Electricity Futures Markets
Successful launches of electricity futures markets in smaller power markets are rare. The most recent one was the NEMS in Singapore. This successful launch was the result of more than three years of careful planning, product design, industry engagement and launch preparations. The Singapore example thus holds valuable lessons for other nascent electricity markets that have plans for extending electricity trading beyond spot markets. The course will provide first-hand in-depth understanding of the challenges facing nascent power markets when launching a forward or futures market, options of addressing these challenges through product design, incentives, industry engagement and other measures. The course explains the positive effects of a futures market, the new opportunities it brings for utilities’ risk management, as well as regulatory questions.
"Overview of physical and financial power markets • Overview of various electricity markets: Nordpool (Northern Europe), EPEX/EEX (Western Europe), GCCIA (Gulf), NEMS/SGX (Singapore), NZEM (New Zealand), KPX (Korea) in terms of history, physical and financial volume
• Characteristics of market structures
• Stakeholders in the markets: TSO, market operator, clearing house, members, utilities, independent retailers
• Case study: Volume growth and product development in the small derivative market of New Zealand"
"Regulatory intentions of creating a futures market • The ‘social value’ of an electricity forward curve
• Lower entry barriers for generators
• Support for independent retailers and downstream competition
• Direct purchasing for large electricity users
• Case study: Regulatory considerations in the case of the Western European and the Singaporean electricity derivatives markets"
Successful product design depending on a given physical market
• Physical market characteristics that influence derivative design, like intra-day price swings and seasonal price patterns
• Various electricity derivative types
• Designing derivative products for an underlying physical market
• Considerations of tenor and cascading
• Mapping line constraints and regional pricing to product design
• Which customer types need what kind of products
• Settlement process for derivatives: Margining, daily settlement price (with particular focus on the peculiarities of electricity, what works and what doesn’t work), final settlement price, settlement for options based products
• Case study: Product development in Nordpool (Northern Europe) and NZEM (New Zealand)
Risk management in utilities using derivatives
• Management of physical risks with available financial derivatives
• Organizational setup of a utility’s risk management functions
• Risk transfer within a utility
• Introduction to hedge accounting
• Case study: Organization and risk transfer within a European utility
Market making for futures, and incentives for market making
• Role of a market maker
• Who can be a market maker
• Risks and risk management in market making
• Options to incentivize market makers
• Regulatory options to foster liquidity in futures
• Case study: Market making on EEX and SGX
Information disclosure for futures markets
• How is market power exercised in electricity markets, and what mitigants are available
• What information disclosure is critical for non-physical market participants to trust a futures market and actively trade it
• The trade-off between usefulness of a futures market for physical market participants, and extensive disclosure to give financial market participants comfort in the market
• Introduction to REMIT as an example
• Case study: Voluntary transparency initiative by Western Europe utilities
Market surveillance for futures market
• Physical and financial market regulation – differences and requirements
• Surveillance for financial power markets, with ACER as an example
• Information sharing between physical and financial oversight bodies
• Case study: Surveillance and information sharing between financial and physical markets in Singapore