Nasdaq, Nord Pool to Start U.K. Power Futures Market

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 electricity trading in the U.K. to boost liquidity and market transparency.

The tender was run by Britain’s Power-Trading Forum, whose members include Merrill Lynch & Co. and Barclays Capital, Nasdaq OMX said today in a statement. The platform may help the market recover from a dip in trading, according to Paul Beynon, who led the selection committee. Volumes have declined after utilities reduced credit lines to financial institutions.

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. In the U.K., Europe’s third-largest electricity market, traded volume was 2.3 times consumption last year, 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. A more liquid market may encourage new participants.

The companies intend to establish the exchange in the second quarter of next year, eventually offering around-the-clock trading, a daily auction, clearing services and a derivatives market. A platform for gas trading is also part of the plan. A precise start date is yet to be decided, Reigstad said.

Nord Pool Experience

The selection committee studied bidders’ credit rating and operating experience, said Beynon, who is also head of U.K. power trading for RWE AG, Germany’s second-biggest utility. Nord Pool Spot operates the day-ahead power market for Denmark, Finland, Norway and Sweden, and was formed in 1991.

“It’s good to see reputable exchanges getting involved in the U.K. market,” Paul Mead, Citigroup Inc.’s managing director for European power, gas and emissions, said today in a telephone interview. “This may help price formation in the spot market and possibly spur financial trading around that.”

Nasdaq OMX and Nord Pool Spot’s initiative may not necessarily boost U.K. trading volumes, Mead said. “I don’t think it’s a cure for low liquidity. The market mechanism is important but so is the degree of market concentration.”

Market Liquidity

The U.K.’s biggest power suppliers own generation facilities, reducing their need to buy wholesale electricity and lowering market liquidity, according to David Hunter, a consultant at McKinnon & Clarke Ltd., which advises companies on buying energy. The exchange “won’t fix the underlying problem,” he said.

The majority of power trades in the U.K. are currently made through brokers including ICAP Plc, GFI Group Inc. and Spectron Group Ltd. Dutch energy exchange company APX BV offers U.K. contracts including for same-day, next-day and weekend delivery.

Trades on exchanges are cleared, or guaranteed by a central counterparty, to reduce the risk that contracts won’t be honored in the event of one party going out of business.

British Energy Group Plc, the country’s biggest electricity producer, and Germany’s E.ON AG said this month they are reducing risk with regard to financial institutions. 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.

Raise Volumes

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. While U.K. trading rose 24 percent to 811 terawatt-hours last year from a year earlier, volumes have since declined.

“Volumes have definitely dropped in the last two months,” Beynon said today by telephone, adding that the slump isn’t “necessarily the start of a trend.” The new venture may allow counterparties to bet on electricity prices without touching the physical market, reducing the complexity of market entry.

The forum, part of the Futures & Options Association, said when opening the competition 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 the Nasdaq statement.

“It’s extremely important that a solution to increase transparency and liquidity in the U.K. power market is delivered,” said Tony Cocker, head of E.ON’s energy-trading unit. “We’re committed to providing Nasdaq OMX Commodities with the support it needs.”

It took more than two years to decide on the trading platform, which will rival APX’s plans to start day-ahead electricity auctions in the U.K. on Dec. 2. 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 next-day electricity, broken down into hourly pricing blocks.

“We will now jointly work on an implementation plan to make sure that the end product is fit for purpose,” Beynon said.

To contact the reporters on this story: Lars Paulsson in London at lpaulsson@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net