By Lars Paulsson and Paul Dobson
Nov. 27 (Bloomberg) -- Nasdaq OMX Group Inc.’s commodities unit and Nord Pool Spot AS won a competition to set up an exchange for futures and day-ahead electricity trading in the U.K. to boost traded volumes and market transparency.
Britain’s Power-Trading Forum, whose members include Merrill Lynch & Co. and Barclays Capital, selected the two companies after a process that took more than two years, Nasdaq OMX said today in a statement. The trading platform will rival Dutch energy exchange company APX BV’s plans to start day-ahead electricity auctions in the U.K. on Dec. 2.
Nasdaq is expanding in energy and carbon-dioxide emissions trading after taking over most operations of Oslo-based Nord Pool ASA, Europe’s biggest power exchange, this year. In the U.K., Europe’s third-largest electricity market, traded volumes amount to 2.3 times consumption, according to Prospex Research Ltd. That compares with 7.3 times in the Nordic region, where Nord Pool handles the majority of transactions.
“The U.K. has the same potential as the Nordic market, and it’s an opportunity to show that the model we have can work,” Geir Reigstad, head of Nasdaq OMX Commodities, said by telephone from Oslo.
Around-the-Clock Trading
The companies plan to establish the exchange in the second quarter of next year, offering around-the-clock trading, a daily auction, clearing services and a derivatives market. A precise start date is yet to be decided, Reigstad said.
The new trading platforms will “improve access, participation and liquidity in the U.K. power market, allowing it to grow and be more efficient,” he said.
The majority of power trades in the U.K. are currently made through brokers including GFI Group Inc. and Spectron Group Ltd. APX already offers U.K. contracts including for same-day, next- day and weekend delivery.
Trades on exchanges are cleared, or guaranteed by a central counterparty, which means they are less risky than bilateral trading directly between participants.
British Energy Group Plc, the country’s biggest electricity producer, said Nov. 18 it reduced the credit it’s willing to grant financial institutions in power trading to lower counterparty risk. Germany’s E.ON AG, one of the six biggest energy suppliers in the U.K., said Nov. 12 it was reducing risk with regard to financial institutions.
Failed Banks
Banks that have been active in Europe’s power markets include Fortis, which had to be rescued by the Dutch and Belgian governments, and Lehman Brothers Holdings Inc., which filed for bankruptcy in September.
The Power Trading Forum’s project was designed to boost volumes after companies such as Enron Corp., then the world’s biggest energy trader, exited the market in 2001 and 2002. Trading volumes in the U.K. rose 24 percent to 811 terawatt-hours last year from a year earlier, according to London-based consultant Prospex.
The forum, part of the Futures & Options Association, said when opening the competition for a market operator that its members planned to use the winning platform for U.K. trading. Existing members on the Nord Pool and Nasdaq OMX exchanges won’t need to pay membership fees, according to Nasdaq’s statement.
The committee chosen to pick the winning bidders made a unanimous decision to select Nasdaq OMX Commodities because of its “depth of experience and resources,” said Anthony Belchambers, the FOA’s chief executive officer. Germany’s European Energy Exchange AG and APX also took part in the tender.
Traders in other European markets including Germany, France and the Netherlands already participate in auctions to determine prices for electricity delivery on the next day, broken down into hourly pricing blocks.
Nord Pool Spot operates the day-ahead power market for Denmark, Finland, Norway and Sweden. It has operated since 1993.
To contact the reporters on this story: Lars Paulsson in London at lpaulsson@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net
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