Establishing Efficient Marketplaces

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• Establishing Efficient Marketplaces
• - lessons learned

APEx Annual Conference Cartagena, October 15 ,
2003
Presentation by Kjell Asserlind kjell.asserlind_at_o
m.com
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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
• gt 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

• 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
Maturity
Trade as of Consumption
The six phases of commodity trading (conceptual
picture)
Phase 5 Speculation Phase
Phase 4 Rapid Growth Phase
Phase 3 Expansion phase
Phase 2 Build up phase
Phase 1 Pre-trade Phase

900
Derivatives
800
700
Phase 6 Mature Phase
600
500
400
300
200
Spot
100
Time
0
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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 facilities
• Obstacles
• Insufficient or inadequate liberalisation / rules
• Market design
• Market power

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Establishing Efficient Marketplaces- lessons
learned

• 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

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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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