Nordic power market competition heats up

With Nord Pool set to offer electricity futures contracts from March, competition for liquidity on the Nordic power curve will heat up this year. Who will come out on top?

Also, the European Commission, along with the energy  regulators, wants to create a new, centralised unit to operate day-ahead market coupling in the EU. Whilst market participants agree with the need for increased regulatory oversight, there is concern from exchange bosses that this would promote a single point of failure and hamper healthy competition.

Would this proposal fix the part of the system that isn't broken? 

In this episode, Richard sits down with the CEOs of Nord Pool and EEX in Essen to discuss this, as well as the issues concerning liquidity in certain markets in Europe, and how the market needs to adapt to aggregators and the flexibility that the investment into renewables demands. 

Host: Richard Sverrisson - Editor-in-Chief, Montel News

Guests: 

Tom Darrell - CEO, Nord Pool

Peter Reitz - CEO, EEX

Contributor:  Julia Demirdag - Germany Reporter, Montel News

Editor: Oscar Birk

Producer: Sarah Knowles

Subscribe to the podcast on our website, via Apple Podcasts or Spotify

Transcript

Richard Sverrisson - Editor-in-Chief, Montel News: 0:06

Hello listeners and welcome to Plugged In - the Energy News podcast from Montel, where we bring the latest news issues and changes happening in the energy sector. This week we are examining the state of the traded wholesale market. And some of the pressing issues that participants are navigating. Honing in on the energy exchanges in particular, how is competition hotting up for financial power trading in the Nordics? Is there a risk of fragmenting liquidity in the futures market? Are negative prices deterring investment into renewables? And is the European Commission's proposal to install single market coupling with a central operator fixing something that ain't broken. In this episode, I'll be speaking to the bosses of two of Europe's biggest exchanges about some of the challenges, changes, and choices they're facing at the moment. Let's hear now from Tom Darrell, the CEO of Nord Pool, and Peter Reitz, the CEO of EEX. But first I'm joined by one of our Germany reporters, Julia Demirdag. Welcome back to the podcast, Julia.

Julia Demirdag - Germany Reporter, Montel News: 1:05

Thanks for having me again.

Richard Sverrisson - Editor-in-Chief, Montel News: 1:07

I'd like to start by asking you, Julia, what changes have we seen in the marketplace over the last few months?

Julia Demirdag - Germany Reporter, Montel News: 1:12

Yeah, I think it's been some very interesting months for energy markets overall in the past few months. We have seen a lot of volatility. There has been a scare over the winter that Europe may run low on gas. So I guess that's something that's been keeping markets busy. And I have the feeling that people are being more calm about this now. So even though volatility can be high on single days, I think the overall price levels have eased a bit, marketing a bit more quiet.

Richard Sverrisson - Editor-in-Chief, Montel News: 1:41

Before we go to the, the main part of the episode can you tell us a little about the countries in Europe that have the most liquidity, high levels of intraday trading, volatility, for example.

Julia Demirdag - Germany Reporter, Montel News: 1:52

So I would say, obviously looking at the short term trading, we have to look at Germany. It's the market's, the biggest market with the highest volumes, and that's also the leading market in Europe. And they also have a big share of in today. And with the new trading, like when they switched to the, when Europe switched to the 15 minutes trading, then I think, yeah, that's affecting all markets. And another market that's important obviously is the Nordics. There we see a big chunk of the trade is taking place short term. And that's also, yeah, where we are looking at the market shares for the single exchanges, which is something we are going to touch briefly later.

Richard Sverrisson - Editor-in-Chief, Montel News: 2:30

Perfect. And, and can you just highlight some of the challenges that exchanges like Nord Pool and the EEX, what they face in the months and years ahead?

Julia Demirdag - Germany Reporter, Montel News: 2:38

I would say the market has been changing rapidly over the past months and years even so there has been a high influx of renewables. So that's something they have to adjust to. They have new products developed. And also I think another thing we should look at is regulatory things. So will there be changes to the market zones, the pricing zones? That's something exchanges are very aware of because it can mean a big impact on their business model really.

Richard Sverrisson - Editor-in-Chief, Montel News: 3:06

Julia, thanks very much.

Julia Demirdag - Germany Reporter, Montel News: 3:08

You're welcome.

Richard Sverrisson - Editor-in-Chief, Montel News: 3:08

It's with great pleasure. I am speaking now to Tom Darrell, the CEO of Nord Pool and Peter Reitz, CEO of EEX. A warm welcome to you both gentlemen.

Peter Reitz - CEO, EEX: 3:17

Good morning.

Tom Darrell - CEO, Nord Pool: 3:18

Good morning. Thank you.

Richard Sverrisson - Editor-in-Chief, Montel News: 3:19

I'd like to start with the green transition. So, Peter, how are you and other exchanges adapting to the growing need for flexibility and while still delivering clear price signals and predictable revenue streams?

Peter Reitz - CEO, EEX: 3:32

Well, we see ourself as a driver of the energy transition and we, we do that in several ways, and it starts with actually putting a price to Carbon EEX is the auction platform for all of the European states to determine a price for emission of carbon. And that will be expanded as we know with the ETS two, coming up with covering new sectors. And then when we come to the electricity market. It's all about integrating renewable energies into the existing market. And we do that from the very short end of the curve. So at the spot market where you can now trade five minutes before delivering, that gives flexibility, especially to those who don't know exactly how much they're producing. So if you're running a solar panel farm or a wind farm, you only know very short before it actually happens, how much you you're going to produce. And that's why we need to provide the instruments for that. And one major step in that regard was our common effort to shorten the periods of time that people can trade. So 15 minutes was a major event last year when we moved all the short term markets into a more granular during of the market price. And it goes all the way to the very end of the curve. Where we at EEX we trade power until 10 years out. And that's also important for producers of renewable energies who want to finance new energy production sites for because for they're banking their need and income stream for 10 years and they need a risk management tool for that as well.

Richard Sverrisson - Editor-in-Chief, Montel News: 5:05

Absolutely. And, and how about you, Tom? How's Nood Pool aiding the, the green transition here?

Tom Darrell - CEO, Nord Pool: 5:10

To build on what Peter said, we have also in the fiscal market in the last 12, 14 months, undertaken a lot of, lot of big projects actually, which is reflecting more the imminent nature of renewables. We have more granularity, 15 minutes in intraday markets. We have 15 minutes in day ahead, which is also a part of enabling the wind transition. We introduced nordic flow based. We have done changes to the balancing markets from the TSO perspective, and also we are seeing increased volumes in intraday which is reflecting the fact that there is a bigger need to trade closer to delivery because we have a weather based system where when we nominate 36 hours in advance, things are happening in the meantime. So also granting, allowing market access to the inlay market is is a part of it.

Richard Sverrisson - Editor-in-Chief, Montel News: 5:58

Absolutely. And I think that that's clear, isn't it? You know? As good as weather forecasts are, changes can happen very quickly. I want to stick with you, Tom, and, and I'll come to Peter in a minute, but the European Commission and regulators been keen to push a single market coupling operator. Could you just, in a few words, explain what that is and what your view is? You kind of changed your opinion slightly on this. Tom, could, you could explain what that is.

Tom Darrell - CEO, Nord Pool: 6:23

Thank you for giving me the chance to answer that question. We have advanced our position in line with the discussions we have, have been having over the last year. We are saying that we acknowledge a need for strengthening the governance part, so we are therefore also then supporting the commission's proposal of creating a common, a Nemo, TSO entity with stronger decision capabilities.

Richard Sverrisson - Editor-in-Chief, Montel News: 6:50

Could you just explain what, what a NEMO is for those listeners? Unaware.

Tom Darrell - CEO, Nord Pool: 6:53

Sorry. That's, those are exchanges. Those are the nominated electricity market operators. So we think a common entity to improve the governance to shorten decision time to make decision making more effective by moving to qualified majority voting as opposed to anonymity voting. We'll shorten decision times and also thereby decreasing the implementation times on new projects. Where we are not agreeing with the commission, the commission is also proposing to consolidate the decentralized market coupling. We think that is working well today. We have never had the complete decoupling caused by the decentralized, the collaboration between the nemos, meaning that there are more than one NEMO computing the prices. This structure is today giving redundancies because we have backup nemos doing calculations. So if one NEMO has a problem, there is another one taking over. We think that the commission can de-risk the implementation by focusing on the governance part, which we acknowledge have its weaknesses today, but preserving then the decentralized NEMO price calculations. And we think it's gonna be extremely complex to move to a single legal entity on that side. It's gonna be costly, it's gonna take a long time, and it's gonna be risky. And we are introducing a common single point of failure. So yes, we can support the single legal entity on the governance. We need to preserve and improve what we have on the decentralized coupling.

Richard Sverrisson - Editor-in-Chief, Montel News: 8:21

Okay. Thank you Tom. And. Peter, what, what's the view of EEX on this matter?

Peter Reitz - CEO, EEX: 8:25

They're very much aligned in, in this direction. We have a common view that we don't think a central operator is the right solution. We support the commission in several asset aspects of this change. Like Tom explained, we need new voting rules in order to make the system flexible and get quick decisions. We also support the commission in its effort to abandoned monopolies, which we still have in about a third of Europe. Competition, I think is good for the market as a whole. We're not far apart here. We're very much aligned in, in our position. The current system works well. Introducing a single market operator introduces a single coin of failure, and that's a big risk to this market that we shouldn't go into, and it creates a monopoly and that stifles competition. And innovation. That's what the market needs. So why change dramatically a system that's working very well today? I think we have to create improvements on the edges, like the decision making process.

Richard Sverrisson - Editor-in-Chief, Montel News: 9:31

Do you find that the commission or the regulators are listening to your points of view?

Peter Reitz - CEO, EEX: 9:35

Hard to say at this moment. I mean, there's a lot of discussions happening. A lot of views are put into this discussion. We have had a lot of meetings with all decision makers in this, the regulators in particular, the European Commission. Acer is a important player in all of this. So we will see what comes out of this because they haven't discussion with a lot of other players as well.

Richard Sverrisson - Editor-in-Chief, Montel News: 9:58

So it's an ongoing process. It is, yeah. Yeah, absolutely. I'm, I'm sure that's the case. You know what a big element of the energy transition and of, you know, the move to this increased amount of renewables coming to the system, Tom, is the scale up and the involvement of batteries. How does the scale up of batteries and aggregators affect short-term products?

Tom Darrell - CEO, Nord Pool: 10:17

Well, I feel we have just scratched the surface in terms of integrating that flexibility into the market and I think we are also seeing it such a big scale up in capacity coming in this year, next year if you look at the projects. I mean, for the time being, we are having aggregators and VPPs that are aggregating that these

Richard Sverrisson - Editor-in-Chief, Montel News: 10:36

virtual power plants. Yeah,

Tom Darrell - CEO, Nord Pool: 10:37

virtual power plants. That are, are, are integrating that aggregating that flexibility and providing market access to portfolio bidding. I think we will see a lot more development and to be honest, I don't have all the answers how this will play out, but one issue is the capture rates are falling right, and we see more negative prices and we, so therefore we need the storage to play into this equation to secure bankability of future projects. Currently, these flexibilities are mostly taken into the intraday and the balancing markets. The flexibility markets will be a future strategic area for us. We will work with ecosystem to make sure that we are able to grant market access in the most effective way. But I think it also goes along with the fact that we need to create more flexibility on the demand side.

Richard Sverrisson - Editor-in-Chief, Montel News: 11:23

We return to the issue of price and also the futures market in a minute. But Peter, what, what's your view on the, on the role of batteries and of aggregators in the market?

Peter Reitz - CEO, EEX: 11:31

It's sort of a new customer group for all of the power exchanges. And we see a lot of new players coming into the market providing that flexibility. In batteries in particular we're also seeing combinations of things when a lot of people who are building new solar parks today, building the battery right next to it so that they can sell the power, not only when they produce it, but also when the market sends a signal that, you know, prices are high. So, and, and that's also a way to get around this cannibalization effect to where you see negative prices at times.

Richard Sverrisson - Editor-in-Chief, Montel News: 12:06

Tom mentioned negative prices. So renewable outputs, as we see across Europe is increasing the instance of negative prices and sort of cannibalization of merchant revenues. How do you think the marketplace can still attract investment in clean generation and storage despite the increasing prevalence of negative prices? Peter.

Peter Reitz - CEO, EEX: 12:26

Exactly the way I just described it. It's the combination of renewable power, because that's the cheapest way to produce power these days with a facility to store it at least for some hours, so that you can market it at a time when prices are high. And we see increasing spreads throughout the day between the lowest prices of the day and the highest prices of the day. And that's the perfect business case for a battery. So. I think the future will be we will see a lot of combinations of, for example, solar plants and batteries together. That then will be marketed across the exchanges.

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

Absolutely. And I think you, we've spoken on this pod about the queuing system or the congestion in terms of getting those batteries on the grid, but that's a completely different matter. But of course that's also very important to get that on the grid that into the market. But what's your view here Tom?

Tom Darrell - CEO, Nord Pool: 13:20

I fully agree with Peter that this is from a market perspective and use a new customer segment, right? The best part, the battery part goes along with renewable assets so that we can, we can charge, you know when prices are really low and we can deploy back when the prices are higher. We also need to focus on the demand side because, I mean, for an industrial offtaker. If you're able to exploit, if you have enough flexibility to exploit the affordable prices or the low prices so that you can also, I mean, if you are into steel or, or chemical or automotives or some of the big fertilizers if you are into some of the big green steel projects, if your electrolyzers, if you can create more flexibility on that side and take advantage of it. It'll also play very nicely into this equation because you will create the right frame conditions for the industry, but you will also create frame conditions when, where you consume more, when the electricity prices are low. Which is also a reflection of the imbalance or a surplus or a deficit sedation. Right.

Richard Sverrisson - Editor-in-Chief, Montel News: 14:19

I want to move as well to the futures market. I'll start with, with Peter, you know, Nord pool has announced plans to launch a futures market there from March, if I'm not wrong, Tom. We can see the forward market liquidity in the Nordic market is recovering, but it will obviously get it become a very competitive space. What's the risk of fragmentation of liquidity here, Peter? What do you think? What's your view?

Peter Reitz - CEO, EEX: 14:40

First of all, I think competition is good for the market and that people have a choice is good. The current incumbent exchange, if you want to call it that Nasdaq is leaving the market, so each of the customers as to make a decision where to move their business because there is a growing need we think of trading derivatives and hedging prices across Scandinavia. And we at EEX have created a very good offering for that with a lot of incentives and growing liquidity. And we see increasing customer inflow already today. A lot of people are moving open interest into our clearinghouse, ECC, especially the more international players, because there is a big capital savings that they can achieve by moving their Scandinavian power positions into the same clearinghouse where they have all their other power positions across Europe. So that is something we've seen already over the last four months. A lot of uptake. We offer a complete set of products, not only for the Scandinavian market as a whole, the so-called system price, but also for each individual price zone, cross Scandinavia. And that is something that people appreciate. Of course, we can also offer all the spreads of so-called e-pads as well. So people have a lot of choices and there are market makers in each of these products. There's been trading in each of the price zones. So the liquidity is developing, and I think that's good for the market overall.

Richard Sverrisson - Editor-in-Chief, Montel News: 16:06

Absolutely. What, what's your view, Tom? I mean, do you Competition is good. What's gonna make your product so competitive and that the choice of the customers will come to you instead of maybe to Peter's exchange?

Tom Darrell - CEO, Nord Pool: 16:16

Yeah, I, you know, this is for us a very important project. We've been working very hard to get to the readiness level we are now, and it's looking good. In terms of the migration date, which is 14 to March, we have technically open, opened the market. It it, it works well, which is in assurance ahead, though what will happen next month. Yeah, obviously, I mean, this is something which for us is making us more, having a comprehensive offering making us a relevant partner to our customers. We have a strong belief that we will grow the size of the market through the relevant offerings, through a resilient platform, competitive commercial offers, and and strong local presence and knowledge of the local market. And we are also having new customers onboarding with us, entering the market. We see an interest from that side, so. Yeah, it's an exciting time ahead and I'm optimistic.

Richard Sverrisson - Editor-in-Chief, Montel News: 17:04

Okay. Glad to hear it. And I think, with the future, we'll tell who, who is the winner here, but I'd like to also focus back to sort intraday the intraday market. We see that the intraday volumes and liquidity is low in the Nordic, but it's better in continental Europe. Why is that, Peter?

Peter Reitz - CEO, EEX: 17:18

Actually, I don't share that view. You always have to look at it in the context of the overall liquidity of the market. At our market at EPEX, we've looked at statistics of last year about 16% of our Nordic trading was in intraday. When you compare that to other markets like Germany, Belgium, France, it's in the same range. So the, the intraday market is not less liquid compared to the overall liquidity of the nordic market as a home.

Richard Sverrisson - Editor-in-Chief, Montel News: 17:49

Okay. That's a, that's a good point. Peter. What's your view here, Tom?

Tom Darrell - CEO, Nord Pool: 17:51

You know, what's, what's really interesting? You can build on that point of Peter. What's interesting to see is that if we compare August 25 to February 26, we have a 50% increase in intraday volumes in the Nordic. So. There is something happening now, and I think it's a combination of more renewable, it's a combination of better systems or technical sort of systems that are enabling automated trading. So there is a change in the Nordic now, if you look at absolute volumes, it's still lagging behind Continental. But bear in mind that Germany is more than 50% of the combined of the total less IDC volumes. Right. So I think Germany has been a big front runner in terms of internet trading, but we see that is, has changed in, in Benelux. It is changing in France, it is also changing in the Nordic. And the proportion, as Peter is saying is rising everywhere. We are moving towards some sort of 80-20 picture now. Yeah. And this will continue.

Richard Sverrisson - Editor-in-Chief, Montel News: 18:50

Yep. And is that Peter, because of the, the increased use of sort of bots, the automated trading, but also the massive amount of renewables coming into the system is a combination of the two? Maybe there's a, there's another factor involved here.

Peter Reitz - CEO, EEX: 19:02

No, I think those are the two main drivers. The share of intermittent renewables. Let's call 'em that because those are the ones who really need the intraday market because they only know very short term how much they're actually gonna produce. That's where the, we've seen a growing trend in the intraday market across all of our markets at EPEX. The intraday market for the last 15 years has been growing double digit every year. It's really the gross driver for the whole spot volume. So the share is increasing as the share of renewable is increasing. And yes, most of the training that we see on this intraday market comes from algo trading not only from new players that are specialized in that, but also existing players are using much more automatization of their trading strategies.

Richard Sverrisson - Editor-in-Chief, Montel News: 19:50

One of the headaches, certainly in the Nordic area and others has been. Splitting markets into zones. Tom, does this solve congestion problems at the expense of liquidity? For example,

Tom Darrell - CEO, Nord Pool: 20:01

when, when the TSOs are explaining topologies valleys and mountains and which direction water is flowing and constraints in the transmission lines, I do understand the reasoning, right? I I do understand what the physical reasoning behind the zones are. From a physical market, we see big price differences between north and south. Which is creating a lot of debate because it's hard to explain. In the financial market it's clearly not a favorable thing. I mean, from a financial market perspective, we like big bidding areas as possible to create, you know, a liquid market with with plenty of counterparts, right? So. Yes, it is an interesting topic and it's interesting to see now because the Swedish minister has instructed the TSO to look at Sweden. Then we have Norville left with fire price areas and we are even discussing the sixth. So from a market perspective, it's not an ideal thing.

Richard Sverrisson - Editor-in-Chief, Montel News: 20:54

Germany, obviously, there's been that discussion about splitting the bidding zone. They decided against it. You know, is it in the Nordic region, is it a headache for the trading community?

Peter Reitz - CEO, EEX: 21:02

It is, especially for those who who want the long-term hedging. Because you need, as Tom explained, you need many players who have an interest in that particular price that is determined. And the bigger the price zone, the larger the community that that is acting in it, the better the price formation mechanism that we provide as exchanges. So splitting zones into even smaller things is, is not a good solution. Reason for having small zones is'cause the grid can't anil it. Then grid expansion is the solution, not splitting zones.

Richard Sverrisson - Editor-in-Chief, Montel News: 21:37

That's a fair comment. Absolutely. We we're here at E.world, one of the biggest trade fairs for energy probably in Europe and the world. And Peter, we spoke a few years ago about a product you launched at the time, guarantees of origin. Could you talk us and the trading of green energy, could you talk us a little bit through how that has gone and how you see the direction of travel there for guarantees of origin?

Peter Reitz - CEO, EEX: 21:58

I think guarantees of origin are a crucial part of this energy transition. It's a market that we've been developing over a long period of time, started in many years ago when we were way too early for it. There was not enough standardization for this market. So we've taken a different approach of building the infrastructure first. We're running the registries of many European countries for guarantees of origin. And that means that, first of all, you have to make sure that the actual transfer happens smoothly. And then we built a spot market with the auctions that we're now running at EPEX for guaranties of origin, so you have an underlying price. And now we have again, launched futures on geos, standardized products. And now it's really becoming a market. It's, it's one of our fastest growing markets. We have a lot of interest in that. A lot of players have already signed up to it. We add new vers every week. It's, it's a fast growing market and we have even extended our product range now so that you have a choice of all different technologies with it and extended the, the range in terms of maturities. So it's a, it's a fast growing market. We think it's an essential part of the energy trend

Richard Sverrisson - Editor-in-Chief, Montel News: 23:19

and having it on exchanges. Obviously Boost is a massive boost of transparency of those prices for all market participants. So is this of interest to Nord Pool Tom, the listing of guarantees of origin?

Tom Darrell - CEO, Nord Pool: 23:28

It's not something we are into at the moment but it's something we are exploring.

Richard Sverrisson - Editor-in-Chief, Montel News: 23:31

Hmm. Okay. Interesting. And that's something we watch very carefully, I think, and you know, maybe in competition you guys with the brokers that are out there, we often receive use from marketplace that the guarantee of origin market is a little bit, is lax, somewhat in transparency in terms of price transparency, but

Tom Darrell - CEO, Nord Pool: 23:47

No, I agree. I agree. And I, and I think also from that perspective, it's, it's interesting to discuss, you know, what's the right, what's the right product structure for the future? Should it be a more granular, continuous structure. Right. And that's also something you are looking at

Richard Sverrisson - Editor-in-Chief, Montel News: 24:00

and I think that's being discussed, potential reforms to the guide, you guarantee of Origin Market as well, that the Greenhouse Gas protocol and then change to that. Final question, gentlemen, I realize we're, you know, we're, we're, we're running out of time very fast, but how can you ensure market access to companies who don't have large trading guests? Peter,

Peter Reitz - CEO, EEX: 24:16

we have a variety of access models to the exchange. You don't have to become an exchange member to benefit from the exchange price discovery mechanism. There's plenty of players in the market that provide direct access facilities, be it banks, be it bigger utilities, be it brokers, and they're all providing routes into the central market that we as exchanges operate. And the same is true on the clearing layer. We also provide access models for smaller players to have direct access to the clearing. So that they can you know, manage their positions and their risks on the spot markets in particular spot power, but also spot gas, trying to reduce the barriers of entry as much as we can. And we've seen a lot of smaller players now acting directly on the exchange.

Richard Sverrisson - Editor-in-Chief, Montel News: 25:05

Tom, anything to add there?

Tom Darrell - CEO, Nord Pool: 25:07

I see it exactly in the same way. The also different kind of aggregators or client representatives models lowering the threshold for some of the smaller players.

Richard Sverrisson - Editor-in-Chief, Montel News: 25:17

Well, gentlemen, thank you very much indeed for being guests on the Plugged In Podcast. We'll watch the competition in the Nordics very closely in the coming months and years. But thank you very much. And to you listeners, thanks for listening to this episode of Plugged In. If you enjoyed this discussion, please like, rates and follow to make sure you get the latest podcast episodes as soon as we release them every Thursday. We'd also love to read your reviews of the podcast. It helps us to keep up to date with what you, our listeners, think of the podcast and what content you want to receive more of. Finally, you can head to montelnews.com for more news and analysis from our team of journalists across Europe and beyond. See you next time.