power derivatives market where the main market, the German power derivatives, which is the biggest in Europe, grew by 34%. So it's really been a tremendous year. So that's a crazy picture then for you. Yes.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:32

I mean, how. If I can react to some of what you're saying about Asia, I mean, there's been a lot of focus now on the coronavirus and how that is impacting both LNG and, and oil demand. Are you seeing any impact so far at your exchange? In, in both. I, I know you, you are also active in Japan as well. You didn't quite mention, mention that, but, uh, are you seeing an impact so far from, from this outbreak?

Peter Reitz, CEO European Energy Exchange: 2:55

A little bit impact, I would say. A little bit of a slow down in the freight market, yes, we can see that. But the Japan Power offering that you mentioned will only start in May, so we haven't seen any impact on that, but that's a major initiative for us as well in 2020. To grow our Asian offering.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:15

Okay. If we stick to Europe, the exchange landscape is getting quite competitive. How will you manage to be the remain that have that competitive edge, if you like?

Peter Reitz, CEO European Energy Exchange: 3:25

Well, it's actually not a new phenomenon. It has been a very competitive landscape throughout the last years. If you look at our main product power derivatives, let's say German power derivatives, there are six exchanges where you can trade German power derivatives. But it's all about client relationship. It's about the product itself. But also the service around it. And that's where we think we have a unique offering, both with our clearing service. We have a clearing house ECC that's specialized on commodities. But also we help our clients to cope with all the regulatory burdens that are coming with trading these markets on an exchange. So, for example, we offer them reporting services so that we can take the burden away from them and do it centrally for all of our customers.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:16

I'd like to come back to that, but are you seeing some new players emerge in these markets? There was a lot of talk when the banks left in the wake of the financial crisis. Do you see them coming back? Do you see more boutique firms entering European power and gas markets?

Peter Reitz, CEO European Energy Exchange: 4:31

I would say all of the above. Okay. Yes. Yeah. The banks are coming back. Less so because they have their own proprietary trading desk, but more in the role of providing access for their institutional customers, both on the financial side as well as their industrial customers, to give them direct market access to the exchange. So that's a big movement that we've seen. The banks are coming back, but more as a facilitator rather than a risk taker in these markets. But what we're seeing in general is the market is getting much broader. We have a lot of new entrants into the market, both in the production as well as more industrials that are now demanding direct access to the exchange and don't want to go through intermediaries. So the number of participants is, has broadened. And that's always good for the price formation of an exchange.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:32

Absolutely. So the, you think you've had this growth in liquidity last year. I mean, what, what are your expectations for this year and for next year? Do you, do you, I mean, with these new players come board i i coming on board, I'd expect you to keep growing in, in these markets.

Peter Reitz, CEO European Energy Exchange: 5:46

That's what we expect. Indeed. The number of customers is one driver for that. There is another driver, which is the trend we've seen for almost eight years now of. Moving business from the OTC markets onto the exchange. That has been a major driver for our growth in the last couple of years, and I expect that to continue because some of the trends that we just discussed, for example, the broadening of participants, new participants, smaller participants entering the market, they. Definitely benefit from a central marketplace where price transparency is formed.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:24

Absolutely. And so you mentioned regulation and on the policy side, you know, there's been some talk about changes to, to the miit regulation. How do you view some of the proposals that were put. Forward by ESMA recently that wanted to change how these markets operate or the financial regulation.

Peter Reitz, CEO European Energy Exchange: 6:42

I think some of the points that are in the discussion now are very positive for the market. I take one example. The whole regime of position limits. We've always argued that some of these mechanisms work well for well established markets, but that we need different rules for new emerging products. And that is now considered in these discussion of changing the regulatory environment. And I think that will help us to create new markets and. Build new liquidity pools.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:15

Are you in dialogue with a lot of the regulators and the policy makers and do you think that, do they listen to your input?

Peter Reitz, CEO European Energy Exchange: 7:22

Yes, absolutely. I mean, we're in very close dialogue with them. Whenever there's a consultation process, we actively take part in that. And now that we have some experience in how the new regulation works and what kind of effects it has on the market. That's obviously something we share with the policy makers

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:41

Absolutely. Is to make these as liquid and as transparent as possible. You talked about some of the growth in the intraday markets. I mean, as Europe becomes decarbonized, as there's more and more renewables. Do you expect, you know, intraday volumes to exceed those of day ahead and of, of the derivatives? If there, is there still a role? I mean, there are many questions, but, uh, but I think, you know, I'm talking about the, the, the idea of the intraday market becoming more prominent, but also. You know, is, is the concept of base load and peak power, is that coming to an end?

Peter Reitz, CEO European Energy Exchange: 8:13

Indeed. A lot of questions. I'll try to address them one by one. Yeah. First of all, the importance of the intraday market is growing and the main driver for that is indeed the renewables. Because if you don't have full insight of how much you can produce, depending on when the wind comes or when the clouds come on the sun, so. Yeah, there is less predictability, which means there's a, an increased need of very short term adjustment of positions. And that is what we facilitate with the intraday market. And that's why we see double digit growth in, in that segment on the longer term, you know, derivative side of the power market. Also, the change in production mix to renewables plays an important role because what we're seeing now is that the people. Are building new capacities in renewables without subsidy. And the way to finance that is through long-term contracts, the PPAs, the power purchase agreements. But with that, people also take on counterparty risk for let's say 10 years. And that's obviously where our clearing offering has a big advantage for those who use it because we're taking over that. Delivery risk, that merchant risk and the guarantee both the payment for the 10 years and the delivery. So the clearing service is more important for the very long contracts and that's why this year we will extend our product offering to enable all the market participants to cover the whole decade. The decade just started up until now, we are offering contracts. Out to six years. So we will enable our customers to manage that risk for the whole decade, and that will start into 2020.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:10

Okay. Perfect. And if I return to the, there were, there were a lot of questions there, Peter. So there was one that I, I was interested in as well was the, the base load, uh, on the peak. You know, whether that has, you know, has had its day, if you like. Is it still relevant

Peter Reitz, CEO European Energy Exchange: 10:23

for some people? It is, but if you look at the. Overall market, less and less so. Mm. Uh, and you know, when, when the sun is shining the peaks are often actually cheaper than the base load. So depending on the market and the production mix, that is less and less relevant, but it's still a good proxy for, you know, the, the standard user profile. But I think going forward the importance of having peak contracts will. Diminish,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:54

you mentioned PPAs and they're obviously gonna be a very important element in the German market going forward when the, some of the wind farms and the renewable facilities. Come off the feed in tariffs the renewable energy law. I mean, how, how does this affect the derivatives markets are still, are people still gonna be hedging their risk and their exposure to the markets through derivatives? Or how does this work? Is there, when they sign PPAs, does what happens to those volumes? Do they come into the exchange or they stay out of the market? It's something I've heard, you know, people question.

Peter Reitz, CEO European Energy Exchange: 11:26

Yes. And, and we just have to look at what's happening in the Spanish market today. I mean, last year, uh, we had seen a lot of trades that were triggered by the signing of PPAs. So people go into these long-term contracts, but they want to have a clearing offering to hedge the risk of the counterparty going bust, basically. And that's where our standard contracts can be used. That's why we are extending the range for the whole decade now. And we will do that for the Spanish market. The Italian market and the German market, that's where we see current demand. And again, this is driven by also the fact that, for example, in Spain, if you want to build new power capacity today, the cheapest way is to build it in solar. And because of the decline of solar panels, for example. That will spread over Europe. Over time. And the next market, where it's already starting is Italy.'Cause you have relatively high prices if you look at the overall European map and you have a lot of sun. So even without subsidies in place, you already have the advantage of that decreasing prices of producing. And solar is the cheapest way to add. Power capacity and that barrier will sort of move north. And there are studies out there that say it's gonna happen in Germany next year somewhere. Say it's in three years, maybe it's somewhere in the middle.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:05

Absolutely. How about France

Peter Reitz, CEO European Energy Exchange: 13:06

could be an another market where this will play a role? The market structure in France is a little bit different also in the production mix 'cause of the big portion of nuclear there. But we're gonna start with those three markets that I mentioned, Spain, Italy, Germany. And if this is successful and there is client demand in the other markets, we will add them later on.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:28

There's a big discussion, open debate in Germany about the coal exits plans. How do you view this? How do you view the current debate? I mean, is the move a away from coal going fast enough? And how, how does this affect your business?

Peter Reitz, CEO European Energy Exchange: 13:43

Well, first of all, it's, it's a political debate. And it's driven by the target setting of reducing or decarbonizing, basically the power generation, which I think is the right thing to do. The compromise that was reached is very long, you know, 38, the last coal is supposed to phase out. But if you look at what actually happens in the market, we may not have to wait that long. In 2019 alone. The, uh, hot coal fired power production in Germany was cut by a third. So maybe we don't need 20 years. If we have two other two more years, like the one we had last year we're, we're out of hot coal in Ignite. The same is happening to a bit lesser extent. So, but still, lignite production in Germany last year, minus 22%. So the market is already reacting and it's reacting to the price signals that come from the exchange. As we've seen very low gas prices and comparatively high CO2 prices, and that has changed the merit order. So a lot of the coal was replaced by the new capacities of renewables, but also by gas fired power plants. In the German market already,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:08

so, absolutely. So, you know, the market, as you say, will. Probably get there beforehand if the pace is as it is or has been in the recent years. I think of course that's helped by very low gas prices, as you also mentioned. But, you know, h how long the supply gluts will last is, you know, anyone's, uh, idea yet, but at least maybe in the foreseeable future. But I, I wanted to touch on another thing, Peter, you. You mentioned PPAs and a very important component of PPAs, especially for firms and industrial firms who want to consume renewable energy, is the guarantees of Origins, the GOs. Have you got plans to to, to list guarantees of origins?

Peter Reitz, CEO European Energy Exchange: 15:44

Yes. We already have some activities in that field. Number one, we're a supplier of the registries. So where the actual booking takes place through our subsidiary Drexel, we, provide services for those registries in, I think 15 different countries across Europe and in France. We're even operating the registry ourselves. So that's sort of the one end of the spectrum. The other activities that we have is that we, last year started providing auctions for the French government for those guarantees of origin. So the sort of the primary market where we bring those into the whole mix. All the way to. The actual booking in the registries. What's missing in between is sort of a spot market, a derivatives market, and the clearing that is attached to it. And that's where we are currently in discussion with the market, how to standardize the product offering, because that's the piece that's missing at the moment. So that we have a product design where a lot of people can meet and trade the same thing.'cause right now it's a very. Specialized markets. You don't have a really market standard yet.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:59

No, it's, I mean, it's, it's, it's quite difficult to standardize, I would've thought, because they have Nordic Hydro, the Dutch wind, Alpine Hydro, you know, biomass. I mean, how do you standardize that?

Peter Reitz, CEO European Energy Exchange: 17:09

And they all do have different prices at the moment. Of course. Exactly. So we are trying to come up with a market design that collects all of them. But those who don't care actually get the cheapest one. But those who have restrictions. Still can buy the ones they're interested in on the same market. So we have some ideas how to do that, but it's a discussion we're having currently with the market participants, how to best set up that product design.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:37

So when could we expect that on the ex then?

Peter Reitz, CEO European Energy Exchange: 17:40

Hard to say. And it's also a case of where you need to walk before you run. So we started a an offering in derivatives a couple years ago. I think that was too early and it was not standardized in a way. So now as we start these auction services in France, it could be something, a model that could also work in other parts of Europe. And then probably the next best thing to do is establishing a spot market. So that's the discussion we're currently having with all the market participants.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:14

So it's not that far away then?

Peter Reitz, CEO European Energy Exchange: 18:16

It's not that far away, but I can't give you a launch date yet. Okay.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:19

That's what I'm trying to fish outta here, Peter, but, but that's fine. On the regulatory and policy side, I think one of the big things that's gonna happen this year is the green deal that's coming from the commission. How do you expect that to impact the market and your business?

Peter Reitz, CEO European Energy Exchange: 18:33

I think long term it's gonna be positive for us because there's a clear commitment to a carbon neutral Europe in this, and in order to get there, a lot of things have to happen, especially in the carbon market itself. We have a very well functioning ETS system for carbon, but it's only covering about 50% of the emissions. So what needs to happen is that needs to be extended to other sectors. Heating is one big component. Transportation is the other one. The German government has now started an initiative to establish a national market for those sectors separate from the EU ETS, but it's designed so that other countries can join. The ultimate solution, I think needs to be that this will then be combined with the existing EU ETS. So that we do have a system that covers all emissions within Europe. And that will then obviously increase the market that we are trading today on CO2 certificates.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:42

Absolutely. And will increase the number of participants and maybe who knows, here at Ewell there could be, you know, it could double, triple in size.

Peter Reitz, CEO European Energy Exchange: 19:49

It could actually, the emissions market could, because as I said, it's currently only covering half of the emissions. And the other half is more diversified. You have much more players involved, so it, it could actually give a boost to the trading volume, the market size overall.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:06

Peter, thank you very much for a very interesting discussion. All the best with your future plans. That's all we have time for today. So thank you for joining the Montel Weekly podcast.

Peter Reitz, CEO European Energy Exchange: 20:15

It was a pleasure. Thank you.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:16

Remember listeners to keep up to date with all our stories on Montel News. Follow us on Twitter and LinkedIn and subscribe on Apple Podcasts and Spotify, and it's goodbye from me

Peter Reitz, CEO European Energy Exchange: 20:25

and from me. Thank you.