Commodity market

The European electricity market is fragmented and comprises a dozen different commodity and financial exchanges. Different EU national markets are at different phases of growth and exchanges offer very different products despite ongoing unification of the spot markets. Consequently, market participants either work with a single exchange or decide to join several exchanges depending on their market preferences and must pay a higher cost. The same is true of clearing services. It is expected that exchanges should follow the market by consolidating and integrating clearing houses in order to cover possibly the biggest geographic area and maximise the volume of trading and clearing.

Those exchanges that are required by the CACM Regulation to create competition on the electricity market have opted for one of two strategies: either to protect their interests under monopoly regulations (GME, OMIE) or to consolidate and expand dynamically (EPEX SPOT, NORD POOL). Exchanges have already been consolidating and consolidation may soon come to Central and Eastern Europe. Exchanges operating spot markets have close capital links with Transmission System Operators (NORD POOL, EPEX SPOT) in Western and Northern Europe. The spot market could soon become a regulated market under strong pressure of regulators (OTE, OKTE, HUPX, OMIE, GME), as witnessed in the preparation and approval of market documents under the CACM Regulation and as required to demonstrate cost transparency.

Market solutions under implementation on the European energy markets in accordance with the applicable regulations (CACM, MCO Plan, MNA) prompt TGE to align itself with the regional and European markets in order to ensure:

  • implementation of TGE’s strategy of a reliable and professional electricity exchange;
  • conditions of TGE’s presence and efficient operation as an energy exchange on the national and European spot market under conditions of competition between exchanges;
  • implementation of functions under the ERA President’s Letter of Guarantee;
  • contractual and technical capacity of full-fledged active participation in market development projects and implementation of EU market mechanisms jointly with other European exchanges.

Energy and Gas Market in Poland and in Europe

The year 2017 was the second consecutive year when liquidity on the exchange electricity market was adversely impacted by a reduction of the volume of mandatory sale on the exchange. Consequently, the volume of trading in electricity on the Commodity Forward Instrument Market decreased as expected. The volume of mandatory sales affected the spot market in 2017, as well, as its trading volume decreased after hitting a historical high in 2016; however, the volume in 2017 was higher than in 2015. The gas market, which was spared major regulatory changes, reported a historically high annual volume of trading on TGE for the second year running. In 2017, it was driven by growing activity on the forward market, where the volume of trading exceeded the historical record set in 2014. This was possible owing to active trading of market participants including contracts with deliveries in 2017 and beyond. On the other hand, the uptrend in volumes of trade on the spot market initiated soon after the market opened (late 2012) came to an end.

The year 2017 was a difficult time for trade in electricity and gas derivatives in view of the EU Markets in Financial Instruments Directive (MiFID2) which comes into force in January 2018. MiFID2 provides for a new status of such derivatives and imposes new obligations both on organisers of trade in such instruments and on trading entities. Those developments most likely affected the liquidity of trade in futures with financial settlement, which is crucial to the European electricity market. Trade in such contracts decreased substantially, mainly on the Nordic market (Nasdaq OMX), in the Czech Republic (PXE – EEX Group), in Germany, France and Italy (EEX). Another factor on the German market is the planned split of the German-Austrian electricity trading zone. The gas market, where trade mainly includes contracts with physical delivery, did not change as dramatically, although the volume of trading in derivatives on the German and French markets decreased sharply. On the spot market, 2017 was another year of fast growth of trade in natural gas while trade in electricity did not change significantly compared to 2015-2016, especially on the biggest markets.

Volume of trading in electricity on European exchanges in 2017 (spot) [TWh]

Source: TGE based on exchange data

Volume of trading in electricity on European exchanges in 2017 (forward) [TWh]

Source: TGE based on exchange data, estimates for EEX

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 trading 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 TGE’s relations with market participants aiming to align its organisation with their specific needs.

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

Deregulation of gas prices for industrial customers took effect in October 2017. The decision is good for TGE 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 were amended in December 2017. A decrease of trade on the exchange was one of the drivers of the decision to change the level of the obligation set in the Energy Law from 15 to 30 percent of generated energy.

Volume of trading on European gas exchanges in 2017 (spot) [TWh]

Source: TGE based on exchange data

Volume of trading on European gas exchanges in 2017 (forward) [TWh]

Source: TGE based on exchange data

Prices of energy commodities: natural gas and oil, increased in 2017 as expected. Prices on European spot electricity markets also increased with the exception of the Polish market where they remained relatively low. Energy prices in Poland increased substantially only on the forward market, mainly for deliveries in 2018 and 2019.