Power & Gas Options


option management could now be increasingly being carried out internally as the market competence of the incumbent suppliers increases. That may explain the decrease in power option volumes traded in the market in 2008 and 2009. The large investment banks are the other major players in the


option market. With their cutting-edge expertise in financial products, they act either on behalf of their clients, major consumers, distributors, etc. or for their own account, taking leveraged directional positions in the underlyings or speculating directly on volatility levels. Their appetite for options must, nevertheless, remain slightly limited in view of the liquidity risks that may still exist in certain products. Moreover, many of these operators have no natural position in the market and therefore no structural interest in trading. In summary, it is the traditional leaders of the European


gas and power markets that are found in the wholesale option market. The big absentees are ultimately consumers who at present do not seem to have any real interest in managing their risks through option purchases.


Consumers See Options as Too Expensive There are several explanations for this. Apart from a possible


lack of knowledge of the opportunities offered by the market, it appears that from a very practical point of view any enthusiasm among certain consumers is tempered by difficulties in the accounting treatment of options. But, more fundamentally, industrial customers probably feel that option premiums are still too high with regard to the opportunities they offer. Currently, for example, the price of an at-the-money call


option on German Cal 11 baseload power is around 8% of the price of the underlying, which is far from negligible. It is still hard to get consumers to pay such an additional premium to buy a single MWh of energy, despite the subsequent opportunities they may be able to seize. Options may also be used to secure price levels for production


or consumption volumes that are not known with certainty in advance. The contracts of industrial customers often already include a degree of flexibility in terms of volumes, which is managed directly by the supplier through its own assets or in the market. Naturally, this volume flexibility transferred directly to consumers is not found in the wholesale market. That, in particular, marks an important difference as


value of their CER portfolios in which there is still a risk of non- approval by purchasing put options. Moreover, while consumers are reluctant to buy options, their


Options have a value that the market is


compared to the CO2 allowance market: CDM project owners face a risk with regard to the volumes of CERs that will be generated by their investments. They commonly secure the


worldPower 2010


prepared to pay. But as yet few industrial customers have adapted their behaviour


assets are also far from fully valued in the market. Flexibilities in industrial processes or decentralised power plants of the cogeneration type are, no more and no less, than physical call or put options on energy. Options therefore have a value


that the market is prepared to pay. But as yet few industrial customers have adapted their behaviour to put themselves in a position to take advantage of this opportunity.


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