Whither IPEX in risky times Nigel Hawkins Responsabile

Whither IPEX in risky times? Nigel Hawkins Responsabile Bidding, Enel Produzione. Rome, 7 December 2007

IPEX has worked well since it went live on 31 March 2004 Ø Liquidity - high Ø Spot Price – a reference for annual contracting Ø Investment in new capacity

Market liquidity – MGP vs Contracts Markets TWh/annum up until 30 Nov

Investment in new capacity Total period 2003 -2011 Greenfield MW (*) Full capacity of plant Greenfield Conversions 2000 Conversions 16, 320 12, 160 (*) Enel estimate 0 Conversions 4000 6000 8000 Ø Period 2003 -2011 characterised by new greenfield capacity of around 16 GW Ø New entrants concentrated in the North zone in the initial phase; from 2006 significant presence also in the South 0 2000 4000 6000 8000

Risk – Europe susceptible to fuel price increase 98, 8% Relationship between net import by source and gross consumption 82, 7% 98% 80% 100% 95% 100% 59% 2025 Dependence on foreign fuel supplies Source: European Energy & Transport – Trends to 2030 Total Natural gas Oil Solid Fuels

Risk - fuel prices Oil Coal *NBP (National Balancing Point): Hub in UK; TTF (Title Transfer Facility): Hub in Olanda **API 2: CIF ARA (Amsterdam Rotterdam Anversa), API 4: FOB Richards Bay Gas CO 2

Faced with risk…. . Faced with risk the natural choice of market participants is to contract forward – both fuel purchases and power sales. …. eliminating market risk, converting to physical risk.

Faced with risk…. . Faced with risk the natural choice of market participants is to contract forward – both fuel purchases and power sales. …. eliminating market risk, converting to physical risk. Failure to deliver physically would lead to the need to buy back » in IPEX day ahead at the PUN, or else » at the penal imbalance price

Faced with risk…. . Faced with risk the natural choice of market participants is to contract forward – both fuel purchases and power sales. …. eliminating market risk, converting to physical risk. Failure to deliver physically would lead to the need to buy back » in IPEX day ahead at the PUN, or else » at the penal imbalance price To avoid exposure to the PUN the producer requires liquidity in the forward markets for products within year – monthly, weekly, daily, hourly. What is the liquidity of such products?

Market liquidity – OTC Weekly energy transactions in 2007

Market liquidity – OTC Transactions in November 2007

What does the market need? Ø Freedom of Choice Ø Liquidity Ø Reference Price Ø System Security

What does the market need? Ø Freedom of Choice Ø Liquidity Ø Reference Price Ø System Security Development of liquidity of financial and physical products in all timescales