Foreign firms needed to boost Polish OTC electricity market – but changes loom

Despite a rise in volumes on the Polish over-the-counter (OTC) electricity market this year, more must be done to attract foreign companies to remain because state-owned utilities are still legally obliged to trade most of their volumes via exchange, market sources have said.

But this could soon change as these legal obligations reach expiry, ICIS understands.

OTC on rise

So far this year, liquidity on the OTC market has been on the rise, with a total of 16.3TWh changing hands in the first three months, a 16% year on year increase.

A total of 160MW traded on the Polish day-ahead on Thursday 23 April alone, the highest volume by far on a Day-ahead contract so far this year – and more than half of what traded on day-ahead throughout the whole of the first quarter of the year.

Despite volumes on exchange POLPX still being significantly higher, Polish OTC trade has been rising since October last year, when POLPX scrapped one of its closing times, referred to as fixing times, for day-ahead trading.

Until this date, the Polish exchange had three fixings: the first published at 08:00 central European time, the second at 10:30 and the third at 11:30. But scrapping the 8:00 closing time meant the market lacked a benchmark price to set a tone for the rest of the day’s trade.

And this is why more participants have turned to the OTC market to close their positions, meaning the OTC could become a trading platform alternative for the exchange this year.

Several Polish traders were in favour of trading on the OTC via brokers screens, provided by TFS and 42 Financial Services in Poland, but they said those screens were usually empty and liquidity too low.

“Those brokers need to attract more big companies from abroad. The future and success of the OTC depends on that, “one trader said.

Foreign companies usually favour the OTC market as they do not need a financial guarantee and it is cheaper for them.

In comparison, on the exchange POLPX, every company needs to leave a deposit directly proportional to their traded volumes, which could be an obstacle to new participants. They also don’t need to go through a complicated registration process or pass exams in Polish language to attain a broker’s licence.

Last year some international traders told ICIS they were are shying away from entering the Polish electricity market because of an overly complex registration procedure (see EDEM 20 June 2014).

While companies such as Sweden’s Vattenfall, Switzerland’s Alpig, Germany’s RWE and France’s Engie, the latter formerly known as GDF SUEZ, trade on the OTC in Poland, according to two sources their activity has decreased in recent months due to a lack of transparency on the market.

“Trading on the Polish market resembles roulette at the moment, even if one does their daily analysis of fundamentals, they still cannot explain what happens on the market on most days,” one market participant said.

Transparency

Another foreign counterparty echoed those views, adding that many participants seem to lack an idea of what will happen next on the Polish market which means people are less keen to trade. In his opinion shared with several other traders that spoke to ICIS about the issue last year, the market lacks transparency and until this changes, international energy companies and banks will stay away from the Polish market (see edem 7 August 2014).

“More transparency would certainly help, but I have the feeling that won’t happen. Most of the time when I write an e-mail with questions to [grid operator] PSE they don’t reply, even though they have a dedicated PR person mentioned on their website.

“I guess these things do not really attract foreigners to build big positions in such an environment,” he said.

A spokeswoman for PSE was unavailable to comment at the time of writing.

Regulatory changes

However, changes to market dynamics could be on the way thanks to the expiry of some legal obligations.

In Poland all electricity producers have a legal obligation to sell at least 15% of their power output via exchange. Additionally, the biggest producers fall under another rule to sell 85% of their generation through long-term contracts via exchange. Most of the big state-owned companies, such as PGE, Energa and Enea are believed to still be under that obligation.

But, according to PGE’s spokesman, the company will not be obliged to sell more than 15% of its generation via exchange from 2016, which could see volumes that go through the exchange cut and increase trading on the OTC market.

Moreover, Poland’s second largest utility Tauron told ICIS the company no longer has an obligation to sell 85% of long-term contracts via exchange and indicated that liquidity on the OTC has been rising. karolina.zagrodna@icis.com