1. Peter Styles, Board Member Electricity Committee Chairman Peter.Styles@EFET.org SVSE Lichtenstejn Palace Conference 2007 Prague, 12/09/2007 The Past and Future of European Energy Trading from the point of view of EFET Peter Styles Prague 2007 European Federation of Energy Traders 1

2. Peter Styles Prague 2007 2 The Past and Future of European Energy Trading Liberalisation of European electricity markets did not cause high prices…

3. Peter Styles Prague 2007 3  Bullet point End-user prices in Western Europe (1995-2004) (Source: Kema Consulting study for Eurelectric 2006)

4. Peter Styles Prague 2007 4 Industry power prices in Austria 1970-2001  Text  Text: text

5. Peter Styles Prague 2007 5 Liberalisation of European electricity markets did not cause high prices …though remaining monopoly elements and free allocation of carbon allowances do not help! The Past and Future of European Energy Trading

6. Peter Styles Prague 2007 6 Prices for industry in Eastern Europe (1985-2003)

7. Peter Styles Prague 2007 7 Influence of different factors on the German wholesale power price (Source: Technical University Dresden)

8. Peter Styles Prague 2007 8 German wholesale power price versus marginal costs on one day in April 2004 (Source: Technical University Dresden)

9. Peter Styles Prague 2007 9 There is no way back from free markets, except to central planning The Past and Future of European Energy Trading

10. Peter Styles Prague 2007 10 LV distribution Illustration of electricity market wholesale function Demand management I&C Local power Customer choice Residential Hub Independent network operators HV transmission Electricity interconnectors Market prices at trading hubs Competing producers (including ancillary services) Competing suppliers

11. Peter Styles Prague 2007 11 Ingredients for successful liberalisation (1) Privatisation and liberalisation  Relationship between the government-owner and government as “sponsor” of regulator  Commitment to developing competition versus financial benefits to government-owner?  Timing, order? Unbundling  Ownership, management?  Balancing and other services for competitors ?

12. Peter Styles Prague 2007 12 Ingredients for successful liberalisation (2) Liberalisation on the supply-side?  Divestiture of generating capacity by dominant incumbent may be necessary for competition to start  Auctioning of virtual power plants or long term contracts is possible second best Cross border trade is an important source of liquidity  Integration of neighbouring markets helps competition  Non discriminatory access to cross-border capacity is a challenge

13. Peter Styles Prague 2007 13 Ingredients for successful liberalisation (3) Avoid hidden cross-subsidies  Bad experience with stranded costs and legacy contracts  Subsidies may be designed to not distort the market Regulators must communicate with market participants  It is impossible for a regulator to anticipate and understand all effects of its intervention or non-intervention; market participants are creative  Benefit of experience of regulators in earlier liberalised territories

14. Peter Styles Prague 2007 14 The Past and Future of European Energy Trading Policymakers’ interference in market operation already causes distortions

15. Distortions of most concern to traders April 2007 Price caps or regulated tariffs imposed by national governments or regulators (power and gas) 76% of respondents have indicated it as a serious distortion National failures to implement EU Directives (power, emissions and gas) 73% Improper or insufficient or non-firm allocation of transmission capacity (power and gas) 73% Mergers and protection of national champions 73% Lack of transparency about the use of infrastructure (power and gas) 65% Uncertainty about CO2 emissions and allocation of allowances 61.5% Peter Styles Access to transmission and storage (gas) 57.5% Ineffective or insufficient unbundling 57.5%

16. Peter Styles Prague 2007 16 Regions or countries suffering most from distortions

17. 1.Completing the internal market and market integration, including harmonized and uniform regulatory framework in EU (14) 2.Unbundling, formation of an Independent Transmission Operator(6) 3.Development of gas markets, improving access to the gas infrastructures, changing business practices (4) 4.Merger control and preventing the anti-competitive behaviour (4) 5.Improving cross border trading: Increasing transmission capacity allocation, reduction of bottlenecks, common procedures (3) 6.Transparency (e.g. unused/used transportation capacity) (3) Desired priorities for EU energy policy Styles, Oprea

18. Peter Styles Prague 2007 18 The Past and Future of European Energy Trading Traders play a vital role in optimising use of infrastructure and enabling retail competition

19. Peter Styles Prague 2007 19 Development of cross-border trading  Cross-border trading existed before liberalisation but in a discriminatory, non-transparent manner  NTC measure of cross-border transmission capacity outdated and overly restrictive  No real firmness in allocation of transmission capacity  Non-market-based allocation mechanisms persist  Tension between advocates of market coupling and proponents of physical OTC market flexibility  No financial transmission rights yet

20. Peter Styles Prague 2007 20 Cross border trading timeline Yearly explicit auction Monthly explicit auction Daily implicit auction (deadline for exchange and clearing) Continuous Cross Border intra-day Hourly H-1 intra-day deadline M-n M-1 D-2 D-1 D t D-1 deadline for internal nominations (TSO gateclosure) Deadline for title transfer of rights (closure of SCRM) Secondary Capacity Rights Market LT cross border nominations Deadline D-1 for use of the rights (UIOSI) May 2006

21. Peter Styles Prague 2007 21 Contrast between commercial and physical views of wholesale power supply (1) Operator's view (the “physical” dimension)  Balancing the system  Controlling the flows  Maintaining security (guaranteed?) Trader's view (the “commercial” dimension)  System is a market place with trading flexibility  Potential restrictions should be transparent Relationship between flows and commercial contracts

22. Peter Styles Prague 2007 22 Contrast between commercial and physical views of wholesale power supply (2)  “Border flows” do not coincide with “border commercial exchanges” (known to traders as “nominations”)  Renewable power subsidies distort capacity allocation  Load and generation schedules needed for accurate prediction of commercial trading capacities  Schedules are fixed after end of all trades (within hubs and between them)  In order to trade between hubs, traders need to know the commercially available capacities...

23. Peter Styles Prague 2007 23 Actual flows Congestion management Capacity allocation Must be consistent security standards Allocate more Increased rebalancing Allocate Less Reduced rebalancing Volume allocated is a commercial - not a technical - decision

24. Peter Styles Prague 2007 24 The Past and Future of European Energy Trading Traders play a vital role in optimising use of infrastructure and competition …and the way forward must include a secondary market in transmission capacity rights

25. Peter Styles Prague 2007 25 Use it Daily Monthly/Quarterly Intraday market 200820102009Annual Capacity H-15mins Time Annual capacity sale harmonised with energy market Use or sell term capacity to the market Options tradable in secondary market Obligations tradable in intraday market H+30mins Intra-day market starts H Multi-Annual H D-1 explicit allocation Capacity used OTC Capacity allocation at D-1: Explicit auctions only

26. Peter Styles Prague 2007 26 Current usual practice 100% 66% 33% 1 Y allocation M + Q allocations 365*24h daily Allocations remaining 33% + seasonal variation 22 % yearly 44% multi year “Wished” realistic practice M + Q allocations per year for about 22 % 66% 100% 44% 88% Multi-year and yearly auctions held for proportional shares at different times in year; e.g. 4 auctions of 11% multi-year capacity and 4 auctions of 5.5 % yearly capacity, multi-year products and also Y+1, Y+2, Y+3,.. to be offered separately. 365*24h daily allocations per year 12% + seasonal variations Seasonal expected commercially available capacity

27. Peter Styles Prague 2007 27 The Past and Future of European Energy Trading European Federation of Energy Traders Tel: +31 (0)20 5207970 Email: secretariat@efet.orgsecretariat@efet.org www.efet.org