Nov. 29 (Bloomberg) -- The biggest changes to Europe’s energy market since it was liberalized in the 1990s probably will miss a third deadline, traders and analysts said as the second target date passed.
Network and exchange operators likely won’t meet the Feb. 4 goal to join up day-ahead power trading in 15 nations from the U.K. to Finland, according to eight of 12 traders and analysts surveyed by Bloomberg News after the Nov. 26 deadline passed. Two respondents said they didn’t have a view.
Integrating electricity trading in the 28-nation European Union, known as market coupling, is intended to increase competition by allowing power to flow more easily across borders to markets where prices are higher. The European Commission, the EU’s executive arm, estimates the annual savings for consumers at as much as 4 billion euros ($5 billion).
“It is an unprecedented project in size, covering 75 percent of domestic consumption,” Jean-Francois Conil-Lacoste, chief executive officer of Epex Spot SE, the Paris-based exchange operator, said at a conference in Berlin on Nov. 26. Technical problems must be overcome first because “once it is flying, there is no room for mistakes.”
Market coupling is expected to smooth out price gaps between countries. The day-ahead price in Germany, Europe’s largest power market, averaged 40.02 euros a megawatt-hour this year, compared with 59.47 euros for the same contract in the U.K., according to broker data compiled by Bloomberg. The gap jumped to a record 92 euros in December 2012.
“Market areas that had above-average prices before the coupling, for example the U.K. and the Netherlands, can generally expect falling prices,” Johannes Mayer, a researcher at the ISE Fraunhofer Institute in Freiburg, Germany, said by e-mail. Markets with below-average prices, such as Germany and Scandinavia, may see higher prices, he said.
German power for next-year delivery, the European benchmark contract, is headed for a third annual decline, its longest losing streak since trading began on the Leipzig, Germany-based European Energy Exchange AG in 2002. Electricity for 2014 on EEX fell 0.4 percent to settle at 36.84 euros a megawatt-hour today.
Increased efficiency in coupled markets might yield a benefit equivalent to 15 to 25 percent of the value of the EU’s annual 16 billion-euro cross-border power trade, according to a report by Booz & Co. for the European Commission. The first deadline was in December 2012.
“Imperfect integration and retail market fragmentation throughout the EU have led to significant social welfare losses for European energy consumers in the order of several billion euros in 2012,” the Agency for the Cooperation of Energy Regulators in Ljubljana, Slovenia, said in a report yesterday. The agency was created by the EU in 2011.
The benefit from coupling markets in northwest Europe, which are already more closely linked than those in the south of Europe, probably would be 150 million euros a year, Conil-Lacoste of EPEX Spot said.
The EU issued its first directives in 1996 to liberalize its members’ mostly state-controlled electricity markets. Nations were obliged to allow competition from multiple power suppliers, transfer the control of networks to independent entities and set up regulators.
Market coupling is the next step to reduce consumer costs by easing cross-border trade and increasing competition between suppliers, according to the European Commission.
Traders selling power into another market have to buy capacity on an interconnector cable in advance, then make a separate trade on an exchange in another country, exposing themselves to two sets of price risk, according to data on the website of APX Group, the Amsterdam-based exchange operator. Market coupling allows traders to bid for energy on their local exchange, which then automatically allocates cross-border capacity based on price differences between two or more areas.
Europe began linking day-ahead national power markets in November 2006, when France, Belgium and the Netherlands integrated allocation of transmission capacity on electricity cables and power trading. Germany and Luxembourg were added in November 2010.
The February deadline is for the most comprehensive coupling yet. Day-ahead trading in Austria, Belgium, Denmark, Estonia, France, Finland, Germany, Latvia, Lithuania, Luxembourg, Norway, the Netherlands, Poland, Sweden and the U.K. excluding Northern Ireland will be joined, according to data on the website of Nord Pool Spot AS, the exchange operator in Oslo.
The change requires cooperation from 13 electricity network operators as well as four power exchanges -- APX Group, its Brussels-based Belpex unit, Nord Pool Spot and Epex Spot.
“In projects such as this, involving extensive negotiations with a number of expert parties, there is always a risk of delay,” Stina Johansen, a spokeswoman for Nord Pool Spot, said in an e-mail. “The target date will be confirmed before Christmas.”
Nord Pool Spot and EPEX Spot are running a parallel project to couple same-day power markets in Belgium, the Netherlands, France and Germany. Same-day trading can cover contracts of as little as 15 minutes duration and are used to balance power flows around a network.
This initiative will probably miss its deadline at the end of 2014 because power exchanges disagree over technical details of the trading platform, Walter Boltz, president of Austrian regulator E-Control, said in Berlin on Nov. 26.
“The project is still in a design phase, so no comment on the start date can be made,” Jonathan Fasel, a spokesman for EPEX Spot, said at the conference in Berlin on Nov. 26.
The European Commission will take steps to make legally-binding rules to force cooperation on same-day coupling, Marlene Holzner, a Brussels-based spokeswoman for the regulator, said by e-mail on Nov. 19. It is considering transferring responsibility for the project to national grid operators.
Market coupling is critical for security of supply as the share of power generation from intermittent sources such as solar and wind increases, the International Energy Agency said in a report Nov. 26.
Renewable power supply surged as high as 32.5 gigawatts in Germany on June 15, compared with average output of 5.5 gigawatts over the past year, data from the European Energy Exchange AG show. That spike, combined with weaker demand, resulted in a negative day-ahead power price in Germany, meaning generators had to pay their customers to take electricity.
Market integration over wide areas would help prevent that occurring, the IEA said. Failure to integrate markets would increase the cost of expanding renewable energy, the Paris-based group said.
“We saw with the Czech-Slovak coupling almost immediately a reduction in the border price,” Alan Svoboda, the director of sales and trading at CEZ AS, the Czech Republic’s state-owned utility, said in Berlin on Nov. 26, referring to the linking of those two markets in September 2009.
The cables carrying electricity from Germany to France, Europe’s two largest markets, operated at a daily average of 44 percent of capacity this year, according to data from Paris-based grid operator Reseau de Transport d’Electricite. The cable between France and the U.K., Europe’s third-largest power market, operated at an average 62 percent of capacity, according to National Grid data.
Europe needs 104 billion euros of investment in power grid infrastructure in the next decade, according to the Brussels-based European Network of Transmission System Operators for Electricity.
“If there is no extra capacity allocated at borders then market coupling cannot help, it will emphasize the existing problems with the grid,” Svoboda said. “It could be a way to show markets can bring prices to consumers at the lowest cost.”
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