Market Dynamics Report

JUNE 13 2013

May 2013

Block Futures steam-roll ahead in Coal, PEGAS launches & Nasdaq OMX strengthens German Power offering

Block Futures were a hot topic in last month's blog, and the shift to blocks continues this month, with a majority of the cleared market executed as block futures. The cleared market also represented a significant majority of volume during May. Coal is majority cleared, of which an overwhelming majority is block futures – what's the tipping point at which the exchanges will flip the switch and increase the block size, sending volume to the exchange?

Another milestone on the increasingly competitive Euro Gas exchange scene took place at the turn of the month. The PEGAS collaboration between Powernext & EEX launched on the 29th May, with Gaspool deriviatives going live on 4th June and trading that day. With the full curve due to be available for trading across Gaspool, NCG, TTF & PEG on the one PEGAS platform in the coming weeks, this represents another serious development in the European Gas markets. The advent of the PEGAS collaboration highlights the potential the exchanges clearly believe that Euro Gas offers. Despite remaining a highly broker bilateral market, the exchanges are positioning themselves both to battle for clearing revenue, as well as compete for direct execution.

German Power remains a particularly interesting market to follow, even if the landscape looks fairly bleak right now. The low price of coal plus the increased use of wind and solar renewable energy sources are contributing to the continued decline in price. The impact is palpable not just in low volumes and prices, but additionally it is reported* that European utilities are hedging their power output more aggressively than any time over the past five years. Analysts are predicting no change to this in the near-term, especially while the German government continues to aim for renewable energy sources to make up 35% of the German Power mix by 2020. Still, some people clearly see potential in the market. Nasdaq OMX Commodities announced the launch of their German Power Initiative, aimed in their words "making the German power market more transparent, liquid and cost effective". With both clearing services and direct execution on offer, Nasdaq OMX are now head-to-head with EEX on German Power. Will we see more exchanges entering this arena as well?