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A New Power Exchange for the UK?

Posted in Market Design,Trading,UK by Cheryl Morgan on the July 15th, 2008

Long, long ago and far, far away, the UK decided to get rid of the famous Pool and set up a trading-based market instead. Questions were asked as to whether an official exchange would be established as part of the new market design, but Professor Littlechild, then head of OFFER, decided to let the market decide. There were, after all, many firms eager and willing to set up exchanges. Where are they all now?

Gone. Aside from the Balancing Mechanism, which doesn’t come into operation until after gate closure, there isn’t an exchange for UK power, and liquidity of OtC trading is apparently falling fast. This is not a healthy situation. Via the medium of the Futures and Options Association’s Power Trading Forum, a group of companies is looking to set up a new exchange. You can read about the project here.

Finding someone who could operate the market is probably not hard. There are several power exchanges in Europe. All of them appear to be growing their traded volumes. But will they be interested in the UK? A key issue has to be vertical integration. The more of it there is, the less need there is for trading, and there is certainly a lot of vertical integration in the UK. However, the head of the FOA project, Paul Benyon of RWE, thinks that there is still enough imbalance in the market to support an exchange (see this presentation).

So what is going wrong? Why have all of the other exchanges failed? Possibly they have not been offering the right products at the right price, and this is where the FOA’s investigation is focused. Could someone come up with a better product – one that UK power companies will actually want to trade.

The fastest growing exchange in Europe (according to Benyon’s slides) is Leipzig-based EEX. One of the attractions of the market is apparently a relatively low initial margin payment. And EEX is apparently interested in the project. This Platts interview with CEO Hans-Bernd Menzel reveals that three proposals have been short-listed by the FOA, and EEX is one of the successful bidders.

The proceedings are still being kept very quiet, an details of what the new exchange will look like are unlikely to be available until such time as a successful bidder is selected. But at least the project appears to be moving forward.

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