kjell asserlind head of global commodity solutions65661/kjell_asserlind... · global companies...

© Copyright 2011, The NASDAQ OMX Group, Inc. All rights reserved.


KJELL ASSERLINDHEAD OF GLOBAL COMMODITY SOLUTIONSNOVEMBER 2011

Agendag

● Update on European Power Market● Update on European Power Market

● Opportunities for Electricity Derivative Market in Singapore


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depositories

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global indexes

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indexesaverage speeds


EUROPEAN POWER MARKET

European Conceptual market design

National/regional Power MarketOrganized and bilateral market

Physical & Financial markets

Market OperatorDAM

BalancingPower

k

SystemOperation

R l Ti

Intraday

one day ahead- auction trade -

marketsMarketequilibrium

hours ahead- cont. trade -

Hedging1 day - years ahead- continuous trading -

Market Real-TimeOperationNational/

regional

FuturesDays Weeks

ForwardsMonths Quarters Years CfDs

Derivatives Security - Margins - Business reportsMark-to-Market, Risk Management

Clearing houseBalancinggeneration

and consumption

Servicesduring the Real-Time-Operation:

Controllingfrequency and

Q

© Copyright 2010, The NASDAQ OMX Group, Inc. All rights reserved. 5

5

Additional Services Clearing of Bilateral Derivatives

and consumptionin realtime

frequency andvoltage etc.

European SPOT Market Trading Volumes, 2009 in TWh


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European Forward Market Trading Volumes, 2009 in TWh


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Total European Exchange trading and OTC Clearing Volumes 2005-2009Clearing Volumes 2005 2009


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European Market Coupling Development


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Future of Power Trading in EuropeFuture of Power Trading in Europe

• EU: All countries connected through market coupling by 2015E t t h it i d d • Export power to where it is needed and prices are high

• Open cross-border pricing models (transparency)

- Greater liquidity

- Consumer choice

- Production efficiencies

- Lower barriers of entry

- Aid government planning

in new sources of energy

• Mandatory clearing• Standardization and trading on

i d h / k t l


organized exchanges/marketplaces

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OPPORTUNITIES FOR ELECTRICITY DERIVATIVE MARKET IN SINGAPORE

Introduction to future marketsIntroduction to future markets

• The objective is to provide a structured mechanism to set an agreement for a future d li f t t d fi d idelivery of an asset at a pre-defined price

• Future market provides risk management tools (a hedge market) to either secure revenue in advance (seller) or lock-in cost in advance advance (seller) or lock in cost in advance (buyer)

• Product types: Future and forward- Both terms are used to adress the issue of hedging

• Future indicates a higher degree of sophistication

- Organised exchange

- Standardised index-based derivatives

- Daily M2M providing the opportunity to close positions and settle future obligations before maturity


Concepts and market modelsConcepts and market models

Basis of Trade Physical Delivery Financial settlement

Market set-up Bi-lateral Organised exchangeBroker

Platform Voice Electronic

Clearing arrangements

Bi-lateral Central counterpartyclearingg

Participants Hedgers Speculators


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Derivatives Market Phases in the Development Towards Maturity

Trade as % of

Consumption

800

900

The six phases of commodity trading (conceptual picture)

Derivatives

Phase 5

Phase 4

Rapid Growth Phase

Phase 3

Expansion phase

Phase 2

Build up phase

Phase 1

Pre-trade

Phase600

700

800

Phase 6

Mature Phase

Speculation Phase

300

400

500

0

100

200

Spot

0Maturity

Exchange traded

Dissagregation Standardisation of products

Early adopters ”Prefered choice” Speculators in place


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Bi-lateral

OTC

Mature Commodity Trading (Phase 6)y g ( )

The Multiples For Electricity and Gas Trading Are Based Upon Multiples of underlying consumptiony g p

3000

3500

4000 %

32

2000

2500

3000 27

1000

1500 15

5,9

15

0

500

US Gas Aluminium Nickel German Nordic Power

,

1,8


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Power Power Potential

The purpose of a future market for electricityThe purpose of a future market for electricity

Support investment

TradingOpportunities

Support the supply security of

decisionspppp y y

the market Allowing hedgers to

connect with speculators Shortages can be

anticipated and managed Assesing investments in

new facilities

Additional benefits

Ability for seller to set revenue in advance

Ability for buyer to lock in costs in advance

Providing tools for day to day risk management

set revenue in advance lock-in costs in advance


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Providing tools for day to day risk management

Do we need power derivatives?Do we need power derivatives?

•Electricity price is correlated to price of the fuel

• Should market participants focus on oil and gas trading instead?•Should market participants focus on oil and gas trading instead?

• Power derivatives will be a local market

•Gas and oil markets are international marketsGas a d o a ets a e te at o a a ets

FX

PowerOil

FX

Gas Freight


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How can this be implemented in Singapore?How can this be implemented in Singapore?

•Daily Index from EMC as reference price

•A Derivative Exchange that offers Gas and Power Derivatives •A Derivative Exchange that offers Gas and Power Derivatives and the possibility to trade both at the same time ie. “Spark Spreads”

• The Exchange offers also Clearing services. All trades are done with one Center Counter Party (CCP).

• Potential for the volumes 40 – 400 TWh ( 1 – 10 times the (underlying consumption)


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What are the benefits of getting it right?What are the benefits of getting it right?Consumers

•Remove price risks•Lock in future supply costs

Producers•Lock in of revenue stream•Long-term planningLock in future supply costs

•Discover benchmark prices•Long term planning•Discover benchmark prices

Investors•Forward price aids valuation of assets

•Lock in of revenue streams

Speculators•Trading opportunities•Structured transactions•Multiple commodity portfoliosp y p

Regulator Intermediariesg•Increased transparency of forward curve

•Efficient market attracting capital

Intermediaries•Business opportunities•Structured transactions•Product innovation


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Pre-conditions for an Efficient Energy Marketplace - ObservationsMarketplace Observations

• Clear vision by all stakeholders of the benefits of electricity market deregulation

Supportive and vigilant regulator is most critical- Supportive and vigilant regulator is most critical

• Voluntary - Choices for the market participants

Clear and well defined price discovery mechanism in spot • Clear and well defined price discovery mechanism in spot market to gain confidence among traders for price reference of underlying

- Minimize impact of grid and operational constraints on energy price reference to gain confidence among traders outside t diti l t i tt t fi i l l ttraditional energy sector, i.e. attract financial speculators

• Ensure transparency

I f i i i• Information provision

• Central counterparty clearing services to expand market reach and reduce risk and transaction costs


Thank you!

Kjell Asserlind

Head of Global Commodity SolutionsMarket Technology

Direct: +46 8 405 6112


© Copyright 2009, The NASDAQ OMX Group, Inc. All rights reserved.21

Direct: +46 8 405 6112SE-105 78 Stockholm, SWEDENe-mail: [email protected]

kjell asserlind head of global commodity solutions65661/kjell_asserlind... · global companies...

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