BUSINESSWEEK ONLINE : DECEMBER 11, 2000 ISSUE
INTERNATIONAL -- FINANCE Zap! Here Comes Electricity Trading (int'l edition) As Europe deregulates, power exchanges are plugging in Traders love to deal. Gold. Wheat. Oil. Pork bellies. Currencies. And juice. Not just the stuff you get from oranges, but also electricity. Utilities with spare power capacity offer contracts to deliver kilowatt-hours on the open market. Traders swap them back and forth, and power companies can buy them to make up shortages. Trading in electricity--spot and futures contracts--has been going like gangbusters in the U.S. for several years. Now, the action is heating up in Europe. On Dec. 11, the four-month-old European Energy Exchange (EEX) launches Germany's first exchange-based indexes of electricity prices, which will track peak and off-peak prices. EEX officials hope their index plan will give the market a powerful boost by becoming the benchmark for electricity derivatives contracts--much as stock indexes are the basis for trading in baskets of stocks. Such contracts would allow utilities to hedge expected supply shortfalls or surpluses in advance. ''Indexes make the market more transparent, easier to measure, and thus easier to compare,'' says EEX board member Hans Schweickardt. A sign of the potential stakes in this new market is the already hot rivalry between Europe's fledgling electricity exchanges. EEX's strategists hope the indexes will give them the edge over the six-month-old Leipzig Power Exchange (LPX) for dominance of Germany's fast-growing electricity-trading market. Eventually, they hope to become Europe's leading power exchange when the region is sufficiently deregulated to allow Continentwide trading. ''EEX plans to transcend national frontiers and become the central marketplace for energy in Europe,'' says Schweickardt. Not so long ago such ambitions would have seemed absurd. But the dismantling of power generation and distribution monopolies in most European Union countries--a glacial process that the EU has pushed for years--has finally brought this market to life. Some 1,500 terawatt-hours were traded in Europe last year, estimates Colin Bryce, managing director for energy trading at Morgan Stanley Dean Witter in London. In a few years, trading could exceed several times the 2,700-twh annual production of Europe's energy plants. Exchanges now operate in the Nordic countries, Britain, the Netherlands, Germany, and Spain. They're on their way in Italy and Austria. ''The pace and scope of change is amazing,'' says Benjamin Tait, a director of Prospex Research Ltd., a London power-market research consultancy. ''The sophistication of the market is growing, and trading volumes are soaring.'' Top U.S. trading houses, such as Enron Corp., have leaped in. This may not mean lower prices immediately--especially for large industrial customers, whose power costs have already dropped by up to 50% thanks to increased competition. But it should mean a more efficient and stable market, says Tait. DERIVATIVES NEXT. Such a market, says Morgan Stanley's Bryce, would favor power companies--such as Germany's RWE Energie, Spain's Endesa, or Sweden's Vattenfall--that can generate the most tradable electricity most efficiently. Trading should also foster a strong derivatives market. Scandinavia already has a headstart with its Nord Pool, through which energy companies can hedge their obligations with futures on local power contracts. There are also plans to introduce derivatives in Germany and the Netherlands. Some utilities are joining forces with banks in a bid to grab a piece of the action. Endesa, which has 21 million customers in 13 countries and accounts for 45% of Spain's electricity market, has allied with Morgan Stanley, one of the world's biggest energy traders, to promote a European wholesale electricity trading business. Endesa, RWE, and Enron are among 31 shareholders of the Amsterdam Power Exchange. Six German utilities plus Switzerland's Atel and Enron are among 29 companies that own 52% of EEX. Eurex, the German-Swiss derivatives market, owns the rest. For all these developments, Europe's electricity market will be in flux for some time. Continentwide trading can't happen until France's huge power monopoly is broken up. And the newborn exchanges already face challenges from Internet traders. U.S.-based HoustonStreet.com has just launched a pan-European energy-trading platform on the Web with Belgium's Electrabel, RWE, and Vattenfall. But if traders have their way, the free market for power will just get bigger. By David Fairlamb in Frankfurt _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Zap! Here Comes Electricity Trading (int'l edition) CHART: Powering Up INTERACT E-Mail to Business Week Online

Copyright 2000-2008, by The McGraw-Hill Companies Inc. All rights reserved. Terms of Use   Privacy Notice