Power & Gas Options
Figure 3: Commodity Derivatives Volume Growth (million contracts)
EUA Option Market Size (% of Forward/Futures Market)
Sources: IOMA, Emission exchanges (ECX, EEX, etc.) & Gaselys estimates.
Market Association), across the organised commodity markets as a whole (encompassing energy, metals and agricultural products), options represent 10% of volumes traded. In the EUA and CER allowance market too, the proportion is around 8% – even though these developed more recently. In the case of the most active energy markets – US natural gas and oil – the proportion is around 15%. Secondly, in terms of liquidity, periods of low activity can
be followed by periods of high expressions of interest, without being satisfactorily explained. At most, and without any certainty, these could be attributed to particular volatility regimes, exceptional price levels or operations to hedge possible commercial flows.
Only the European gas market seems to show any real [option] growth momentum
Although the somewhat fluctuating nature of liquidity does
not have too negative an impact on the structurally most active markets and maturities, it remains problematic in the case of less ‘standard’ interest. In view of the specific needs of each operator, traders are not always able to fully turn their positions round in the market. This residual risk borne by the trader will probably deteriorate the theoretical price of the options and hence the interest in trading. Finally, annual trading volumes of option products does not
yet show any strong growth trend. Even though the economic crisis must have affected operators’ risk appetite last year – and therefore particularly their propensity to trade in derivative products – the volumes of power options traded are struggling to get off the ground. In the case of the NBP, the ratio of options to total trading volumes seems to be similarly stuck at around 2%. Only the European gas market seems to show any real growth momentum, with a notable increase in liquidity in the option market in 2009.
44
Options Trading Held Back by Market Fragmentation? The first factor that can be advanced to explain these relatively
low volumes of gas and power options traded in Europe is the fragmentation of the market. Even though there is increasing cooperation and integration between the various marketplaces, there is still no genuine single market in energy in Europe. Whereas the German power market and UK gas market attract most of the volumes, physical interest is expressed in each of the countries and is therefore still frequently at the mercy of transmission constraints between regions. The dispersion of interests and liquidity increases the risks in
terms of both price and volume, and although it undoubtedly affects the volumes of forward or futures trading, it is even more harmful to the activity of the option market.
Consumers Absent From a Market Dominated By Incumbents & Banks Activity in the gas and power option market in Europe is also
probably affected by the nature and behaviour of the two main categories of operators that drive it. On the one hand, there are trading subsidiaries of major European energy suppliers. These are often delegated the task of optimising their parent company’s physical assets – particularly with a view to optimum realisation of their additional option value. A power generating plant ultimately represents an option on the price differential between power and fuels; gas storage represents an option on differentials between gas prices for different maturities, etc. Fundamentally, these operators who hold assets therefore tend to be ‘long’ options. And although part of the value can be realised through options sales to other counterparties – thereby adding to market liquidity – it can also be extracted through the active management of hedging. In this case, this internalisation of optimisation will limit the volumes of options ultimately offered to the marketplace. Whereas the former route seems to have been favoured initially (particularly in the case of power assets, with flexibilities being transferred to the banks)
worldPower 2010
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