UNIVERSIDAD POLITÉCNICA DE MADRID ESCUELA TÉCNICA SUPERIOR DE INGENIEROS INDUSTRIALES

UNIVERSIDAD POLITÉCNICA DE MADRID ESCUELA TÉCNICA SUPERIOR DE INGENIEROS INDUSTRIALES REGULATORY PROPOSALS FOR THE DEVELOPMENT OF AN EFFICIENT IBERIAN ENERGY FORWARD MARKET. PROPUESTAS REGULATORIAS PARA EL DISEÑO DE UN MERCADO IBÉRICO A PLAZO EFICIENTE DE LA ENERGÍA. PhD THESIS TESIS DOCTORAL Álvaro Capitán Herráiz Ingeniero Industrial (UPM) & Mecánico (KTH, Suecia) y MSc Internacional en Ingeniería Energética Sostenible (KTH, Suecia) Director: Carlos Rodríguez Monroy Doctor Ingeniero Industrial Ingeniero Industrial Lcdo. en Ciencias Económicas y Empresariales Lcdo. en Derecho Lcdo. en Sociología y Ciencias Políticas 2014

Tribunal nombrado por el Magnífico y Excelentísimo Sr. Rector de la Universidad Politécnica de Madrid Presidente: Secretaria: Vocal: Vocal: Vocal: Suplente: Suplente: D. Sergio Martínez Gonzalez Dª. Rosa María de Castro Fernández D. David Robinson Dª. Gema Rico Rivas D. Fermín Pedro Moreno García D. Santiago Chivite Fernández D. Egbert Rodríguez Messmer Realizado el acto de lectura y defensa de la tesis el día 14 de julio de 2014, en Madrid. Calificación: PRESIDENTE LOS VOCALES LA SECRETARIA

To those who have guided me in my educational process, especially to my parents Ramiro and Angelines. To my family, my sustainable energy source: Sonsoles, Arturo, Amalia, Lucas and grannie tata Angelines.

ACKNOWLEDGEMENTS I would like to thank to all my colleagues in the Spanish Energy Regulator (currently Comisión Nacional de los Mercados y la Competencia, CNMC, formerly Comisión Nacional de Energía, CNE) who have provided me with a great support for the completion of my PhD Thesis. In particular, I am very grateful to all my mates in the Energy Derivatives department we have learnt together since year 2007 in this exciting and fast developing world of energy derivatives, to my boss in the Gas Markets department during years 2004-2006, Javier Notario Torres a privilege to learn from his wisdom and knowledge about gas markets, the gas price formation mechanisms, and gas regulation in general, to the Librarian, José Antonio Sánchez Montero who always shows a great interest in my research work and provides me with many sources of information related to energy markets, and to the technical specialists Fermín P. Moreno García providing me with many insights to build this research in a comprehensive way to understand the evolution of the Spanish electricity sector, and to Javier Rincón García, who gave me a great guidance for the econometric research. Finally, I thank especially my PhD Thesis Director, Carlos Rodríguez Monroy, for all his support during the whole PhD programme and his confidence and stimulus in publishing in prestigious peer reviewed energy journals.

GENERAL INDEX FIGURES INDEX.vii TABLES INDEX ix RESUMEN..xi ABSTRACT.xiii KEY WORDS / PALABRAS CLAVE...xv LIST OF ABBREVIATIONS... xvii CHAPTER 1. INTRODUCTION AND METHODOLOGY... 1 1.1 The research question.1 1.2 The PhD thesis goal...1 1.3 Structure of the PhD Thesis 3 1.4 Fundamentals of Energy Forward Trading..4 1.5 The basics of the Iberian Power Futures Market and interrelated market mechanisms... 5 1.5.1 The main features of the the spot market, adjustment markets, and ancillary services... 9 1.6 Methodology of the research performed 11 1.6.1 Description of tests related to market price efficiency... 11 1.6.1.1 Definition of the Ex-post Forward Risk Premium... 11 1.6.1.2 Description of tests regarding forward risk premium... 13 1.6.1.3 Description of tests regarding cointegration analysis of energy prices and analysis of the clean spark spreads 17 1.6.2 Description of the regression model built related to liquidity of energy markets...19 1.6.3 Description of the hedging efficiency analysis through the net position ratio..21 1.6.3.1 The relationship between volume and open interest... 22 1.6.3.2 The fundamentals of the net position ratio methodology.22 1.6.3.3 Description of test regarding net position ratio... 23 CHAPTER 2. LITERATURE REVIEW... 25 2.1 Introduction...25 i

2.2 Literature related to market price efficiency..25 2.3 Literature related to liquidity of energy markets 30 2.3.1 Academic research... 30 2.3.1.1 Supervision Reports in European Energy Markets... 31 2.4 Literature related to ratios measuring the hedging efficiency.33 2.4.1 Literature regarding commodity derivatives and application of the Iberian energy derivatives market... 33 2.4.1.1 Literature review of the hedge ratio... 33 2.4.1.2 Literature review of energy markets about analysis of the open interest.34 CHAPTER 3. OVERALL ASSESSMENT OF THE IBERIAN ENERGY DERIVATIVES MARKET AND RELATED REGULATION... 37 3.1 Introduction...37 3.2 The current electricity policy context...38 3.2.1 The subsidised coal fired generation with indigenous coal... 38 3.2.1.1 The impact of the recognised price of the indigenous coal fired generation in the Spanish forward price formation... 39 3.2.2 The moratorium to renewables... 41 3.2.3 The extension of life cycle of power plants... 41 3.2.3.1 The effect of the German Nuclear moratorium on power prices 42 3.2.4 The mitigation of large cost deficits in the electricity sector... 42 3.2.4.1 Policy recommendations by the National Regulatory Authority. 42 3.2.4.2 The first measures taken by the Government... 43 3.2.5 The introduction of household hourly tariffs... 43 3.3 Evolution of the trading efficiency 45 3.3.1 Volume comparison between Iberian forward trading mechanisms... 46 3.3.2 Competition in the power futures market... 49 3.3.3 Key trading drivers in OMIP continuous market... 49 3.3.4 Comparison with the most developed European Exchanges... 50 3.4 Evolution of the price efficiency...51 3.4.1 Comparison of the ex-post forward risk premia in the Iberian power futures market and the CESUR auctions... 52 3.4.2 Economic impact of CESUR auctions in the energy cost of the last resort supply rates... 53 ii

3.5 Energy policy considerations 54 3.5.1 The need for increased post-trade transparency from the power futures market operator... 54 3.5.2 The necessity for trade repositories for a comprehensive oversight by regulators... 55 3.6 Results.....57 CHAPTER 4. EVALUATION OF THE FORWARD RISK PREMIUM... 59 4.1 Introduction.60 4.2 Comparison of the ex-post forward risk premium with some relevant international energy markets..61 4.2.1 Test 1 results... 61 4.2.2 Test 2 results... 66 4.2.3 Test 3 results... 67 4.2.3.1 Test 3.1 results... 67 4.2.3.2 Test 3.2 results... 68 4.2.4 Test 4 results... 73 4.3 Comparison of the ex-post forward risk premia in the Iberian power forward contracting mechanisms.75 4.3.1 Some introductory facts..75 4.3.2 Analysis of the forward risk premium... 78 4.4 Results.83 CHAPTER 5. EVALUATION OF THE LIQUIDITY DEVELOPMENT... 87 5.1 Introduction.87 5.2 The basics to assess the liquidity development of the Iberian Power Futures Market 88 5.2.1 The derivatives listed in OMIP... 88 5.2.2 OMIP market makers as liquidity boosters... 90 5.2.2.1 The effects of the market maker agreements in the bid ask spread reduction... 91 5.2.3 Comparison with the most mature European power futures markets.95 5.3 Analysis of the drivers developing the continuous market managed by OMIP..96 iii

5.3.1 Evolution of the traded volumes in the continuous market... 96 5.3.2 The enrollment of trading members..96 5.3.3 The discounts in OMIP trading fees... 98 5.3.4 The regression model for the continuous traded volumes....98 5.3.4.1 The regression results...98 5.3.5 Correlation analysis... 101 5.4 Efficiency recommendations.. 101 5.4.1 The three-layers liquidity pyramid... 101 5.4.1.1 The basic layer... 102 5.4.1.2 The intermediate layer... 103 5.4.1.3 The top layer... 105 5.5 Results...106 CHAPTER 6. EVALUATION OF THE FORWARD PRICE FORMATION THROUGH THE GENERATION COST ASSESSMENT... 109 6.1 Introduction...109 6.2 Evaluation of the Forward Generation Costs..111 6.2.1 Correlation Analysis... 111 6.2.2 Cointegration Analysis of Energy Prices... 118 6.2.3 Analysis of the Clean Spark Spreads with Forward Prices... 120 6.3 The first renewable trading and clearing mechanisms in the Iberian Electricity Forward Market 123 6.3.1 Renewable auctions in Latin America... 124 6.3.1.1 The Peruvian case... 124 6.3.1.2 The Brazilian case... 124 6.3.2 The first mechanisms in the Iberian electricity market... 126 6.3.2.1 The Contract for Differences derived from CESUR auctions in Spain.126 6.3.2.2 The auctions for the sale of the special regime production in Portugal 128 6.4 Results...130 iv

CHAPTER 7. EVALUATION OF THE HEDGING PERFORMANCE BASED ON OPEN INTEREST AND CLEARED VOLUMES... 133 7.1 Introduction...133 7.2 Analysis of the net position ratio of the Spanish electricity derivatives..134 7.3 The net position ratio and the prudential oversight of the systemic risk.136 7.4 Results...137 CHAPTER 8. RESULTS, CONCLUSIONS AND FUTURES LINES OF RESEARCH... 141 8.1 Regulatory recommendations 141 8.2 Further research..152 CHAPTER 9. REFERENCES..159 ANNEX: LIST OF PUBLICATIONS 179 v

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FIGURES INDEX Figure 1.1. Evolution of resulting Weighted Average Equilibrium Price in OMIP Call Auctions versus Average Underlying Spot Price ( /MWh)...13 Figure 3.1. Evolution of the Spanish prompt year ( Y+1 ) base load power futures settlement price versus the underlying spot price, the French base load power futures settlement price and the forward GTCC generation costs ( /MWh)...40 Figure 3.2. Evolution of traded and cleared volumes in OMIP-OMIClear, traded volumes in CESUR auctions, and cleared volumes in MEFF Power (TWh)...47 Figure 3.3. Evolution of the ex-post forward risk premia in the Iberian energy derivatives exchange and in CESUR auctions...52 Figure 4.1. OMIP Risk Premia in different quotation periods with different Reference Prices...62 Figure 4.2. Comparison of OMIP Settlement Prices: Quarterly Contracts versus Weighted Average Monthly Contracts (*) and underlying spot prices (OMEL)...64 Figure 4.3. OMIP Forward Risk Premia distinguishing Reference Prices per approach to maturity...69 Figure 4.4. Powernext Forward Risk Premia distinguishing Reference Prices per approach to maturity...69 Figure 4.5. Nord Pool Forward Risk Premia distinguishing Reference Prices per approach to maturity...70 Figure 4.6. NBP Gas Forward Risk Premia distinguishing Reference Prices per approach to maturity...70 Figure 4.7. Brent Forward Risk Premia distinguishing Reference Prices per approach to maturity...71 Figure 4.8. EEX ARA Coal Forward Risk Premia distinguishing Reference Prices per approach to maturity...71 Figure 4.9. Delivered Energy (MWh) per MIBEL Forward Contracting Mechanism...76 Figure 4.10. Evolution of OMIP Auction and Continuous Volumes of Month Contracts...77 Figure 4.11. Evolution of OMIP Auction and Continuous Volumes of Quarter and Year Contracts...77 Figure 4.12. Forward Risk Premia of OMIP Month Futures Contracts...79 Figure 4.13. Forward Risk Premia of OMIP Quarter and Year Futures Contracts...79 Figure 4.14. Forward Risk Premia of OMIP Futures: Global weighted average versus weighted average of month contracts...81 Figure 4.15. Quarterly Forward Risk Premia of MIBEL Forward Contracting Mechanisms...82 Figure 5.1. Evolution of OMIP Closing Spreads: Monthly Futures contracts quoting from July 3 rd 2006 to July 2 nd 2007...92 vii

Figure 5.2. Evolution of OMIP Closing Spreads: Quarterly & Yearly Futures contracts quoting from July 3 rd 2006 to July 2 nd 2007...92 Figure 5.3. Evolution of OMIP Closing Spreads: Monthly Futures contracts quoting from July 3 rd 2007 to November 20 th 2008...93 Figure 5.4. Evolution of OMIP Closing Spreads: Quarterly & Yearly Futures contracts quoting from July 3 rd 2007 to November 20 th 2008...93 Figure 5.5. Enrollment of OMIP trading members...97 Figure 5.6. The three-layers liquidity pyramid...102 Figure 6.1. Evolution of power (OMIP), gas (TTF), LNG import prices in Spain and emission (ICE EUA) forward prices (month maturity)...116 Figure 6.2. Evolution of power (OMIP), gas (TTF) and emission (ICE EUA) forward prices (quarter maturity)...117 Figure 6.3. Evolution of power (OMIP), gas (TTF) and emission (ICE EUA) forward prices (year maturity)...117 Figure 6.4. Daily evolution of CSS built with M+1 power and gas contracts and Spanish month LNG index...121 Figure 6.5. Daily evolution of the CSS built with the prompt quarter power and gas contracts...121 Figure 6.6. Daily evolution of the CSS built with the prompt year power and gas contracts...122 Figure 7.1. Evolution of OMIP-OMIClear and MEFF Power net position ratio per delivery month..135 viii

TABLES INDEX Table 1.1. Iberian Regulated Forward Contracting Mechanisms within the MIBEL Framework complementing the OMIP call auctions...21 Table 3.1. Correlation coefficients of the Spanish prompt year base load power futures settlement price with the underlying spot price, the French prompt year power futures and the forward GTCC Generation Costs...40 Table 3.2. Evolution of traded volumes in OMIP, CESUR auctions, OTC and demand (TWh)...49 Table 3.3. Correlation coefficients between OMIP continuous traded volumes and the monthly evolution of key trading drivers...50 Table 3.4. Comparison of the Iberian power futures market with the most developed European energy derivatives exchanges...51 Table 3.5. Economic impact of the electricity purchased by the Spanish last resort suppliers in CESUR auctions...53 Table 3.6. Main European legislative pieces impacting on energy derivatives trading...55 Table 4.1. Costs assessment of Energy purchased in OMIP Call Auctions by Spanish Distribution Companies. Distinction per Forward Risk Premium nature...62 Table 4.2. Costs assessment of Energy purchased in OMIP Call Auctions by Spanish Distribution Companies. Distinction per contract type...63 Table 4.3. Basic Statistics of F all & Underlying Spot Prices of Monthly Futures Contracts during period Aug.06-Jul.08...66 Table 4.4. Basic Statistics of F all & Underlying Spot Prices of Quarterly Futures Contracts during period Q4.06-Q2.08...66 Table 4.5. t-student test regarding null hypothesis of no existence ( zero value ) for the Forward Risk Premium...68 Table 4.6. Regression results regarding compliance with Bessembinder-Lemmon's Hypothesis...73 Table 4.7. Spanish Regulated Forward Contracting Mechanisms within the MIBEL Framework complementing the OMIP call auctions...75 Table 4.8. Analysis of OMIP Forward Risk Premia: basic statistics...80 Table 4.9. Average OMIP Forward Risk Premia per delivery year for global and maturity weighted average series...81 Table 4.10. Basic statistics of the quarterly Forward Risk Premia for the MIBEL forward contracting mechanisms...83 Table 5.1. Derivatives listed in OMIP: basic features and liquidity diagnosis...89 Table 5.2. Market maker agreements within the Iberian Power Futures Market...91 ix

Table 5.3. Evolution of OMIP Closing Spreads: Futures contracts quoting from July 3 rd 2006 to November 20 th 2008...94 Table 5.4. Comparison of the main European Power Derivatives Exchanges with data of year 2008...95 Table 5.5. Regression model results of traded energy in OMIP continuous market...99 Table 6.1. Correlation Matrix between Wholesale Energy Prices...113 Table 6.2. Correlation between Gas Prices (TTF, in /MWh) and Oil Prices (Brent, $/Bbl)...115 Table 6.3. Dickey-Fuller s Test for Analysis of Unit Root Variables in Energy Log Price Series...118 Table 6.4. Unitary Root Analysis of the Residue in Regression OMIP M+1 versus Fuels in Columns...119 Table 6.5. Regression Results OMIP M+1 versus Fuels shown in columns...119 Table 6.6. Comparison of Annual Average CSS per Maturity ( M+1, Q+1, Y+1 ) and CSS built with Spanish LNG Monthly Index...122 x

RESUMEN El mercado ibérico de futuros de energía eléctrica gestionado por OMIP ( Operador do Mercado Ibérico de Energia, Pólo Português, con sede en Lisboa), también conocido como el mercado ibérico de derivados de energía, comenzó a funcionar el 3 de julio de 2006. Se analiza la eficiencia de este mercado organizado, por lo que se estudia la precisión con la que sus precios de futuros predicen el precio de contado. En dicho mercado coexisten dos modos de negociación: el mercado continuo (modo por defecto) y la contratación mediante subasta. En la negociación en continuo, las órdenes anónimas de compra y de venta interactúan de manera inmediata e individual con órdenes contrarias, dando lugar a operaciones con un número indeterminado de precios para cada contrato. En la negociación a través de subasta, un precio único de equilibrio maximiza el volumen negociado, liquidándose todas las operaciones a ese precio. Adicionalmente, los miembros negociadores de OMIP pueden liquidar operaciones Over-The-Counter (OTC) a través de la cámara de compensación de OMIP (OMIClear). Las cinco mayores empresas españolas de distribución de energía eléctrica tenían la obligación de comprar electricidad hasta julio de 2009 en subastas en OMIP, para cubrir parte de sus suministros regulados. De igual manera, el suministrador de último recurso portugués mantuvo tal obligación hasta julio de 2010. Los precios de equilibrio de esas subastas no han resultado óptimos a efectos retributivos de tales suministros regulados dado que dichos precios tienden a situarse ligeramente sesgados al alza. La prima de riesgo ex-post, definida como la diferencia entre los precios a plazo y de contado en el periodo de entrega, se emplea para medir su eficiencia de precio. El mercado de contado, gestionado por OMIE ( Operador de Mercado Ibérico de la Energía, conocido tradicionalmente como OMEL ), tiene su sede en Madrid. Durante los dos primeros años del mercado de futuros, la prima de riesgo media tiende a resultar positiva, al igual que en otros mercados europeos de energía eléctrica y gas natural. En ese periodo, la prima de riesgo ex-post tiende a ser negativa en los mercados de petróleo y carbón. Los mercados de energía tienden a mostrar niveles limitados de eficiencia de mercado. La eficiencia de precio del mercado de futuros aumenta con el desarrollo de otros mecanismos coexistentes dentro del mercado ibérico de electricidad (conocido como MIBEL ) es decir, el mercado dominante OTC, las subastas de centrales virtuales de generación conocidas en España como Emisiones Primarias de Energía, y las subastas para cubrir parte de los suministros de último recurso conocidas en España como subastas CESUR y con una mayor integración de los mercados regionales europeos de energía eléctrica. Se construye un modelo de regresión para analizar la evolución de los volúmenes negociados en el mercado continuo durante sus cuatro primeros años como una función de doce indicadores potenciales de liquidez. Los únicos indicadores significativos son los volúmenes negociados en las subastas obligatorias gestionadas por OMIP, los volúmenes negociados en el mercado OTC y los volúmenes OTC compensados por OMIClear. El número de creadores de mercado, la incorporación de agentes financieros y compañías de generación pertenecientes a grupos integrados con suministradores de último recurso, y los volúmenes OTC compensados por OMIClear muestran una fuerte correlación con los volúmenes negociados en el mercado continuo. La liquidez de OMIP xi

está aún lejos de los niveles alcanzados por los mercados europeos más maduros (localizados en los países nórdicos (Nasdaq OMX Commodities) y Alemania (EEX)). El operador de mercado y su cámara de compensación podrían desarrollar acciones eficientes de marketing para atraer nuevos agentes activos en el mercado de contado (p.ej. industrias consumidoras intensivas de energía, suministradores, pequeños productores, compañías energéticas internacionales y empresas de energías renovables) y agentes financieros, captar volúmenes del opaco OTC, y mejorar el funcionamiento de los productos existentes aún no líquidos. Resultaría de gran utilidad para tales acciones un diálogo activo con todos los agentes (participantes en el mercado, operador de mercado de contado, y autoridades supervisoras). Durante sus primeros cinco años y medio, el mercado continuo presenta un crecimento de liquidez estable. Se mide el desempeño de sus funciones de cobertura mediante la ratio de posición neta obtenida al dividir la posición abierta final de un contrato de derivados mensual entre su volumen acumulado en la cámara de compensación. Los futuros carga base muestran la ratio más baja debido a su buena liquidez. Los futuros carga punta muestran una mayor ratio al producirse su menor liquidez a través de contadas subastas fijadas por regulación portuguesa. Las permutas carga base liquidadas en la cámara de compensación ubicada en Madrid MEFF Power, activa desde el 21 de marzo de 2011 muestran inicialmente valores altos debido a bajos volúmenes registrados, dado que esta cámara se emplea principalmente para vencimientos pequeños (diario y semanal). Dicha ratio puede ser una poderosa herramienta de supervisión para los reguladores energéticos cuando accedan a todas las transacciones de derivados en virtud del Reglamento Europeo sobre Integridad y Transparencia de los Mercados de Energía ( REMIT ), en vigor desde el 28 de diciembre de 2011. La prima de riesgo ex-post tiende a ser positiva en todos los mecanismos (futuros en OMIP, mercado OTC y subastas CESUR) y disminuye debido a la curvas de aprendizaje y al efecto, desde el año 2011, del precio fijo para la retribución de la generación con carbón autóctono. Se realiza una comparativa con los costes a plazo de generación con gas natural (diferencial clean spark spread ) obtenido como la diferencia entre el precio del futuro eléctrico y el coste a plazo de generación con ciclo combinado internalizando los costes de emisión de CO 2. Los futuros eléctricos tienen una elevada correlación con los precios de gas europeos. Los diferenciales de contratos con vencimiento inmediato tienden a ser positivos. Los mayores diferenciales se dan para los contratos mensuales, seguidos de los trimestrales y anuales. Los generadores eléctricos con gas pueden maximizar beneficios con contratos de menor vencimiento. Los informes de monitorización por el operador de mercado que proporcionan transparencia post-operacional, el acceso a datos OTC por el regulador energético, y la valoración del riesgo regulatorio pueden contribuir a ganancias de eficiencia. Estas recomendaciones son también válidas para un potencial mercado ibérico de futuros de gas, una vez que el hub ibérico de gas actualmente en fase de diseño, con reuniones mensuales de los agentes desde enero de 2013 en el grupo de trabajo liderado por el regulador energético español esté operativo. El hub ibérico de gas proporcionará transparencia al atraer más agentes y mejorar la competencia, incrementando su eficiencia, dado que en el mercado OTC actual no se revela precio alguno de gas. xii

ABSTRACT The Iberian Power Futures Market, managed by OMIP ( Operador do Mercado Ibérico de Energia, Pólo Português, located in Lisbon), also known as the Iberian Energy Derivatives Market, started operations on 3 July 2006. The market efficiency, regarding how well the future price predicts the spot price, is analysed for this energy derivatives exchange. There are two trading modes coexisting within OMIP: the continuous market (default mode) and the call auction. In the continuous trading, anonymous buy and sell orders interact immediately and individually with opposite side orders, generating trades with an undetermined number of prices for each contract. In the call auction trading, a single price auction maximizes the traded volume, being all trades settled at the same price (equilibrium price). Additionally, OMIP trading members may settle Over-the-Counter (OTC) trades through OMIP clearing house (OMIClear). The five largest Spanish distribution companies have been obliged to purchase in auctions managed by OMIP until July 2009, in order to partly cover their portfolios of end users regulated supplies. Likewise, the Portuguese last resort supplier kept that obligation until July 2010. The auction equilibrium prices are not optimal for remuneration purposes of regulated supplies as such prices seem to be slightly upward biased. The ex-post forward risk premium, defined as the difference between the forward and spot prices in the delivery period, is used to measure its price efficiency. The spot market, managed by OMIE (Market Operator of the Iberian Energy Market, Spanish Pool, known traditionally as OMEL ), is located in Madrid. During the first two years of the futures market, the average forward risk premium tends to be positive, as it occurs with other European power and natural gas markets. In that period, the ex-post forward risk premium tends to be negative in oil and coal markets. Energy markets tend to show limited levels of market efficiency. The price efficiency of the Iberian Power Futures Market improves with the market development of all the coexistent forward contracting mechanisms within the Iberian Electricity Market (known as MIBEL ) namely, the dominant OTC market, the Virtual Power Plant Auctions known in Spain as Energy Primary Emissions, and the auctions catering for part of the last resort supplies known in Spain as CESUR auctions and with further integration of European Regional Electricity Markets. A regression model tracking the evolution of the traded volumes in the continuous market during its first four years is built as a function of twelve potential liquidity drivers. The only significant drivers are the traded volumes in OMIP compulsory auctions, the traded volumes in the OTC market, and the OTC cleared volumes by OMIClear. The amount of market makers, the enrolment of financial members and generation companies belonging to the integrated group of last resort suppliers, and the OTC cleared volume by OMIClear show strong correlation with the traded volumes in the continuous market. OMIP liquidity is still far from the levels reached by the most mature European markets (located in the Nordic countries (Nasdaq OMX Commodities) and Germany (EEX)). The market operator and its clearing house could develop efficient marketing actions to attract new entrants active in the spot market (e.g. energy intensive industries, suppliers, small producers, international energy companies and renewable xiii

generation companies) and financial agents as well as volumes from the opaque OTC market, and to improve the performance of existing illiquid products. An active dialogue with all the stakeholders (market participants, spot market operator, and supervisory authorities) will help to implement such actions. During its firs five and a half years, the continuous market shows steady liquidity growth. The hedging performance is measured through a net position ratio obtained from the final open interest of a month derivatives contract divided by its accumulated cleared volume. The base load futures in the Iberian energy derivatives exchange show the lowest ratios due to good liquidity. The peak futures show bigger ratios as their reduced liquidity is produced by auctions fixed by Portuguese regulation. The base load swaps settled in the clearing house located in Spain MEFF Power, operating since 21 March 2011, with a new denomination (BME Clearing) since 9 September 2013 show initially large values due to low registered volumes, as this clearing house is mainly used for short maturity (daily and weekly swaps). The net position ratio can be a powerful oversight tool for energy regulators when accessing to all the derivatives transactions as envisaged by European regulation on Energy Market Integrity and Transparency ( REMIT ), in force since 28 December 2011. The ex-post forward risk premium tends to be positive in all existing mechanisms (OMIP futures, OTC market and CESUR auctions) and diminishes due to the learning curve and the effect since year 2011 of the fixed price retributing the indigenous coal fired generation. Comparison with the forward generation costs from natural gas ( clean spark spread ) obtained as the difference between the power futures price and the forward generation cost with a gas fired combined cycle plant taking into account the CO 2 emission rates is also performed. The power futures are strongly correlated with European gas prices. The clean spark spreads built with prompt contracts tend to be positive. The biggest clean spark spreads are for the month contract, followed by the quarter contract and then by the year contract. Therefore, gas fired generation companies can maximize profits trading with contracts of shorter maturity. Market monitoring reports by the market operator providing post-trade transparency, OTC data access by the energy regulator, and assessment of the regulatory risk can contribute to efficiency gains. The same recommendations are also valid for a potential Iberian gas futures market, once an Iberian gas hub currently in a design phase, with monthly meetings amongst the stakeholders in a Working Group led by the Spanish energy regulatory authority since January 2013 is operating. The Iberian gas hub would bring transparency attracting more shippers and improving competition and thus its efficiency, as no gas price is currently disclosed in the existing OTC market. xiv

KEY WORDS / PALABRAS CLAVE Energy regulation; Power futures; Market supervision; Market efficiency; Forward risk premium; Risk Management; Energy derivatives Regulación energética; Futuros de energía eléctrica; Supervisión del mercado; Eficiencia del Mercado; Prima de riesgo a plazo; Gestión del riesgo; Derivados de energía xv

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LIST OF ABBREVIATIONS ACER: Agency for the Cooperation of Energy Regulators ACM: Dutch Energy Regulatory & Competition Authority ADF: Augmented Dickey-Fuller s Test AOC: Spanish Gas Virtual Trading Point ARA: Amsterdam-Rotterdam-Antwerp coal import harbours ARIAE: Association of the Ibero-American Energy Regulatory Agencies ARIS: ACER REMIT Information System ARMA: AutoRegressive Moving Average BB: Best Bid (the most expensive purchase) BME: Spanish Bourse and Markets BO: Best Offer (the cheapest sale) BOE: Spanish Official Gazette CAE: Portuguese Energy Purchasing Contracts CCGT: Combined Cycle Gas Turbine CCP: Central CounterParty CEER: Council of European Energy Regulators CESUR: Energy Contracts for the Last Resort Supply CfD: Contracts for Differences CFTC: U.S. Commodity Futures Trading Commission CMVM: Portuguese Securities Market Commission CNE: Spanish Energy Commission CNMC: Spanish Commission of Markets and Competition CNMV: Spanish Securities Market Commission COB: California-Oregon Border COT: Commitments of Traders report CPUC: California Public Utilities Commission DERA: Danish Energy Regulatory Authority DG ENER: European Commission s Directorate-General for Energy DG TREN: European Commission s Directorate-General for Transport and Energy DJ-UBSCI: Dow Jones-UBS Commodity Index DTe: Dutch Office of Energy Regulation EEC: European Commodity Clearing EEX: European Energy Exchange EFET: European Federation of Energy Traders EI: Swedish Energy Market Inspectorate ENTSO-E: European Network of Transmission System Operators for Electricity ENTSO-G: European Network of Transmission System Operators for Gas EPE: Energy Primary Emissions EPEX: European Power Exchange ERSE: Portuguese Regulatory Entity for the Energy Services EU: European Union EUA: European Union Allowances EU ETS: European Union Emissions Trading System FERC: Federal Energy Regulatory Commission FIFO: First In First Out FTB: Futures Base load FTR: Financial Transmission Right xvii