Intra-day markets: a necessary tool for trading portfolio optimisation

Intra-day markets: a necessary tool for trading portfolio optimisation Seminar organized by XM Compañía de Expertos en Mercados Medellín, May 18 th, 2012

Agenda 1. What is the intraday market for? 2. Intraday vs day-ahead vs balancing 3. Trading on the Intraday 4. Focus on the integration of renewable energy in a liberalized power market 2

P-C balance: a constant goal As electricity cannot be stored, Production / Consumption balance must be ensured on real time Electricity cannot be stored Power demand varies at each time Unplanned outages of power plants or transmission lines can disrupt the P&C Balance It is essential to ensure the P&C balance on real time but also on the long-run taking into account both internal and crossborder trading. Organization of the power sector has to cope with this constraint of P=C in real time Consumption Production 3

What is the intraday market for? When to use it? ❶ ❷ ❸ ❹ Purchase or sale of quantities that have not been executed on the Auction. In case of unexpected power plant failure after the Auction is closed. Re-balancing of portfolio closer to real-time Arbitrage with neighboring markets 4

Two Main Products at EPEX SPOT Day-Ahead Intraday 6

Optimising a power generation unit Day-ahead, intraday and balancing 7

Intraday market vs day-ahead auction Day-Ahead Auction and Intraday are complementing each other EPEXDAY AHEAD The auction is a blind process: No pre-auction price indicator Uncertainty on executed amount and price Simple order types The auction is a liquidity pool EPEXINTRADAY The intraday is a flexible tool to trade close to real time. 8

Balancing vs Intraday D-X D-1 D=Delivery Forwards / Futures / Options / Swaps OTC and Exchange «Day-ahead» OTC and Exchange Intraday Market OTC and Exchange Balancing Market: TSO Intraday and balancing are much alike in terms of lead-time ahead of delivery but they also differ in many respects. 9

EPEX SPOT Intraday Continuous Trading The Intraday market begins after the closure of the day-ahead markets and thus is operated until close to delivery (45 minutes) Lists hourly and block contracts as well as single 15-minute contracts Allows cross-border trading between France and Germany: connection between the trading system and the intraday capacity platform managed by Transmission System Operators parallel access to capacities for the cross-border trading on the exchange and OTC key to liquidity and market efficiency FITS: Flexible Intraday Trading Scheme Advantages of FITS: Simple governance, clear definition of roles Fast implementation, using existing infrastructure Efficient access for exchange members to a flexible and liquid market 11

FITS: Flexible Intraday Trading Scheme 23 rd November 2010: Single trading system for France and Germany (ComXerv) 14 th of December 2010: Connection of EPEX trading system to the capacity platform Cross-Border trading system + Connection to TSOs platform = FITS (Flexible Intraday Trading Scheme) Integration of the two trading platforms to facilitate cross-border trading 12

The incentives to integrate EPEX Spot intraday markets Some of the benefits of integrated intraday markets: Increased last minute optimisation opportunities More efficient capacity utilization Lower grid imbalances Lower balancing costs Important cross-border trading opportunities the example of the French-German interconnection : DE>FR FR>DE Strong benefits to be gained by market players, TSOs from the implementation of a cross-border mechanism between EPEX Spot hubs Average available intraday ATC Average use of intraday ATC 2 312 MW (Jan-Oct '10) 3 720 MW (Jan-Oct '10) 5%* 5%* Average number of users of intraday ATC 3* 3* * Source: French Energy Regulator, 2008 Annual Report on Interconnection 13

Orders Matching Rules Rule The system will match compatible orders according to priority rules. Orders are arranged in the order book: by side (bid or ask), by limit price, by time of reception. The best orders in the order book are matched automatically with same- or betterpriced orders entered in the order book. The order is executed at the price of the order already present in the order book. 14

Clearing and settlement 1. Once two orders are matched, the transaction is created. 2. The transaction is made anonymous and transferred immediately to the clearing house. 3. The clearing house acts as a central counterparty and takes the place of buyers towards sellers and viceversa. 4. The clearing house is responsible for the financial safety of the exchange. 15

Intraday volumes Intraday markets are still very active both locally and cross-border Cross-border trades represented on average 13% of total traded volume Cross-border trades facilitated by the Flexible Intraday Trading Scheme (FITS) Liquidity doubled in France 16

Market data broadcasting Market data are distributed on EPEX website and ftp server every 10 minutes. Historical data are available on subscription on a private section of the website and on the ftp server Alert messages: To be sent via SMS when prices break pre-determined threshold: to be available soon EPEX Spot intraday market Indexes are daily volume-weighted average of transaction prices. 17

Development of renewable energy in Germany 20-20-20 Renewables Efficiency Nuclear Exit 700 TWh/y 600 500 400 300 200 100 0 17% Mio t/y 80% -85% Ambitious goals can be reached by 2020 by massively installing RE capacities. By 2050, Germany will have to import RE from the EU or reduce demand. 1 200 1 000 800 600 400 200 0 Analysis: EPEX SPOT Sources s: BMU, Statistisches Bundesamt, Umweltbundesamt 19

Introduction renewables in Germany Main market drivers German renewable production, 1990-2050 Analysis: EPEX SPOT; Source: BMU Source: TSOs Installed renewable capacity, 2012 Jan 2012 Feb 2012 Mar 2012 80% onshore wind 27.751 27.832 29.121 solar 21.990 23.860 25.095 biomass 4.803 4.818 5.111 35% hydro 1.382 1.381 1.359 20% gases 618 610 609 offshore wind 208 209 210 geothermal energy 8 9 8 Total 56.760 58.720 61.515 The development of renewables in Germany can potentially lead to increasing volumes on the exchange, depending on the evolution of the regulatory framework and the market design. 20

Germany s promotion schemes for renewables An nalysis: EPEX SPOT In the coming years, market-based models (e.g. Market Premium) will progressively replace the feed-in tariff. EPEX SPOT actively supports this evolution and offers participants a transparent, liquid & secure trading platform. 21

Market integration of renewables on EPEX SPOT Volumes - EPEX DE/AT Auction Baseload price - EPEX DE/AT Auction Analysis: EPEX Rising liquidity No discontinuity in price evolution No increase in volatility Lower occurrence of negative prices SPOT Sources: EPEX SPOT The spot market has proven to be a suitable instrument for the integration of RE in Germany (sustained by CWE Market Coupling). The exchange provides a liquid, secure and transparent marketplace with a stable reference price. 22

Price impact of erratic wind production [MW] 70000 [ /MWh] 140 [ /MWh] A. 140 B. C. Oil C. 60000 50000 40000 A. 30000 20000 10000 B. 120 100 80 60 40 20 120 100 80 60 40 20 Nuclear Lignite CCG Coal Gas turbine CCG Analysis: EPEX SPOT Sour rces: EEX, EPEX SPOT, IEWT 0 Forecasted load [MW per hour] 0 0 0 15 30 45 60 [GW] The concerted development of all 3 strategic pillars is fundamental to efficiently integrate RE in EU: flexible production, reliable grid & integrated markets. 23

Conclusion: key success factors In order for an intraday market to perform, it is necessary to have: Well adapted internal and cross-border nominations rules Prevalence of the clearing house nominations over other nominations No obligation to be balanced in day-ahead A secure and user-friendly trading system Experienced and well-organised market operations with thoroughly tested procedures If liquidity is not spontaneously present in the order book, then it is possible to resort to market makers: Exchange members committed by contract to enter orders at a predetermined bid-ask spread and volume. 24

POWER FOR TODAY. POWER FOR TOMORROW. 25