Ebook Liquidity in the Dutch wholesale electricity market
Energy suppliers need access to competitive wholesale energy commodity and services to underpin competitive offerings to customers. Well developed wholesale energy markets are therefore fundamental to successful energy liberalisation. Liquidity is an essential feature of a well developed market. Liquid markets enable the immediate execution of standard orders, exhibit prices that are resilient to large orders, and have enough participants trading and sufficient volume to ensure low transaction costs.
The Dutch wholesale electricity market has been in operation since 1999 and, while it has not developed to the same extent as the Nordic, German and UK markets, it had better trading to consumption volume multiples in 2001 than other European power markets. Segments of the Dutch wholesale power market include the APX spotmarket, the over the counter (OTC) standard product market and the non-standard product bilateral market.
Events during 2002, starting with the bankruptcy of Enron, led to an exodus of traders from the Dutch power market and, while overall volumes improved, concern about liquidity emerged towards the end of the year and strengthened in the early part of 2003. The deterioration in liquidity was characterised in the trade press by gaps in OTC product offerings, erratic prices, fewer participants and falling volumes.
Research into the market using published information supports these observations. For example, in December 2002 8% of the hours on APX traded at prices below 1 euro/MWh suggesting very few buyers in the market at these times. Further analysis of the APX shows that its clearing price was up to fifteen times more sensitive to small incremental orders in January 2003 than it was a year earlier. A DTe/MSC survey of market participants commissioned for this report confirmed reduced participation in the market over the past year. The character of the players has also altered over time with an increasing proportion of vertically integrated companies contrasting with a rapid decline in the number of pure traders.
Trends in the first three months of 2003 show reductions in trading volumes on the APX and OTC markets. The market for more sophisticated derivative products has seen the most severe decline. Derivatives develop as markets mature and their decline corroborates other measures showing reduced liquidity. The transaction costs of electricity trading have also increased in recent months both on the APX and OTC, reflecting and adding to liquidity problems.
It is important that the crucial role of wholesale energy markets in successful energy liberalisation is understood in the Netherlands. There is currently substantial evidence of falling liquidity in the market and indications that this trend may continue. The MSC is concerned that the benefits of introducing competition in the retail energy market will not be fully realised because of the lack of liquid and well functioning underlying wholesale markets. It is therefore important that monitoring of liquidity developments in the wholesale electricity market continues and is regularly reported.
In the short term the lack of market transparency in the Dutch market is an impediment to market development. It is recommended that the actions already identified by the MSC to improve transparency in the wholesale electricity market be implemented immediately. It is also recommended that DTe should continue to support measures that promote liquidity and/or maintain or enhance market development such as interconnector volumes being traded through the APX and other appropriate measures. To assist visibility in the OTC market the MSC recommends that Endex publish traded volumes and historic information.
The structure of the electricity sector plays a crucial role in the development of wholesale electricity markets – a vertically integrated industry will have less need for a wholesale market than one where generation and supply are entirely separated. Vertical integration and consolidation in the Dutch electricity market may lead to further declines in market liquidity and higher transaction costs that will result in increasing barriers to entry. Such changes need to be taken into account by the competition authorities when defining markets and making decisions about mergers and regulation. For example, mergers that significantly increase concentration in the wholesale market should be carefully reviewed, alternatively if competition in a part of the retail market is not possible because of the shortcomings in the wholesale market, regulation may be appropriate in that part of the market.
Looking outside the Netherlands, survey results suggest that inconsistencies in market operation inhibit the optimal interaction of the Dutch market with neighbouring energy markets. The MSC recommends that market operators work to harmonise the functioning of adjacent markets to lower practical barriers to trade.
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