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Establishing Efficient Marketplaces

- lessons learned

Presentation by:Kjell Asserlind

kjell.asserlind@om.com

APEx Annual Conference

Cartagena, October 15 , 2003

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OM The world’s leading provider of transaction technology to financial and energy markets.

OM operates marketplaces, develops new marketplaces and makes existing marketplaces more efficient.

Partner of choice and leading provider of exchange technology to over 25 international exchanges and clearing houses.

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OM Customer examplesSystem Solutions

SystemOperation

ExchangeOwnership

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What is deregulation into a competitive environment all about?

… to achieve the highest

possible efficiency in

electricity supply through

market mechanisms instead

of natural monopoly and

regulation…

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Important market mechanisms

Voluntary - Choices for the market participants

– OTC markets– Brokers– Exchanges

Trust – Clear and sufficient market rules – How is the price calculated?

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Evolution of Power markets

OTC, Bilateral contracts Development of short-term or spot-

market for physical balancing Market acquires transparency as

prices are quoted Spot prices accepted as benchmarks Separation of supply and pricing Resulting volatility generates needs

to manage price risk

=> Forwards & Futures markets

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Future/forward market

Liquid traded forward markets are essential to healthy power markets in order to provide:

hedging and trading opportunities the correct long-term investment signals to

generators and suppliers

Definition of liquid market: A Market allowing the buying or selling of large quantities of an asset at any time and at low transactions costs

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Chain of Power Markets

ForwardMarket

Short-termForwardMarket

SpotMarket

Intra-dayDay(s)Ahead

Week(s)Ahead

Month(s)Ahead

Year(s)Ahead

•Physical Market•Balancing•Ancilliry services•Scheduling / dispatch

•Physical Market•Financial Market•Weather driven•Fine tuning of portfolio

•Physical Market•Financial Market•Long-term Hedging•Lock-in Returns•Speculation

Delivery

Real timeBalan-cing

Energy market is not a easy defined concept A energy market usually comprises a number of

interdependent markets with shifting characteristics

Alternative price-calculation methods applied

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Power Market Phases in the Development Towards MaturityTrade as % of Consumption

Phase 5Speculation

Phase

Phase 4Rapid Growth

Phase

Phase 3Expansion

phase

Phase 2Build up phase

Phase 1Pre-

trade Phase

0

100

200

300

400

500

Time

600

700

800

900

The six phases of commodity trading (conceptual picture)

Phase 6Mature Phase

Spot

Derivatives

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The issue of liquidity

Prerequisites– Market design that is easy to understand

for ALL market participants– Transparent market information– Attract speculators/ traders– Strong credit rating and clearing

facilitiesObstacles

– Insufficient or inadequate liberalisation / rules

– Market design– Market power

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Clear vision by all stakeholders of the benefits of electricity market deregulation

Supportive and vigilant regulator is most critical Voluntary - Choices for the market participants Clear and well defined price discovery mechanism to

gain confidence among traders for price reference Minimize impact of grid and operational constraints

on energy price reference to gain confidence among traders outside traditional energy sector

Complete chain of markets. -Sole focus on short-term spot markets for physical delivery leads to high market volatility

Establishing Efficient Marketplaces- lessons learned

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“Establishment of a power exchange may not be a

necessity in a particular power market. However, a power

exchange greatly facilitates trade, timely dissemination of

price-sensitive information, and greater market competition and

liquidity.”

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