Daily Management Review

A new benchmark appears on the electricity market


Futures based on the common electricity market of Germany and Austria has been dominating the electricity trade and fixed wholesale electricity prices throughout Europe for 15 years. Since the single price area will cease to exist in the next year, its replacement is about to come, writes Bloomberg.

National Institute for Occupational Safety and Health (NIOSH)
National Institute for Occupational Safety and Health (NIOSH)
This month, futures trading only for the German market in 2020 is expected to exceed the benchmark trading volume for the first time since April, when contracts were launched on the European Energy Exchange AG. This shift may approximate the end of the German-Austrian standard (the volume of such futures in circulation is still over € 30 billion).

The division of the market will be particularly problematic for Austrian factories and utilities. It is not just about the fact that prices in Austria will be higher than those of its larger neighbor. The volume of trading in new futures - only for Austria - is almost zero. Only one such contract was resold since it was launched on EEX.

"So far everything has been transparent," said Johannes Päffgen, head of energy trading at Next Kraftwerke GmbH in Cologne, "an Austrian buyer with a hydroelectric power plant knew what price he would get, but now we cannot just point to one price on the site."

Electricity futures contracts for Germany and Austria, resulting from the liberalization of electricity markets in Europe in the 1990s, are based on an average hourly rate, known as the Physical Electricity Index (Phelix).

Germany sought to separate it to reduce the costs of maintaining balanced networks and to stop Austria's unrestricted access to cheap electricity from its wind and solar power plants.

EEX started offering contracts for Germany in April, and two months later for Austria. Trade contracts for Germany alone this month amounted to only a small part of the volume of trading contracts for the supply of electricity in the next year. However, their share has increased to more than 80% of futures for Germany and Austria in 2019. As for 2020, trade contracts for Germany bypassed the benchmark contract this month, the stock exchange data’s shows.

It is expected that the market division will not greatly affect prices for Germany. Futures for Germany only for 2019 are traded in accordance with the benchmark rate, contracts only for Austria are 5% higher, according to data on prices at the close of trading on EEX.

While the volume is growing, the number of German-Austrian contracts in circulation is still much greater. For electricity with delivery in 2019 and 2020, open positions only for Germany are about 5-6% of the benchmark.

German-Austrian futures will continue to be available, despite the fact that a new benchmark is developing, said EBC strategy director Tobias Paulun.

"We will offer German-Austrian futures, as long as the market trades them," he said, "but we see that the new Phelix-DE contract is developing into a benchmark and that liquidity is increasingly gathering in a new German product."

source: bloomberg.com

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