Traders frustrated as E.ON auction settles above market
The E.ON gas auction on Wednesday has triggered a mixture of disappointment, mockery, frustration and sometimes anger among participants. In a two-round process, E.ON's wholesale gas subsidiary, E.ON Ruhrgas, sold a total of 12.7TWh out of an overall 55TWh on offer over a five-year period, the company said on Thursday. A total of 39 parties qualified as bidders for the 220 lots and about a quarter of the lots were sold at the NCG and delivery at the various exit points offered in the second round.
High prices - disconnected from market prices - were seen as the main reason for the outcome of the auction, which one trader source labelled "big failure".
The company made the supply of lots subject to the standing price in the auction, meaning that the maximum supply of 220 lots was only made available above a certain price. Similarly, the volumes of gas on offer also depended on an undisclosed minimum reserve price for selling the lots.
In the first round, bidders asked for roughly 150% of the total volumes - around 330 lots. In the following round, reserve prices were above the highest bid in the first round, traders reported.
The reserve price for contracts based on a combined oil and gas index was said to be at €18.50/MWh. In the second round, the average price over the five calendar year was said to be €24.70/MWh on average, for oil-linked contracts.
There was still an estimated fifth of the people willing to pay, one source commented. The approximate lots were reportedly paid at the reserve price. In June, E.ON stated that "all successful bidders [would] buy at the same price".
Both price formulas announced by the company last June were requested by the successful bidders. Participants were able to choose between two main price formulas: an oil-indexed option and one that includes aspects of both oil and spot prices.
E.ON also offered some alternative options, like greater flexibility in the annual contract quantity in the first contract year (see ESGM 10 June 2010).
ICIS Heren understands that capacity at Waidhaus was mostly sold under oil and spot index contracts, while contracts for capacity at the Czech border were mainly oil-based.
Interested parties could buy the gas for delivery at the NCG hub or three entry points on the German border, Waidhaus, Emden or Dornum. Most of the capacity was sold at the NCG (an estimated 30 lots) and at the Czech border (an estimated 20 lots).
Several market participants thought interest came from German local utilities - or Stadtwerke - with an end-user market. Companies seeking to enter the Czech end-user market also showed interest, one source reported.
There was a general feeling the offer was not worth the effort for large companies with proper trading desks. "If I had known the process would have been run this way with such high prices, I wouldn't have wasted my time looking at it," one trader commented.
"It is a funny way to run auctions, in the first round it is over-subscribed and at the end only a quarter of the total volume ended being allocated," another source stated. "[E.ON] 'psychologically' played very well, but the market was not ready to agree to [its] prices this time," one dealer added.
"Finally, people were clearly not ready to commit for five years on oil-indexed contracts," one source said, an opinion widely shared.
Outlook
Unlike previous auctions run by E.ON under pressure from the European Commission, the auction on Wednesday was launched on the company's own initiative, indicating it would be long over the coming years.
"The result of this auction will have to be processed now, but should serve to consider further a marketing instrument to be developed in the future," one E.ON spokesperson said. "It is too soon to tell what the company will offer next, but it could announce its next move as early as the autumn," he added.
Some market participants said they would be interested in further auction processes, although they thought some more transparency would not be a bad thing.
"The company might have interest in going on the OTC market to get rid of its long-term capacity," one trader suggested. "These would pressure the spot market so much that the German regulator could then start looking into it," another disagreed.
Several traders expressed the wish to see the regulator take a closer look to auction processes in Germany.
They thought there was a lack of competition. E.ON is a market-dominating company that has a clear interest to keep prices high, they said. Whether or not the auction is a consequence of this situation, is difficult for outsiders to gauge. "If traders observe concrete market abuse, I think that regulators should have a closer look at it and guarantee transparent and open trading," one energy analyst commented.
The German energy watchdog, Bundesnetzagentur, which has flagged up that congestion was a big problem in the country, was not available for comment. DL
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