The German Power Market Recent Developments Lorena

The German Power Market – Recent Developments Lorena Vinueza Stefan Trück Department of Statistics and Econometrics University of Karlsruhe, Germany stefan@lsoe. uni-karlsruhe. de lorena. vinueza@lsoe. uni-karlsruhe. de

Contents n n n Historical overview Ownership and Market structure Power Trading in Germany The Leipzig Power Exchange – a case study Outlook

Dereglation Process in Germany – Historical Overview

Historical Overview (I) 1935 “Energiewirtschaftgesetz” State monopoly 1996 The EU-directive guidelines Liberalization of the power markets in Europe 1998 The German Energy Sector law: opened the German power market to competition

Historical overview (II) 1998 Verbändevereinbarung I (VV 1) Agreement regarding access to and use of the power network 1999 Verbändevereinbarung II (VV 2) New competitors CEPI Index

Historical Overview 2000 Gridcode 2000 Distribution. Code 2000 LPX Leipzig, 06/200 EEX Frankfurt, 08/2000 2001 Guidelines for information exchange regarding trading of physical power in Germany

Lack of competition – Open Access for everyone? Theory: since 1998 open access for all network users in former Western Germany Practice: many obstacles remain for many network users on low network levels like: Øfew players with a lot of market power, Ørather high prices for consumers remain, Ølack of real competition, Øopen access

Electric power prices Source: Bundesministerium für Wirtschaft und Technologie

Compared power prices in EU

Market Structure in Germany

Market Structure and Market Shares Six “super-regional” companies large power plants and regional high voltage grid ~ 50 regional distributors regional distribution grids and smaller power plants ~ 600 municipal utilities regional distribution grids and smaller power plants ~30% ~40% End user sales

Markets – Ownership Structure n n Internationalisation of market Mergers and Acquisitions – some of them n PE + Bayernwerk E. ON n RWE + VEW RWE n VEAG HEW Vattenfall n Local/regional units “super-regional”/global units

Production Volume - Ownership

Power market statistics (year 2001) Source: VDEW

International Markets – Trade in the EU and with East European Countries Total Import: 44, 9 Billion KWh Total Export: 42, 7 Billion KWh Balance: -2, 2 Billion KWh Source: VDEW

Sources of power production (year 2000) Source: VDEW

Consumption of alternative energies (year 2001) Source: VDEW

Consumption according to group of consumer Source: VDEW

CO 2 Emissions Source: VDEW

Costs of power generation in cent per k. Wh

Energy Trading Institutions in Germany

Energy Trading Institutions in Germany • OTC – Market • Internet Market Places • Power Exchanges (EEX and LPX)

Energy Trading – OTC Markets (I) Ø More than 300 parties registered in German market, about 20 -30 active traders Ø Turnover estimated 50 -70 TWh/month Ø Mainly Bilateral Trades Ø Also cross-border auctions and active trading with e. g. Denmark, Netherlands, Czech Rep etc.

Energy Trading – OTC Markets (II) Ø Intermediate Brokers often act between Market Participants (~ 10 -15 brokers active) Ø Different sorts of contracts are traded - spot and future products Ø Transparency is not guaranteed Ø No real „Trading“ of Energy

Energy Trading – Internet Platforms Ø Alternative Platform to common OTCTelephone trades Ø Several Market Places (e. g. Enron. Online, netstrom. de, HEW click&trade) Ø Only very small proportion is traded via Internet Market Places so far Ø Poor Liquidity of Internet Markets

Energy Trading – Power Exchanges Ø Offering Standardised Products (Spot and Future Market) Ø more Transparency in markets than in OTC Ø many Market Participants Ø More „real“ Trading Ø (Especially Futures) Market is rapidly growing

Power Exchanges in Germany I Leipzig Power Exchange (LPX) in Eastern Germany - first German Exchange for Energy Ø Main partner: Nord Pool ASA Ø Spot market Started 16 th of June 2000 60 parties have signed trading agreement Ø Future market Started in July 2001

Power Exchanges in Germany II European Energy Exchange (EEX) in Frankfurt Ø Main partner: German Stock Exchange Ø Spot market Started 8 th of August 2000 30 parties have signed trading agreement Ø Concentration on Future market Started 1 st of March 2001 24 parties have signed trading agreement Turnover in May-01: 0. 6 TWh

Power Exchanges – Spot Market Products Main Products Base Load – for 24 hours Base Load 24 h Peak Load – from 8 am – 8 pm Peak Load 8 -20 h Single hour loads Use of Spot Market Ø Ø Ø Portfolio optimization short term trades for peaks buy extra capacities speculative traders etc.

Power Exchanges – Future Market Products Ø Futures Ø Options (planned) Ø Swaps (planned) ØEtc. Traded are mainly long-term futures like monthly, quarterly and yearly products

Power Exchanges – Turnover Total Consumption in Germany 2001: ~500 TWh Turnover LPX, 01– 06/2001: 5 TWh Turnover EEX, 01– 06/2001: 4, 36 TWh only small fraction of Energy is traded at Exchanges

Trading / Strategies of Market Participants Combination of long-term OTC contracts with fixed prices and short-term trades at Power Exchanges as popular strategy Rapidly Growing Futures Market due to more transparency for complex products at exchanges compared to OTC trades

Prices per MWh – 1999 -2001 As the prices for the consumers became cheaper, power is not traded at significantly cheaper prices at the Exchanges

Power Exchanges - Developments Merge of LPX and EEX in 2002 – EEX in Leipzig Spot market Turnover in July 02: 2, 5 TWh Future market Trading Volume: 30, 1 TWh in July 2002 (Yearly Contracts: 21, 5 TWh Quarter Contracts: 3, 1 TWh Monthly Contracts: 5, 5 TWh) Especially Futures Market is growing rapidly

Case Study: The Leipzig Power Exchange (LPX)

The Leipzig Power Exchange – Organisation of the Exchange Ø Public law structure Ø Ø Ø Exchange as an institution under public law LPX acts through organs under public law Supporter Ø Ø Ø LPX Leipzig Power Exchange Gmb. H Private law institutions Shareholders

The Leipzig Power Exchange – Market Participants (excerpt) - Aare Tessin AG Bewag Aktiengesellschaft DISAM A/S EDF Trading Limited Electrabel Elektrizitäts-Gesellschaft-Laufenburg AG En. BW Gesellschaft für Stromhandel enercity trade Energieunion AG EWMR Entega Trade Gmb. H E. O. N. Energie AG Fortum Energie Gmb. H GEW Köln AG HEW AG Kom-Strom AG - Kraftübertragungswerke Rheinfelden AG MVV Energie AG Norsk Hydro Energy Deutschland Gmb. H NWS Energiehandel Gmb. H Österreichische Elektrizitätswirtschafts AG RWE Energie AG Southern Energy Europe bv Stadtwerke Düsseldorf AG Stadtwerke Leipzig, Statkraft Energy Deutschland Gmb. H Südwestdeutsche Stromhandelsgesellschaft mb. H Syneco Gmh. H & Co. KG Tiroler Wasserkraftwerke AG TXU Europe Energy Trading BV VASA Energy Gmb. H & Co. KG VEAG Vereinigte Energiewerke AG VEW Energie AG

The Leipzig Power Exchange – Trading and Entrance Fees Ø Overview l Trading fees (mutual, i. e. to be paid by both the purchaser and the seller) 0. 04 Euro/MWh l Annual fee 12500 Euro l Entrance fee (one-off) 7000 Euro

The Leipzig Power Exchange – Auction Bidding Ø LPX supposes „Auction Bidding“ as best solution Ø Bundling up of demand supply Ø Minimizes Strategic Influences and Market Power Ø Economical and Simple Solution

The Leipzig Power Exchange – Block Bids Periods Limits for block bids from start Ø Maximum size for an individual block bid is 50 MWh Ø A maximum of 3 block bids per block period and participant can be sent in addition to the hourly bid Ø These limits can change later on and if so LPX will inform its participants no later than on Thursday the week before implementation of new limits. Time 00: 00 Block 3 Block 2 Block 1 06: 00 10: 00 Block 4 14: 00 Block 5 18: 00 24: 00

The Leipzig Power Exchange Trading Volume and Prices I

The Leipzig Power Exchange Trading Volume and Prices II

The Leipzig Power Exchange – Trade Data (I)

The Leipzig Power Exchange – Trade Data (II) – Anomalies Ø in December 2001 the „market-clearing-price“ reached a peak with 1000 Euro/MWh Ø the average weekly price moved to 50 Euro/MWh Ø ‚prices are economically not logical nor explainable‘ (MVV) Ø problem: data about production, network problems not available to all traders

Conclusions considering Prices (I) Ø Behaviour of prices suggests challenges associated with modelling these prices, e. g. • Volatility seen in Power Prices is exremely high and unprecedented in other Commodity Markets • Prices vary substantially by time of day, week or year • Positive and Negative price „spikes“ can be observed • Frequency, Magnitude and complexity of Fluctuations also unique in commodity markets

Conclusions considering Prices (II) Ø However. . . • Prices follow similar daily, weekly and annual patterns • Even the price volatility follows certain patterns, price volatility is strongly correlated with price levels • Basic relationships between power prices at different geographic locations show e. g. similar volatility Ø. . . the challenge is to build models that capture this complex behaviour of prices

Links in the Internet • • www. strom. de www. eex. de www. lpx. de www. bmwi. de www. finance. wiwi. uni-karlsruhe. de www. energy-more. de www. bundeskartellamt. de www. eu-kommission. de