European electricity market: Improvement potential in market structure and quality Bert Den Ouden CEO, APX Group EPFSF Annual conference 15 May 2007

APX Group:gas and electricity exchanges 24/04/2017 APX Group:gas and electricity exchanges APX Gas NL (TTF) APX Power NL APX Gas UK (NBP) APX Power UK APX ZEE (Zeebrugge HUB) Market Coupling together with other exchanges NBP TTF APX UK APX ZEE Bel- pex

Overview of APX Group activities Operations: 5 markets on line 4 service activities 206 gross memberships Traded (2006): 178 TWh of energy € 5.3 billion of contracts 10% of UK gas demand 18% of NL power demand Corporate: Anglo-Dutch management Positive financial results Shareholders TenneT (74.5%, Transmission System Operator NL) and Gasunie (25.5%, Gas infrastructure company NL) Development of APX Group Members per Market, 1999 to March 2007 Gas NL 200 Gas Zee 20 19 11 Gas UK 9 Power UK 15 11 8 70 Power NL 5 67 58 Number of Members 100 54 54 52 46 51 54 41 39 27 34 36 36 27 51 31 36 36 38 40 41 48 21 1999 2000 2001 2002 2003 2004 2005 2006 2007 www.apxgroup.com

European electricity market 24/04/2017 European electricity market Achievements Free customers TSO tasks Efficiency of utilities Role of regulators Shortfalls Volatile prices Low liquidity Transparancy issues Inefficient use of transportation High level of concentration Market power issues  Fragmented market ?

Some available solutions 24/04/2017 Some available solutions Infrastructure Build more capacity…. and/or Make better use of existing capacity! Market Coupling Market organization Transparency Carbon market regulation Transport limitation Integrated market

Market Coupling Netherlands-Belgium-France APX Bel pex Power next APX Bel pex Power next Before Fragmented 2-step operation 2 capacity auctions on each border 2 electricity spot markets After One integrated system, 1-step operation Daily allocation of transmission capacity between 3 countries Generating spot market prices 3 exchanges working together Political will Start: 22 November 2007  TenneT APX Power next 2. 1.  Elia  RTE

Achievements of market coupling: utilisation of transmission 24/04/2017 Achievements of market coupling: utilisation of transmission market coupling 22 Nov 06 Upper graph: Average utilization as % of available 30  60% after MC Lower graph: time-percentage of full usage 0  25% after MC

Achievements of market coupling: price convergence 24/04/2017 Achievements of market coupling: price convergence market coupling 22 Nov 06 Upper graph: APX Lower graph: Powernext Before MC: correlation, no convergence After MC: strong convergence(>70% of time) Some price differences remain

Achievements of market coupling: integration of price areas 100% of time Old situation 19% Either prices will converge 100%, or prices diverge –but then the transmission capacity used for 100% Better price index Better efficiency and better economic results Better basis for long-term contracts & investments 2% 6% 73%: “Copper plate” Shown are the data for January 2007 Percentages vary each month

Achievements of market coupling: Price difference Netherlands-France 24/04/2017 Achievements of market coupling: Price difference Netherlands-France Hourly price difference, €/MWh 9% ∆P > 10 € 19% ∆P 1..10€ 40% ∆P > 10 € 4% ∆P < 1 € ∆P >10 € ∆P 1-10 € ∆P <1 € Equal price “copper plate” 51% ∆P 1..10€ 68% ∆P=0 Equal price “copper plate” 8% ∆P < 1 € Before Market Coupling Winter 2006 After Market Coupling Winter 2007

Hourly price difference, €/MWh 24/04/2017 Price convergence simulation for coupling in “Pentalateral” region (NL-Be-Lux-Ger-Fr) Hourly price difference, €/MWh Results Historically Simulated coupling 15% 19% 24% 35% 33% 38% 14% 12% 3% 19% 2% ∆P >10 € 3% ∆P 1-10 € ∆P <1 € 56% 58% Equal price “copper plate” 52% 68% 66% 54% 9% 9% 9% Fr-Nl Fr-Ge Nl-Ge Fr-Nl Fr-Ge Nl-Ge * by APX ** simple daily ATC capacities like used in the explicit auctions (not flow-based)

Conclusions market coupling 24/04/2017 Conclusions market coupling Market Coupling is proven solution, yields: Better use of transmission capacity Im/exports always in right direction Removal of im/export barriers Prices converge when there is no constraint: “copper plate” More market parties, better liquidity, reduction of market power in the bigger area Creation of NW-European market European market perspective European copper plate is possible Utilize existing transport capacity Integrated market Better index, better liquidity, reduced market power Better basis for financial market and investments

Market transparency Report EC competition highlights market information Information on availability of power plants: scheduled maintenance and (non-scheduled) unavailability May have high impact on (spot) market price  derivatives Information held by parties having generation assets Transparency important for new entrants, financial market parties

Transparency regarding price calculation on the spot markets Publication bids/offers (anonymous): important for index used for futures APX web site example Supply curve offers Demand curve bids price

Publication of power plant availability 24/04/2017 Publication of power plant availability UK, Nordic (Regulated) Complete Accurate Compliance Sanctions Continental Europe (Voluntary) Growth model Accuracy issues No strict compliance No sanctions Compliance is needed for accuracy of data Important role for regulator Important for financial market and investments Regulated Voluntary

Carbon trading and electricity price 24/04/2017 Carbon trading and electricity price Strong correlation between rising prices for CO2-allowances and rising electricity prices since the beginning of 2005* The strong price increase in e.g. the German market during 2005 on can be explained exclusively by taking into account the effect of CO2* After decrease of carbon price, power prices dropped too Huge movements in carbon prices after publishing of carbon data Uncertainties * Source: VIK-Opinion on the Preliminary Findings of the Energy Sector Inquiry (VIK, April 2006)

Needs of the carbon market Achievements CO2-driven market Recognition Reductions Shortfalls National bias Market distortions Contribution to power price volatility Publication issues Political uncertainty Lower liquidity in long-term contracts (forwards) Effect on investments Currently: carbon market not supervised by regulators (both financial and energy) Needed: Harmonization Transparency rules Regulation Political stability Role of regulators in carbon market needed Important for long-term markets, investments

Effort in market structure / Summary Huge potential for structural improvement in the power market Better use of existing infrastructure: market coupling European “copper plate” Better efficiency, better economic results Better market liquidity, better price index, reduction of market power Transparency: compliant publication of generation availability Better role for financial parties and new entrants More liquid and reliable daily prices Regulation of the carbon market Decrease of uncertainties Better liquidity in the forward markets Effort in market structure / market quality Better prices Better efficiency Economic results Investment climate Security of supply

A VITAL LINK IN ENERGY TRADING b.denouden@apxgroup.com