Trading Electricity Trends in Asia · 2017. 9. 15. · Trading Futures Contracts •A Futures contract enables traders to lock in certainty going forward. •For example, you can

Trading Electricity Trends in Asia

Andrew Koscharsky Director, Energy

The RCMA Group (iSwitch Retail) http://www.rcma.com

Andrew Koscharsky - The RCMA Group

Topics for Discussion

• Introduction to Power Trading

• Australia and Singapore Markets Experience

• Characteristics for a successful Electricity Futures Market

• Managing Electricity Wholesale Market Risk

• International Fuel linkage in Power Markets


Intro to Power Trading

Generator Fuel

Credit Risk

Supply

Weather

Demand

Structured Products

Transmission

Government Regulation

Transparency

Market Structure


Trading Futures Contracts

• A Futures contract enables traders to lock in certainty going forward.

• For example, you can shield yourself from Q416 spot market risk by buying a Q416 futures contract today.

• You can buy and sell the contract over and over, or hold on to it until the end of Q416.

• If you hold on to it until the end of the quarter, then it will be worth whatever the spot price average was for that quarter.

• Generators can lock in Revenue. • Retailers can lock in Margins.


Trading Futures

Positives • No Credit Risk due to margining

system

• Strong reliability due to Exchange participation (ASX, SGX, TOCOM etc).

• Can enter and exit positions within a quarter.

• Low paperwork, unlike OTC deals.

• No ISDA required.

• Anonymous.

• Daily Margining and cash flows

Negatives • Limited products (e.g. no Off Peak

in SGX Futures yet)

• Dependent on liquidity

• Higher cost of trading

• Cash flow management

• Market not 24/7

• Carbon Policy

• Setting up trading systems

• Length of listed contracts is often only 2 or 3 years.


CFD Contract Market

Bloomberg: SGX Electricity Futures

RCMA Energy - Andrew Koscharsky

Tools available for Traders

Non-deliverable Derivative Contracts (Financial)

• Referencing a reliable Spot Price

• Credit risk mitigation

Spread Trading

• Spark spread

• Time spread

• Inter-regional spreads

Carbon Pollution (by-product of power generation)

• Carbon Intensity

• Liable Entity (forced to surrender permits)

• Clean Projects (creating tradable certificates)

• International Linkage (importing permits)

Volatility Products

• Weather Insurance

• Caps

Limited only by

Imagination

Transmission Products (help hedge intra and

inter-regional risk)

• SRA

• FTR

PPA

• Long term legal agreements underpin

an asset

• Suitable for developed and

undeveloped markets

• Captive power plants

Spot Market

• Generator re-bidding

• Day ahead trading on European

markets Andrew Koscharsky - The RCMA Group

Trading Power in East Coast Australia

• Interconnected grid comprising several connected regional networks and approximately 46,000 MW of installed generation.

– Operated by AEMO (www.aemo.com.au)

• NOT physically delivered. It is traded using financial products such as swaps, caps, options etc.

• AEMO publishes a half-hourly spot pool price for electricity in each region based on a gross pool merit order dispatch system.

• Generators bid availability at a given

price every 5 mins.

AEMO (operator) matches supply to

demand at the least cost each 5 minutes.

This results in the 5 minute dispatch

price. The half hourly price is the average

of the 5-minute prices.

• Spot Price can vary between -$1,000

and $13,900 per MWh.

• Fundamental drivers

Supply – generator behaviour,

transmission, outages, new build,

regulation, fuel.

Demand – weather, transmission,

economic growth, retail price


http://www.aemo.com.au/

Australian Power Market Physical Market runs in parallel with Financial Market

Physical Market

• 5 min Pool price & Half-hourly settlement

• Generator Re-bidding

• Regulator controlled (AEMO)

• Physically connected

• Physical ownership

• Participants include Generators, Retailers, Transmission companies, Distribution companies

Financial Market

• Financially settled CFD contracts

• Exchange listed products (ASX)

• OTC traded customized products (ISDA based) eg Bloomberg RFQ system.

• No need to own physical assets to participate

• Participants include Generators, Retailers, Banks, Commodity funds, Hedge Funds etc.


Australian Spot Market


Market Participants

• Generators Net sellers to fix revenue

80% Coal with remainder Gas, Hydro and Wind

Government still owns some generation portfolios – will be sold eventually.

• Retailers Net buyers to fix costs. Margin focused rather than outright price

3 large majors with around 10 smaller state based retailers.

• Large users Some larger customers take spot price and hedge using futures/ turn off and

avoid high spot prices

• Traders 8 major banks in the past 5 years

10 to 15 speculative traders/funds

• Brokers 5 OTC/exchange brokers over voice boxes

Active in the block and pre-neg markets on exchange as well as OTC markets


12

Market Structure Positives and Negatives

Power Station Investment

Transmission investment

End user decisions (Industrial and Commercial)

Price volatility

Encourages Overseas Investment

More Financially Tradable

Off the Shelf analytical Tools

Allows for better Government forecasting of country’s energy needs

Retail Competition

Don’t need to have a physical position

Excellent data for VaR and Risk Modeling

Exchange Traded

Alternative Financial Solutions

Balancing of Market Power

Regulatory Changes (Carbon, RET)

Cost of Transmission and Distribution

Project costs

3 major players and a number of smaller players

Inaccurate media coverage

Investment

Signals

Transparency

Wide ranging Participants

Negatives


• Average prices are influenced by fuel cost and typically linked to Oil prices. Most generation is gas fired.

• LNG Storage terminal offers energy security and international fuel linkage.

• Climate and customer mix limits load flex. Higher demand does not always mean higher price. Price is supply driven, rather than demand driven.

• Competitive wholesale market with bi-lateral CFD contracts.

• Recent developments now allow generators to hedge to higher levels, beyond the physical demand levels.

• Exchange traded paper market is now listed on SGX (June 2015).

• Committed Market Makers.

• This means that customers now enjoy even more competitions and transparency.

• Wholesale market operated by EMC (www.emcsg.com)

• Live and transparent trading data. Allows participants to make reliable and real time decisions

• Buyers in Wholesale Market pay the “Uniform Singapore Energy Price” (USEP). This is the half hourly weighted average price across all nodes.

Singapore Power Market


http://www.emcsg.com/

CFD Contract Market

Bloomberg: SGX Electricity Futures


Q3 2015/Sep 2015 Contract Price History


Q1 2016/March 2016 Contract Price History


The Role of the Retailer www.iswitch.com.sg

• Retail Market continues to evolve.

• Therefore, Retail products are also evolving.

• iSwitch Retail (RCMA) philosophy:

“There may be a broad definition of customer, but no matter who you are, you will still want flexibility, transparency and billing accuracy”.

iSwitch customer feedback:

• How will I benefit from this new initiative?

• Specific and tailored solutions?

• Can I hedge on SGX by myself? RCMA Energy - Andrew Koscharsky

19

International Fuel Linkage and Power Trading

Price gap between high and low natural resource owning countries

Power vs Fuel Spreads

Vertical Integration

Understanding the generation fuel mix of each market

The world is now very different and power prices reflect this

Narrowing of gas prices between countries

US/Aust LNG export influence

Changes in Australia’s Coal market and how they influence power trading

Carbon pricing revalues Coal fired generation

Import/Export flexibility vs power trading

Different definitions of “trading” exist

Need transparent power spot markets

Eventual carbon linkage across Asia?

Exchange Trading attracts capital investment

Credit risk

Mixture of trading methods required

Cross Commodity

Opportunities

LNG

Coal

How to Trade Power in

Asia


Documents

Trading Electricity Trends in Asia · 2017. 9. 15. · Trading Futures Contracts •A Futures contract enables traders to lock in certainty going forward. •For example, you can