hedging in the european energy markets · 07.03.2017 hedging in the european energy markets
TRANSCRIPT
www.eex-group.com 07.03.2017
Hedging in the European Energy Markets
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1.EEX Group
2.Why do consumers in the European energy markets hedge? Example of a power retailer
3.Why to producers in the European energy markets hedge? Example of a utility
4.Conclusion
Overview
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The markets of EEX Group
3
Exchange tradingTrade Registration/ Clearing
German, French, Dutch, Belgian, UK & Italian Natural Gas
Power spot markets in Germany, France, Austria, Switzerland, Belgium, the UK and the Netherlands
Austrian Natural Gas
Danish Natural Gas
Clearing for partner exchanges
EEX group companies and partner exchanges
European Power Futures & Options; GoOs; Emissions; Coal; Oil; Agricultural; Freight;
Energy Power Natural Gas Coal Oil price formulas
Environ-mentals
Emission Allowances Guarantees of Origin
Freight Dry Bulk Freight Container Freight
Industrial Metals
Iron Ore Steel Scrap Metal
Agri-culturals
Fertilisers Dairy Potatoes Meat
Product overview Markets
Czech, Slovakian, Hungarian, Romanian,
Polish PowerCzech Natural Gas
Hungarian Power
Serbian Power Spot
Freight; Fertilizer; Fuel Oil, Steel;
Iron Ore
Pulp and Recovered Paper Futures
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EEX at a glance
The European Energy Exchange develops, operates and connects secure, liquid and transparent markets for energy and related products.
EEX is a regulated market according to the German Exchange Act and is supervised by state authorities
EEX is the majority shareholder of Paris based EPEX Spot SE which operates the spot market for power delivery in Germany, France, Austria and Switzerland
Furthermore, EEX organizes trading markets for natural gas, emission allowances, coal, guarantees of origin, freight as well as agricultural products
Clearing and settlement of all transactions is done by European Commodity Clearing AG (ECC), the clearing house of EEX and its partner exchanges.
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Market Growth
0
20.000
40.000
60.000
80.000
100.000
120.000
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
2015 2016
Number of contracts Number of traded contracts for Phelix Futures (Exchange + TR)
Days Weeks Months Quarters Years
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1.EEX Group
2.Why do consumers in the European energy markets hedge? Example of a power retailer
3.Why to producers in the European energy markets hedge? Example of a utility
4.Conclusion
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Definitions
• Spot transaction: Agreement today to buy/sell commodity immediately
• Forward transaction: Agreement today to buy/sell commodity at a predetermined price at a predetermined time in the future
• Swap transaction: Agreement today to buy/sell commodity at a predetermined fixed price over a predetermined period of time. (Often financial)
• Option: pay a small fee today (a “premium”) for the right (but not the obligation) to buy/sell a commodity at a predetermined price at a predetermined point in the future
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Forward vs Future
• Both are standardised contracts – specific quality/quantity/location
• A future is a standard contract traded through an exchange (e.g. Nymex, LME, IPE, CBOT)
• A forward is an “over the counter” instrument (OTC) (i.e. not traded on an exchange)
• An exchange has a trade‐clearing system and “margining” (manages credit risk)
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Consumer Risk Profiles
Hours in the day0 24
Capacity in M
W
Spring
Capacity in M
W
Summer WinterAutumn
Daily Load Profile: 50% swing (up or down)
Seasonal Load Profile: 30% swing
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Retailer Hedging
Power
Fixed price
PHELIX index
Market CustomerRetailer
Power
• Retailer buys at index in the spot market, ie every hour has a different price• Retailer has to sell at fixed price in the retail power market because consumers to not
accept floating prices• Retailer has a fixed vs floating exposure: if his floating “buy prices” increased above is
fixed “sell price” the retailer operates at a loss.• Daily risk where the daily demand can vary by 70% and seasonal risk as the seasonal risk
can vary by 30%• Do I only by spot? What happens if the market spikes? What if I sign on customers now for
in 4 weeks time and the spot prices increases steadily because of less supply?
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Retailer Hedging
Power
Fixed price
PHELIX index
Market CustomerRetailer
Power
EEX
Fixed pricePHELIX
index
• Retailer pays fixed price for 4 quarterly futures contracts to EEX and receives the daily spot price for the physical market
• Retailer has hedged their index vs floating and their seasonal volume risk. They can hedge the daily volume risk closer to delivery
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1.EEX Group
2.Why do consumers in the European energy markets hedge? Example of a power retailer
3.Why to producers in the European energy markets hedge? Example of a utility
4.Conclusion
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Overview
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Utility Hedging
Hours in the day0 24
Capacity in M
W
Spring
Capacity in M
W
Summer WinterAutumn
Daily Load Profile: 50% swing (up or down)
Seasonal Load Profile: 30% swing
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The risk exposure of a utility or generator is far more complex
• Generator needs to buy fuel (gas, coal, pellets, uranium etc) to generate electricity
• Buys at different times to when they sell electricity• Might have to buy at gas spot market index and sell at
electricity market index in the spot, very volatile markets, no certainty or margin or cash flows
Gas Generator
UK electricity index
UK Electricity Market
e‐
Gas Market
Gas
PEGAS
Gas Index* + £5.00
Electricity Index
*Gas Index and Electricity index need to be on same basis I.e £/MwhAgree a conversion factor (efficiency)
Gas index
A “gas only” generator: life is simple!
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Uranium
Bio Fuels
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The risk exposure of a utility or generator is far more complex
• But most utilities have 4 or more different fuel sources, sell in more than 1 electricity market with more than 1 currencies
• Multiple risks to margins and cash flows• MORE BOXES!!!
Gas Generator
UK Electricity Market
Gas Market
PEGAS
Coal
EEX
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Uranium
Bio Fuels
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The risk exposure of a utility or generator is far more complex
• Whilst there are 5 major utilities in Europe, they all hedge because they need to lock in their margins
• They give upside of lower fuel prices away in return for downside protection• Hence in the energy markets suppliers are by far the biggest hedgers in the market
Gas Generator
UK Electricity Market
Gas Market
PEGAS
Coal
EEX
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1.EEX Group
2.Why do consumers in the European energy markets hedge? Example of a power consumer
3.Why to producers in the European energy markets hedge? Example of a utility
4.Conclusion
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Overview
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Conclusion
The European energy market has developed into a liquid financial and physical market where market participants can hedge their exposure.
The market was initially started by consumers because they wanted price transparency and choice.
Today, generators/suppliers of energy products are by far the largest users of the market to de-risk their business.
Liquid commodity markets attract financial investors and traders which in turn provide more liquidity. More liquidity always reduces the cost of trading therefore the cost of hedging.
A liquid commodity market is therefore in the interest of both consumers and producers of that particular commodity