Britain Entices Speculators to Trade Power as Brown Bemoans Oil

By Lars Paulsson

July 30 (Bloomberg) -- Britain, the only European power market to shrink in the past six years, wants hedge funds, banks and commodity firms to trade more electricity at a time when Prime Minister Gordon Brown seeks to quash oil speculation.

The U.K. energy market regulator, called Ofgem, is considering asking companies to post electricity prices to attract more participants such as Rampart Capital, a London- based hedge fund that plans to start trading U.K. power. Nasdaq OMX Group Inc. will start an electricity auction on Sept. 28 in an attempt to make the market more transparent.

The electricity market “is rubbish,” Alistair Buchanan, Ofgem’s chief executive officer, said on July 2 in London. “We know we’ve got a structural weakness in Great Britain.”

The U.K.’s decline in electricity trading may inflate power costs for consumers in Europe’s second-largest economy, to the benefit of generators and suppliers from Centrica Plc to Electricite de France SA. While the British regulator seeks to revive interest in power markets, Brown is lobbying the Group of Seven leaders to rein in oil speculation after crude jumped 42 percent this year.

Power markets are linked to oil, which helps set the price of fuels used to generate electricity, and some of the largest energy traders buy and sell both commodities.

The U.K.’s biggest utilities, enlarged by at least $51 billion of takeovers from 2004 that gave them control of both power production and sales, have squeezed out smaller traders, Ofgem says. Iberdrola SA and Electricite de France led the acquisitions in Britain, with more than four times the value of similar deals in Germany, data compiled by Bloomberg show.

Powering Down

While Germany traded eight times the amount of electricity it consumed last year, the multiple in Britain was 2.7 times, according to Prospex Research Ltd. in London. Companies traded some 937 terawatt-hours of U.K. electricity last year, down 58 percent from 2,235 terawatt-hours in 2003, according to Prospex.

Brown, who declined through his press office to comment on the U.K. power market, railed against volatility in oil at a July 6 press conference with French President Nicolas Sarkozy. Crude rose to more than $72 a barrel in New York last month after selling for less than $34 in February. It settled yesterday at less than $64 a barrel in New York.

“Where there is undue speculation or speculation that is unfair in the oil market, we have got to look at whether there are mechanisms that exist that are making that accentuated and, if there are, we are going to have to be prepared to take action,” Brown told reporters that day.

After Enron

Consolidation in the U.K. energy market began after power prices plunged 40 percent in the four years ending in 2002. The demise of the biggest energy trader, Enron Corp., also led American companies to scale back U.K. operations.

Now traders are calling for more activity and market data. Louis Dreyfus Energy Services LP, a commodity trader, submitted a so-called modification proposal on July 28 to market operator Elexon Ltd., seeking to boost information about power generation by fuel type. The current arrangements with an aggregated number are “a barrier to entry,” according to Kristian Lande, who trades U.K. gas and German power at Louis Dreyfus.

“Transparency brings liquidity,” he said on the phone from Lausanne, Switzerland.

The Nordic market, which trades 7.3 times the amount of power it consumes, according to Prospex, “is a good example” for the U.K. to follow because of its wide variety of participants, Ofgem spokesman Chris Lock said. Traders from U.S. hedge fund manager Tudor Investment Corp. to Russia’s OAO Gazprom and UPM-Kymmene Oyj, Europe’s biggest producer of paper for publications, all trade Nordic power futures, according to the Web site of Nord Pool ASA, the regional exchange.

Nasdaq Entry

Nasdaq OMX, which operates stock markets in 50 countries, will be the third exchange to attempt a revival in the U.K. after winning a tender arranged by industry-backed Power Trading Forum. The company may offer futures after introducing the auction for day-ahead electricity, which it hopes will become a price benchmark.

Geir Reigstad, head of Nasdaq OMX Commodities, said he expects more U.K. trading by utilities, banks and funds.

“It’s a question of how long it will take to establish that reference price, and from that point onwards, the market will start to grow,” he said in an interview from Oslo.

APX-Endex, the Dutch exchange, will offer U.K. power futures on Sept. 18 to complement its short-term contracts, which also includes a day-ahead auction.

Competition between exchanges is “a step in the right direction,” Rampart Chief Investment Officer Marcello Romano, 40, said in a phone interview. “Ultimately, it’s likely there will be one winner.” His hedge fund plans to trade natural gas, U.K. electricity and northwest European power from August.

Active Trading

London-based ICE Futures Europe, whose Brent crude contract is used to price two-thirds of the world’s oil, was the first to set up a U.K. power futures exchange in 2004. The effort failed to boost activity.

“The current U.K. market structure for power, with six vertically integrated utilities, does not readily lend itself to active trading,” Jason Pegley, ICE Futures Europe’s head of utility markets, said in an interview.

Amsterdam-based Energy Capital Management BV, a fund that trades energy from Dutch and German power to carbon-emission allowances, has stayed out of the U.K. in part because of its lack of liquidity.

“We’re not in a rush to enter,” said Marcel Melis, chief executive officer of Energy Capital Management BV, whose MMT Energy Fund has returned 14 percent in the past year.

The U.K. market is recovering. Electricity trades rose 16 percent in Britain last year, according to Prospex. Dusseldorf- based E.ON AG, Germany’s biggest utility and one of the six largest in the U.K., is among those that increased its transactions.

‘Main Drivers’

“The activity of vertically integrated players is clearly increasing, and they seem to be the main drivers of the liquidity growth” last year, said Tom Sargent, E.ON’s director of western European power, in an e-mailed response to questions. E.ON boosted electricity trading in the two years ended in March by 68 percent to 4.7 times the amount it generated, he said.

While independent generators International Power Plc, Drax Group Plc and InterGen remain in the U.K., “the market share of independent generators has been reduced from a few years ago,” Ofgem said in a report.

“Vertically integrated players combining more or securing more generation, then that all points towards a less liquid market, less competition,” International Power’s Chief Executive Officer Philip Cox said in an interview on July 1.

To contact the reporter on this story: Lars Paulsson in London at lpaulsson@bloomberg.net