Once considered just another local German power exchange, today the European Energy Exchange (EEX) has matured into the leading pan-European trading platform for energy and related products, with global expansion firmly within its sights. It is not surprising that EEX should look to a global future. The European market, while still evolving and providing the exchange with numerous long term opportunities, is undergoing radical change; partly driven by natural competitive forces, but also as a result of the ever-changing regulatory landscape. EEX has worked hard to meet these new challenges head-on and has further strengthened its position within its core European markets in recent years. What’s more - the exchange has already embarked on a new, global chapter in its development story.
In real terms, the exchange has come a long way since 2002, when it was created by a merger between the Frankfurt and Leipzig power exchanges. Initially, EEX began offering contracts for electric power, adding CO2 emissions allowances in 2005, followed by coal trading a year later and natural gas in 2007. At its core, EEX operates and connects liquid and transparent markets for energy and related products, on which power, natural gas, CO2, coal and guarantees of origin are traded.
Clearing and settlement of all trading transactions is provided by the clearing house European Commodity Clearing AG (ECC), which was set up back in 2006. ECC not only services EEX, but also another eight exchanges and is connected to 22 transmission system operators (TSOs) across Europe. “Integrated clearing is a key factor in what is an increasingly global and multi-asset market” says EEX chief executive officer, Peter Reitz. “By offering this service, our customers who are active on several markets are able to benefit through easier netting of positions and cross margining effects.”
The establishment of EPEX SPOT in 2008, through a co-operation between EEX and Powernext, was the next step in integrating power spot trading for Germany, France, Austria and Switzerland. Today, EPEX SPOT has become a centre of gravity in European power spot trading and a leading player with regard to market integration, through the involvement in various market coupling projects.
The overarching goal of European market integration still remains a guiding principle for EEX, and it took a significant step towards achieving this goal in 2013. Building on its long term co-operation with France-based Powernext, it launched the Pan-European gas cooperation, known as PEGAS. The initiative covers the German, French, Dutch, Belgian, Italian and UK gas hubs, consolidating these individual markets onto one common trading platform. It was an important development for the exchange, with the move harmonising a significant proportion of the European gas market. Since the beginning of 2015, all natural gas markets within EEX Group now run on the PEGAS platform operated by Powernext, which will be fully consolidated into EEX.
EEX’s activity in the European power markets has always remained a focus, and the exchange has consistently built upon its success in core markets such as Germany and France in order to enter new territories. In late 2013, the exchange began offering trade registration in Italian power derivatives and commenced order book trading on the Italian market in spring 2014 – a region in which EEX has since grown significantly. The exchange also expanded into the Spanish market, again initially through the launch of trade registration services, and at the beginning of 2015, EEX introduced location spread trading on the power derivatives markets, fostering improved cross-border liquidity.
More recently, the Nordic region has been a focus for further development, with the launch of Nordic power futures and the opening of its new Oslo office in September this year. This expansion into new geographical regions, says EEX, is in direct response to customer feedback. Moreover, working directly with exchange stakeholders on new market development has been a central pillar of its growth strategy. Reitz explains: “It’s vitally important to listen to your customers and create a product that meets their needs. A good example of this was in Italy, where we took the time to fully understand what was important to our customers in the region and created a product, tailored to the specific needs of the market.”
EEX has also taken steps to diversify its business fields beyond energy and beyond Europe. Through the acquisition of the Singapore-based Cleartrade Exchange (CLTX) at the beginning of last year, EEX expanded its core asset class offering with the addition of freight, iron ore and fertiliser products. The move into the Asian market enables European market participants to build a more diversified product portfolio and utilise clearing services under the umbrella and rule book of a regulated market in Europe. In May this year, the exchange also successfully took over responsibility for agricultural derivatives from Eurex. “Our expansion into new commodity-focused markets is an important facet of the EEX corporate strategy,” states Reitz.
EEX operates in a highly competitive environment (there are still more than 20 power exchanges in Europe) and clearly, last year’s step into commodity-focused asset classes has added a new dimension to its growth story. For EEX, the broadening of its portfolio into new countries and asset classes promotes choice between trading platforms in the major geographic hubs for customers – be this for energy, energy related or other trading commodities and stimulates competition between marketplaces. “This is clearly something that the market as a whole can benefit from, and this includes EEX Group companies, customers and partners alike,” adds Reitz.
Closer to home, Europe’s energy market still remains fragmented at a policy level. The market has become increasingly regulated and complex in recent years and as a result, it is exchanges that have stepped in to provide pan-European solutions that help consolidate the market and promote liquidity. It has provided an opportunity for the exchange to further implement its long term strategy to simplify trading for its customers and remove technical, legal and regulatory barriers within the market.
Broadly speaking, change in Europe can be divided into two segments: natural market evolution on one side and the impact of regulation on the other. Both segments have the potential to pose challenges to the existing business and risk management models of commodity trading firms, suppliers and other involved stakeholders in energy wholesale trading, including exchanges such as EEX.
The future of European energy market design is another key focus for EEX – it works extensively with the relevant authorities and organisations to lobby on behalf of the market and its customers on policy issues. Taking EEX’s home market of Germany as an example, The Energy Turnaround or Energiewende as it is known, has far reaching consequences throughout Europe in terms of how electricity market design will develop in respect to the growing influence of renewable power. In response, the exchange introduced ‘Cap Futures’ in September – the first of a new range of Energy Turnaround products that the exchange launched to help its market participants to cope with new risk profiles.
This innovation promotes flexibility within the market by providing firms with the ability to hedge against price peaks caused by intermittent renewable power generation. Furthermore, by launching the product, EEX became the first exchange in Europe to offer a derivatives market product referring to the intra-day market.
Looking ahead, the exchange has demonstrated that it is ready and able to meet the opportunities and challenges that will present themselves in the context of its wider strategy for growth. By further strengthening its European foundations, the exchange will look to the region as a springboard for success. Reitz is clear about what lies ahead, “Our global ambitions are underpinned by our strength in the core European energy markets. Our strategic plan is to develop into a global multi-commodity exchange and as a company, we are looking forward to the new opportunities that 2016 will bring.”