Traders Flee Nasdaq Power Market for Better Deals With BanksBy
Nasdaq’s Nordic market trading drops 25% to lowest in decade
Rising cost of EU rules, new contracts fuel switch by users
Since the 1990s, Norwegian metals refiner Elkem AS routinely tapped the world’s oldest power exchange in search of the best deals on the electricity supplies it needed to run five plants that make materials for everything from iPhones to body armor to solar panels. Not anymore.
Elkem, Norway’s third-largest electricity buyer, has joined a growing list of energy players to quit the Nasdaq Inc. exchange that offers power contracts in the Nordic region and Germany. Trading on the Oslo-based market plunged 25 percent in the first half of 2017 to the lowest in at least a decade. Companies now buy directly from power plants or brokers and banks.
Once a model for how wholesale electricity was bought and sold in Europe, the 21-year-old exchange has lost at least 16 Nordic companies, including nine utilities and factories since 2014. Participants say trading became too expensive and cumbersome with new rules imposed to avoid another financial crisis. And with power prices low across Europe, there’s less incentive to use the exchange’s contracts to hedge risk.
“Exactly what we feared would happen, has happened,” Jens Nordberg, head of trading at Swedish municipal utility Goteborg Energi AB who also sits on the board of a lobby group of regional electricity dealers.
It’s not hard to see why participants are quitting the exchange, which is called Nasdaq Commodities. Last year, the European Union imposed a wide-ranging overhaul of markets designed to reduce risk. The new rules included a ban on the use of bank guarantees as collateral for Nordic power trades, eliminating the financing tool that accounted for about 60 percent of the transactions handled by the exchange.
Nasdaq also changed the range of its contracts. Forward agreements that allowed for payments to be made at a future date when the electricity is delivered were replaced by standardized futures contracts, which require daily settlement.
The new contracts and the loss of a major financing tool mean market participants need to tie up more cash to guarantee their trades and renegotiate lending agreements, according to Goteborg Energi’s Nordberg.
As the tightened regulation forced some Nordic players to leave., other members have benefited. Some trading companies and financial firms are earning more from clients that choose not to deal directly with the exchange.
“Our clearing business has increased a lot after market participants were no longer allowed to use bank guarantees,” said Niclas Egmar, head of commodity trading at Swedish bank Skandinaviska Enskilda Banken AB.
For Elkem, the increased costs and regulation proved too much, according to Terje Omland, a senior portfolio manager at the company since 2006.
Skoyen-based Elkem gave up its Nasdaq membership last year and now works directly with power producers for annual purchases of 4.2 terawatt-hours -- or about 3 percent of Norway’s total consumption. Until 2010, the company ran a trading team of about 16 people that bought and sold electricity, gas and oil.
“We went from being a big trading environment to just two people managing power-related issues,” Omland said. “As our entire operation changed, the need to be a direct member became less justifiable as it is expensive and entails some regulatory obligations.”
Other companies that have left include Finnish forestry company Metsa Group Oy and utilities Tekniska Verken i Linkoping in Sweden and Norway’s Ostfold Energi AS.
Nordic power trading has been dropping since 2008, with the exception of 2016, when a prolonged shutdown of French nuclear reactors boosted prices and trading across Europe. But after last year’s rally, low, stable rates have returned across Europe. While the cost to secure next-year Nordic power on Nasdaq has risen 10 percent since the end of March, prices are still less than half the highs of 2011.
The drop on the Nordic exchange reflects a Europe-wide decline in electricity trading triggered by the increased cost of stricter regulation, said Sara Aadnesen, a spokeswoman at Nasdaq Commodities.
Power volumes on the European Energy Exchange AG in Leipzig, Germany, fell 26 percent in the first half from a year earlier. Trading in its benchmark German-Austrian contracts dropped 20 percent in the period.
As Nordic members leave, some are being replaced by bigger international companies including Spain’s Banco Santander SA, Russia’s Gazprom PSJC and Paris-based utility Engie SA. Some of those newcomers have more capacity than local utilities or energy buyers to offer client funding and trade administration. Nasdaq’s commodities market has 137 clearing members.
Still, it will be a challenge for exchange trading to recover, according to Goteborg Energi’s Nordberg. A lack of non-financial companies may make it harder, and more expensive, for larger utilities to find counterparties for transactions that span several years.
“The benefits for an industrial company to be its own participant on Nasdaq are now very small,” said Magnus Lingjarde, a portfolio manager at LOS AS, a Norwegian energy trader.