(Montel) The European Commission’s plans to set up regional virtual hubs could reduce forward liquidity in the EU’s biggest market, Germany, said acting Eurelectric president and Eon CEO Leonhard Birnbaum on Wednesday.
The power industry was “extremely sceptical” that virtual hubs would improve forward market liquidity as the EC hoped, Birnbaum said as he presented a study by Eurelectric on power market design at an event organised by the power lobby group in Brussels.
“It might destroy existing structures without bringing improvements,” he said.
Germany was the EU’s most liquid forward market and used as a proxy for hedging by market participants in other EU countries, he said.
It was unclear how market participants would be able to hedge against a regional virtual hub when there were transmission constraints.
He cautioned EU lawmakers not to do anything “in a hurry” on virtual hubs when the possible outcomes were so uncertain.
The European Parliament and EU Council of ministers, representing national governments, must debate and agree on a common text of the EC’s proposals before they can become binding.
This process usually takes around 18 months or more but EU leaders have called for it to be wrapped up by year end.
Retain hedging incentives
Birnbaum welcomed the proposed intent to improve long-term contracting while preserving forward market liquidity.
But he warned that mechanisms such as contracts for difference (CFDs) and power purchase agreements (PPAs) would need to be carefully designed to retain hedging incentives.
There was a risk that badly designed, obligatory CFDs would mean “the end of forward market liquidity” as developers would not gain any benefits from hedging forward.
Two-way CFDs involve the developer receiving a guaranteed price for their production. If the market price is lower than this, the state makes up the difference, while if the market price is higher, the producer must pay the difference to the state.
“It might destroy existing structures without bringing improvements,” he said.
Germany was the EU’s most liquid forward market and used as a proxy for hedging by market participants in other EU countries, he said.
It was unclear how market participants would be able to hedge against a regional virtual hub when there were transmission constraints.
He cautioned EU lawmakers not to do anything “in a hurry” on virtual hubs when the possible outcomes were so uncertain.
The European Parliament and EU Council of ministers, representing national governments, must debate and agree on a common text of the EC’s proposals before they can become binding.
This process usually takes around 18 months or more but EU leaders have called for it to be wrapped up by year end.
Retain hedging incentives
Birnbaum welcomed the proposed intent to improve long-term contracting while preserving forward market liquidity.
But he warned that mechanisms such as contracts for difference (CFDs) and power purchase agreements (PPAs) would need to be carefully designed to retain hedging incentives.
There was a risk that badly designed, obligatory CFDs would mean “the end of forward market liquidity” as developers would not gain any benefits from hedging forward.
Two-way CFDs involve the developer receiving a guaranteed price for their production. If the market price is lower than this, the state makes up the difference, while if the market price is higher, the producer must pay the difference to the state.
