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PTRM
Energy Market Convergence Figure 2: European Gas & Power
Thereisamarkedcontrastintermsofthematurityand
Exchange traded volumes in Europe
liquiditywithintradedenergymarkets.Oilleadsthegroup
and has been established as a global market for decades.
Oil is traded 24 hours a day on a ‘follow-the-sun’ basis –
betweenAsia,EuropeandNorthAmerica.Physicalcargoes
travel between these continents and market participants
trade world-wide based on the established Brent and WTI
indices(orproxiestothese.)ThereisavigorousOTCmarket
backed by financial futures and options traded with high
liquidity on the ICE and CME Group/NYMEX exchanges.
Bothcrudeandrefinedproductsareactivelytradedthrough
exchangelistedinstruments.
At the other end of the automation spectrum is coal.
Tradingisdominatedbyvoice-brokeredOTCdealsthatare
oftenhighlystructuredandlinkedtothefreightcontracts
Source: BaringaPartners,April2009
neededfordelivery.Pricediscoveryisdominatedbyweekly
published indices. Liquidity is further challenged by neverbeengreater.Fortunately,programmatictechniquescan
variationsinsulphurcontentandcalorificvaluedepending
beappliedtoPT-generatedportfolioswiththesamedegreeof
onwherethecoalhasbeenmined.Whilstcoalisaglobal
automation and real-time response. Examples of
commodity, it is not a homogenous market and cannot
complimentaryPTRMapplicationsaregivenlater.
offertheliquiditynormallyobservedinoilmarkets.
The emissions sector is the newest energy market. We
have witnessed world consensus on the Kyoto Protocol,
Challenges in Power Markets
including the recent announcement that the US
We have observed some convergence between exchanges:
government intends to ratify the Protocol at the
CME has acquired NYMEX (and CBOT); EEX and PowerNext
Copenhagen summit in December 2009. Consequently,
areco-operatingtoprovidecommontradingvenuesforcash
carbon markets are flourishing. As each country deploys
andderivativemarkets,andAPXmergedwithENDEXatthe
ever-tighter emissions quotas, more and more energy- endof2008.However,asonedoorcloses,anotheropens.The
intensive industrial companies will have to participate in proliferation of new energy exchanges continues
the cap-and-trade emissions markets. The world’s largest
undiminished. The consortium NASDAQ OMX Commodities
exchange for carbon emission credits – European Climate
andNordPoolSpotAShasbeenchosentoprovidemarketand
Exchange(ECX)–expectstomorethandoubleitstrading
clearing services for the UK Wholesale Power Market which
volumethisyear.
should be operational in the second half of 2009. Most
Theothermajorenergycommoditiesaregasandpower.
The markets that support these products have historically
European countries have established domestic spot power
been state-owned monopolies whose infrastructures are
markets but, with notable exceptions in Germany and the
fragmented along country borders. Liquidity remains an
Nordicregion,exchangetradedvolumesremainlowwithOTC
issuewithinpowerandgasmarketsoutsideNorthAmerica.
dealsaccountingforthemajorityofenergytrades.
WithinEuropethereisamarkedcontrastbetweengasand
Manycommoditiessuchasoilandagriculturalproductsare
power trading liquidity. This has been largely dictated by tradedwithinhighlyliquidmarkets.Thisliquidityisprovided
domestic political attitudes to market openness. Three bythehighproportionofpapertradesthattypicallyrepresent
exchangesdominatelistedgasandpowertradinginEurope:
manytimesthevalueoftheunderlyingphysicalproducts.In
NordPool,EEXandICE.AsshowninFigure2,tradevolumes
such an environment, price discovery is more accessible and
are growing despite the economic woes in 2007/08. ICE
positionscanbereadilytradedatthemarket’squotedbuy/sell
recentlypublishedrecordvolumesinits2009Q1results.
prices.Ifamarketisafree-flowingmarketitisaconsequence
TheUKwasamongthefirstEuropeannationstoembrace
open energy markets, as is evidenced by the fact that the
of the free-flowing supply of the traded products themselves.
majorityoftheUKpowergenerationandsupplyassetsare
Crude oil and wheat are good examples of fungible
nowforeign-owned.WhilsttheUKgasmarketisthelargestin
commodities, i.e., they can be produced, stored, shipped and
Europe,thepowermarketisdominatedbysixmajorutility
consumedvirtuallyanywhereintheworld.
groupsandlistedtradevolumeshaveactuallybeenindecline
Electricity does not exhibit these fungible characteristics and
inrecentyears.ThisisinmarkedcontrasttoGermanywhere this is the primary reason that power markets lack depth and
tradedpowervolumeshavemorethandoubledsince2006 liquidity. Electricity must be instantaneously produced and
and are still offering good liquidity. It is hoped that the
consumed meaning that a system operator must balance
recentlyannouncedUKWholesalePowerMarketwilladdress
fluctuatingloadsacrossthedistributionnetworkinreal-time–all
thisoncefullyoperational.Likewise,mostEUcountriesnow
the time. For countries such as Norway that are blessed with
observefreemarketprinciplesandarederegulatingtheirgas
large-scale, hydroelectric power generation, managing these
andpowerinfrastructure,encouragingassetdivestitureand
theadoptionoftradingbourses.
fluctuations is relatively straightforward. Power generation is
88 worldPower2009
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