German Clean Power Rules Hamper Use of EEX’s Green Derivatives

  • Exchange plans to introduce ‘wind futures’ this summer
  • EEX to lower cap future limit on power price level declines

Germany’s renewable energy law limits the incentives for producers of wind and solar power to insure against the risks of volatile output, according to European Energy Exchange AG.

The current law and draft legislation include a subsidy system that doesn’t encourage plant owners to use hedging instruments on the exchange, Tobias Paulun, EEX’s strategy officer, said in an interview. The Leipzig, Germany-based bourse introduced so-called cap futures to protect against short-term price swings last year and delayed the start of “wind futures” to this summer.

“Renewable energies, which would have the biggest demand for flexibility in the market, don’t have incentives nowadays to protect themselves against these price swings in the very short term,” Paulun said on June 17.

EEX developed the products as renewables rose to generate over a third of Germany’s power last year and the government included more free market elements into its clean energy subsidy system under current draft law. From next year, auctions will determine the payout for future renewable generation instead of the current fixed-tariff system. Plants will still receive the difference between the amount earned on the market and the renewable subsidy.

Price Swings

Market mechanisms are only introduced by the auctions, which “doesn’t fundamentally change the compensation system,” Paulun said. Renewable energy owners don’t have an incentive yet to protect against price swings because they will receive the difference between the subsidy and what they earn on the market. The exchange favors a model in which there is a fixed subsidy with additional market revenue on top, which could lead to more use of its so-called energy shift products, he said.

The cap futures protect holders from prices exceeding a set limit of 60 euros ($68) per megawatt-hour. A buyer may be a wind power generator that wants to guard against calm conditions, when reduced output may force them to purchase power in the market to meet their delivery obligations. Sellers get a premium for taking on the risk of the cap being broken, EEX CEO Peter Reitz said last year. Such participants get the income for the contract plus the market price for the electricity they provide.

EEX is considering lowering the payout limit of its cap futures to 40 euros per megawatt-hour this year while the exact timing and level are still being discussed with market participants, Paulun said. The exchange wants to lower the limit after a drop in German intraday power prices meant the 60-euro cap is only being exceeded about 2 percent of the time, he said. Since September, 14 participants have been admitted to trade the futures.

The wind futures planned for the summer will allow generators to ensure a steady revenue stream, avoiding swings in income because of changing weather conditions, for periods of as long as two years. Competitor Nasdaq Commodities started a similar product in December.

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