Power & Gas Options
Figure 2: Option Market Size
Market Size Estimate (% of Forward/Futures Market)
Sources: Gaselys estimates based on information from brokers, analyses in the FSA’s Analysis of activity in the energy market and EEX. The Scandinavian market is not included.
The liberalisation of the markets has certainly increased the
price volatility faced by physical operators, but at the same time the development of trading has given them the tools and liquidity necessary to manage it.
Consumers Have Not Substantially Exploited Market Volatility A number of operators, particularly on the consumer side,
nevertheless still have the impression that for the most part they are subjected to the effects of the market without being able to genuinely take advantage of it – particularly in regard to their industrial constraints. It is true that they hedge against price fluctuations with swaps or sometimes try to optimise their purchasing using round-trip or indexation strategies to beat the overall trend in the market, but as yet the price volatility is only being exploited to a very limited extent. However, the uncertainty surrounding the future trend in prices must be seen as an opportunity, since it has a market value through options. For consumers who can adapt their behaviour to the price
... Whereas, There is a Wholesale Option Market ... Although option products are not yet in widespread use
among major industrial customers and physical operators, the wholesale market does nonetheless exist. Even without taking into account the physical options
... liberalisation of the markets has
certainly increased the price volatility faced by physical operators
represented by auctions of gas storage capacity or electrical interconnections, it is estimated that at least 50 TWh of financial options in power and 230 TWh of financial options in gas are traded annually in Western European markets. Quite naturally, it is the most liquid forward and futures markets that account for the bulk of option transactions. In the case of power, these concern the German market, with interest mainly in the first two annual baseload contracts, and then in
level by taking advantage of industrial flexibilities – for example those associated with flexible rates of consumption at production sites, possibilities for private generation, substitution or energy storage – this price volatility can be a source of additional revenue. More traditionally, options enable price levels to be secured
without ‘closing the door’ to any subsequent opportunity if the market moves in a favourable direction. For example, a consumer may obtain a guarantee of a maximum purchase price for his energy through purchase options, while still being able to take advantage of a subsequent decline in prices.
worldPower 2010
quarterly and monthly contracts. There is also some interest in peak products and in the France-Germany spread. In the case of gas, liquidity primarily relates to the first two seasons at the NBP, followed by quarterly and monthly contracts. 2009 also saw a fairly significant increase in the volumes of options traded on the TTF, with interest again in the first two seasons and in the first calendar contract.
... Even Though it Remains Small Compared to Other Commodity Markets ... Although the European market (in volatility terms of gas and
power underlyings) is a reality, it must be said that it has yet to reach full maturity. Compared to other commodity markets, the European market in gas and power options looks somewhat undersized at present. It probably represents no more than 1-2% of the total forward and future volumes traded, whereas according to data from the IOMA (International Options
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