COMMODITY MARKET

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The European market is dominated by several large exchanges which participated in consolidations and now decide about the strategic directions of development of the single energy market and its technologies. Nord Pool Spot (present in Norway, Sweden, Finland and Denmark) has expanded to the Baltic states (Lithuania, Estonia, Latvia); APX-Endex has expanded to the UK and has a presence in the UK, Belgium and the Netherlands; EPEX Spot has expanded to France (presence in Germany, France, Switzerland and Austria).

In the course of consolidations on the European market, smaller exchanges may lose their footprint, especially where their local markets are statistically and geographically small. With a very liquid energy market and good geographic location in Central and Eastern Europe, POLPX aspires to be one of the major exchanges.

Energy and Gas Market in Europe

POLPX’s market environment including participants of the wholesale electricity and gas markets remained stable in 2016. The number of active participants of trade in electricity and gas increased but not significantly as there were close to fifty Exchange Members. The other participants of trading used the exchange’s services through the mediation of brokerage houses. A rising volume of spot trade was coupled with a decrease in trading on the Commodity Forward Instruments Market, where falling trade in electricity drove down the overall volume of trade in electricity year on year. This was one of effects of phasing out a solution which impacts the size of mandatory trading on the exchange as a major part of wholesale trade in electricity moved to the OTC market. The gas market, which is resilient to such developments owing to its current regulatory framework, reported the highest volume of trade in history of the exchange. The rising importance of the spot market as compared to forward trade, observed over the past years, has continued, especially on the market in gas.

Other power exchanges in the vicinity of Poland reported a rising turnover in forward transactions in 2016 while the spot markets were more diverse. Several forward markets witnessed a moderate increase (by several percentage points), including countries south of Poland (Czech Republic and Hungary: PXE, HUPX) as well as the Nordic region (Nasdaq OMX). The European Energy Exchange (EEX) enjoyed a much stronger growth of trade in forward instruments on its three core markets: German/Austrian, Italian, and French. The volume on the first two markets grew by more than a half year on year in 2016. Unlike POLPX, EEX saw a shift in trade in electricity from the OTC to the exchange market.

On the spot markets, a moderate increase in turnover in the Czech Republic, Hungary, and the Nordic region coincided with a decrease in several Western European countries including Germany, the Benelux, and the UK. They dropped by several percent, more than the reduction in electricity consumption in some of those countries. The markets in natural gas operated for the biggest European hubs on the PEGAS platform witnessed continued growth in 2016, including spot and forward trade, for nearly all hubs. The increase was almost as sharp as in 2015 at close to 50% on the spot market and close to 90% on the forward market.

Volume of trade in electricity on European exchanges in 2016 (spot) [TWh]

Volume of trade in electricity on European exchanges in 2016 (spot) [TWh] 

Source: POLPX based on exchange data

Volume of trade in electricity on European exchanges in 2016 (forward) [TWh]

Volume of trade in electricity on European exchanges in 2016 (forward) [TWh] 

Source: POLPX based on exchange data

The example of other European countries confirms that the energy exchange has prospects of further growth driven by two factors. First, on the market in electricity, the volume of trade on the exchange may be greater than ever before as compared to OTC trade; second, there is room to grow the overall liquidity of trade in commodities. This is facilitated by the development of infrastructure supporting imports of both commodities as well as the generation of power; just as important is the continued development of POLPX’s relations with market participants aiming to align its organisation with their specific needs.

The biggest room for growth on the electricity market is opened by the liquidity of the exchange forward market; for gas, it is driven by the OTC platform operated in the POLPX Group.

In 2016, the Parliament approved deregulation of gas prices for industrial customers in two phases on 2017. The decision is good for POLPX as the organiser of a wholesale market as it will become more involved in the pricing of products for industrial customers. The regulations imposing mandatory sale of electricity and natural gas on the exchange have remained unchanged. However, the expiration of long-term contracts caused a sharp decrease in the volume of mandatory sale of electricity on the exchange, resulting in lower liquidity of the POLPX forward market. In 2016, the volume of trade in electricity on the Commodity Forward Instruments Market was less than two-thirds of energy consumption in Poland (excluding own consumption of power plants), which hurts the transparency of the local market.

Volume of trade on European gas exchanges in 2016 (spot) [TWh]

Volume of trade on European gas exchanges in 2016 (spot) [TWh]

Source: TGE

Volume of trade on European gas exchanges in 2016 (forward) [TWh]

Volume of trade on European gas exchanges in 2016 (forward) [TWh]

Source: POLPX based on exchange data 

In terms of prices, 2016 brought a major reduction of gas prices as well as diverse trends on the electricity market. Average spot prices increased in Poland and in the Nordic region; however, the increase followed very low electricity prices in 2015. Electricity prices on the POLPX forward market were lower than in 2015. Prices on the wholesale market in electricity and gas are driven mainly by two factors, i.e. the cost of production or imports, as a function of the market balancing demand and supply, leveraged to maximise gains of trading participants. The second element indirectly involves the impact of prices of emission allowances, property rights to certificates of origin, and in the future support for the construction of new conventional power plants on the power market. In 2017, the prices of oil, natural gas and probably also coal are expected to rise, resulting in higher electricity prices.