The European Gas &


Power Option Market Energy market liberalisation has increased the price risk faced by the physical operators… By Franck Schuttelaar


price risks than they were used to in the old administered systems. That is because the volatility of prices set freely in the markets is of a different order compared to the fluctuations in rates set by the public authorities which, although not always fully predictable, are at least frequently smoothed over time. Suppliers and industrial customers have had to adapt their strategies to this growing exposure to the markets. In addition to the volume risk, they now have to actively manage their price risk. The financial communication from the incumbent suppliers is a good illustration of this trend. Analyst presentations increasingly refer to the opportunities


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offered by the market and the way in which they take advantage of them. One will highlight the flexibility of its power plants amid increasingly volatile spot prices. Another will emphasise the progress made in hedging its production or the level of margins secured relative to historical prices; and a third may vaunt the merits of the market optimisation of its ‘take or pay’ supply contracts in gas, etc. The establishment of these new gas and power markets


has also been supported by financial institutions (corporate and investment banks, and speculative funds in particular), which are often quick to seize opportunities to diversify their commercial activities or develop revenue streams. They have certainly accelerated the adoption and adaptation of derivative products, such as options, which were initially developed for the more ‘traditional’ financial markets, to the specific physical features of gas and power ... and the development of trading has given them tools to manage it more effectively.


Figure 1: Western European Gas Markets Size


he liberalisation and development of the gas and power markets in Europe over the last 15 years has exposed energy consumers and their suppliers to much higher


Expressions of interest among these various operators and


the European Commission’s stated aim of developing a genuine internal market in energy have led to a significant increase in the volumes of gas and power traded in Europe, as can be seen from the trend in the number of transactions on the electronic trading platforms. Although these systems probably account for over half of the interest expressed in the market, the figures show that the volumes traded in Western Europe have risen much faster than consumption – including 2009, despite the economic and financial crisis. Between 2005 and 2009, the volumes of baseload power


traded in the main power markets of Western Europe more than doubled, reaching almost 6,000 TWh in 2009, while consumption by the EU-27 has declined by almost 2% (to ‘only’ around 2,700 TWh in 2009). Whilst this decrease is mainly due to the economic crisis, between 2005 and 2008 even power demand rose by only 3%. Meanwhile, consumption fell compared to 2005, with demand close to 5,300 TWh in 2009. The development of the gas market has been even faster,


with over 16,000 TWh traded in 2009, three times the volumes traded in 2005. It is true that liquidity is concentrated in a limited number of


geographic regions – Germany for power, the UK for gas – with the other markets often trading on a differential basis relative to these benchmark regions. It can be said, however, that physical operators now have a sufficiently developed market in Western Europe to meet their hedging requirements. It is now possible for industrial customers, producers and suppliers of energy to implement strategies to secure their margins or volumes in advance through the markets by means of simple financial or physical products.


Western European Baseload Power Market Size


Source: Gaselys. Data constitutes a low estimate of the size of the market. Only baseload volumes for power. Nord Pool not included. 42 worldPower 2010


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