The announcement is EEX’s answer to the challenges of the energy turnaround. The exchange will offer new products that make flexibility on the power market tradable. To this end, the company has published a concept document at the E-world energy & water trade fair in Essen. This follows the ‘green book’ for the future design of the power market, which has recently been issued by the Federal Ministry of Economic Affairs.
EEX is one of the leading energy exchanges in Europe. It develops, operates and connects secure, liquid and transparent markets for energy and commodities products.
“The energy turnaround, which results in a further increase in market share for renewable energies, necessitates the further development and optimisation of the existing power market” said Peter Reitz, CEO of EEX. “This also includes the need for new products, which will contribute to our success in coping with the challenges of the energy turnaround. For us, turning the flexibility demanded by the market into tradable commodities whose price is established on the market, constitutes one of the most important challenges.”
The demand for flexibility is mainly due to the increasing generation of electricity from renewable energy which cannot be planned in advance with total accuracy. Market participants therefore need tools in order to be able to adjust their short term positions in situations involving deficiencies in wind and solar power (known as ‘dark calm’) and to avoid imbalances between generation and consumption.
Power trading is increasingly taking place on the short-term Intraday Market, because of the growing share of renewable energies. Furthermore, increasing volatility and the emergence of price peaks is also increasingly causing a shift from the Day-Ahead to the Intraday Market.
EEX is developing financially settled derivatives market products which can be used to cover price peaks on the Intraday Market. A so-called Cap Future can be used to hedge against prices which exceed a certain price cap and where it is not known if, when and to what extent these price peaks will emerge.
The buyer of a Cap Future receives a payment from the seller for those hours during which the Intraday price is above the cap equal to the difference between the market price of the hours concerned and the cap.
In summary, a Cap Future has the effect of an insurance against high prices in short-term trading of hourly contracts for the buyer.
For the seller on the other hand, the price of the Cap Future constitutes a premium for the willingness to assume the price risk of the cap being exceeded. By using their own flexible generation capacity on the Intraday Market, the seller, in turn, can cover this risk. Therefore, Cap Futures lead to additional revenue for flexible generation capacity and create investment incentives for plants providing this.
EEX will launch trading in Cap Futures in 2015. As a result, the exchange will become the first to offer flexibility products. EEX also plans to offer further energy turnaround products, such as weather derivatives.
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