Konstantin Lenz - How Renewables Challenge Traditional Energy Trading

HOW RENEWABLEENERGIES CHALLENGETRADITIONAL ENERGY

TRADING

PROF. DR.-ING. KONSTANTIN LENZProfessor for Energy Economics, University of Applied Sciences Erfurt •

Country Manager Commodities Germany NASDAQ

NASDAQ OMX

FROM POWER TO MULTI COMMODITY OFFERING

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Exchange and Trade Reporting (OTC Clearing)

Futures, DS Futures & Options

EXISTING PRODUCTS FUTURE DEVELOPMENTS

POWER＋ Nordic Power

and EPAD＋ UK Power＋ German Power

and EPAD (BE, FR, CZ, NL)

＋ Dutch Power＋ ElCert in EUR

and SEK

EMISSIONS＋ EUA＋ EUAA＋ CER

GAS＋ UK Gas＋ Spark spreads

＋ Coal, Gas＋ Continental energy

markets＋ Polish Power＋ Baltic power EPAD

MARITIMECLEARING ＋ Freight ＋ Iron ore ＋ Seafood

Create a liquid multi commodity exchange to meet our members needs

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THE GERMAN INITIATIVE

Key offering launched May 2013

Financial DS Future (Forward) contracts with 5 years trading horizon Futures contracts with 5 years trading horizon European style options

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EPAD contracts (Electricity Price Area Differentials) were introduced to allow neighboring countries to trade the German power contracts and use the EPADs to hedge against the basis risk between German prices and domestic prices

EPAD contracts are listed for the Czech, Dutch, French and Belgian price areas

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Trading 1995 vs 2014

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AGENDA

Renewable Energies changing Energy Trading

Index futures on renewable production

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RENEWABLE ENERGIES CHANGING ENERGY TRADING

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ELECTRICITY PRODUCTION OUT OF RENEWABLE SOURCES IN GERMANY

Electricity Production out of renewable energy sources in [%]

Targets from Energy concept of the federal government 2011 /

coalition contract 2013

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+ Due to the boom of fluctuating renewables, focus is shifting from long-term to short-term trading

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BOOM OF SHORT-TERM MARKETS

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50

100

150

200

250

300

350

400

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

VOLUMES OF EEX / EPEX SPOT MARKET (TWh)

Source: EEX

VOLUMES OF EPEX SPOT INTRADAY-MARKET (TWh)

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5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012 2013

Source: EEX

2014

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1

2

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8

9

Germany Nordic UK Italy Spain Netherlands France

ELECTRICITY TRADING IN GERMANY

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CHURN FACTORS OF EUROPEAN POWER MARKET

Source: Prospex

Source: RWESource: LEBA

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+ Reduction of volatility and financial crisis reduced number of speculative players what causes again lower volatility

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LOWER VOLATILITY

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NEW PRODUCTS FOR A CHANGING MARKET

Would June 2030 really be traded at 8 €/MWh?

▶ New (standard) trading products could be needed to give hedging possibilities to power plant operator and renewable power producers

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Source: Power2Sim (Energy Brainpool)

Simulated day-ahead prices 2030 assuming significant negative prices especially caused by high solar feed-in during summer

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MORE PRICE ZONES?

▶ Germany / Austria could be split into several price zones

▶ But Power markets should be become more “European” also to gain more liquidity+ Trading / clearing several European

markets

▶ NASDAQ offers already EPADs (CFDs) – European Power Area Differentials (Germany to Czech R., Belgium, Netherlands, France)+ This gives the opportunity to hedge in

lower liquid markets using the advantages of the high liquid German power market

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Source: Spiegel

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CHALLENGES

Short-term markets got significantly increased importance, also trading and analysis resources have shifted

Volumes in long-term markets are more stagnating during the last years

Fluctuating renewable energies (wind and solar) are very volatile and reliable forecast horizons are short

currently trading and hedging takes mainly place in the spot market

How could be hedging in long-term contracts be made accessible to fluctuating renewables?

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ONE ANSWER– INDEX FUTURES ON RENEWABLE PRODUCTION

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THE IDEA

We build trading products based on an index for renewable production

The product should be easy to use and made for power and weather product traders

It can act as missing link between conventional power production, renewable energy production and power trading

A future settled on German wind and solar production

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THE RENEWABLE PRODUCTION INDICESThe Problem: Available measured data give no complete overview of all wind and solar production installations, German TSOs publish projected data out of exemplary measured wind parks. These data are sometimes not available, also often changed ex-post.

Requirements for the index:

The index should represent the production out of wind and solar power as good as possible

The generation of this index has to be transparent and continuously

It should be in hourly resolution

The values will be “frozen” on day D +1 - no later changes

All formal criteria must be fulfilled

The algorithm should be as transparent as possible

The index and its calculation should be well accepted

It must be safe of manipulation

Quote of a trader: “I want to be able to recalculate the index, even though if I would probably never do it”

We have a concept for a synthetic index which fulfills these requirements.

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CONCEPT – THE INDEX FUTURE

CONCEPT 1:A tradable future based on a wind and solar production index for a certain period

Idea: Average Renewable Production 1000 MWh/h = 1 €/GWhi.e. Settlement with 5.420 MWh/h German Prod. = 5,42 €/h

Advantage:• Very straightforward product• Wind and solar producer could use it for volume hedge

Challenge• Does not take into consideration the price impact of the production• Production index is needed

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Wind producer (300 MW, 1% of German installed capacity) Average production expectation for February 2013: 72 MWh/h (48.384 MWh)Average subsidy: 92 €/MWh

German normal production for February: 7200 MWIndex future contract is traded at 7,20 €/h Wind producer takes a short position of 950 contracts for February

The February is characterized with cold weather with low wind production Average German Production: 4700 MWh/h Final settlement: 4,70 €/hProduction of the wind producer: 47 MWh/h (31.584 MWh) Income is 1,545 Mio € lower than expected

The payout of short position is 950 contracts x (7,20-4,70 €/h) x 672h= 1.532 Mio € compensating the impact of the low wind production.

EXAMPLE

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STRUCTURE IN – STANDARD OUT – THE QUANTO

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BUYBUY

SELLSELL

WIN

D P

RO

DU

CTI

ON

Renewable power producer sells a standard product on futures market If he produces less than he sold, he has to buy on spot market If he produces more than he sold, he has to sell on spot marketWith the Quanto, he can hedge the difference between the spot price and the market value of his production type

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THE ADDED VALUES

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The INDEX future can be used in order to hedge volume risks of renewable producers

The INDEX future can be used in order to hedge low load factor of conventional power plants due to high renewable production

The QUANTO future can be used in order to hedge standard product selling

The QUANTO future can be used to hedge spot price risk for physical positions

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CONCLUSIONS

The importance of renewable power production will furtherincrease

Importance shifted from long-term to short-term trading

Integrating fluctuating renewables into the stagnating futuremarkets is a big challenge

Products like futures on renewable production could help toopen futures markets to renewable power producers

The index future on renewable production could help to hedgerisks of fluctuating renewables

More volatile price profiles and potential capacity markets will also challenge electricity trading

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PROF. DR.-ING. KONSTANTIN LENZTel: +49 177 328 85 28

[email protected]