Power traders explore Austrian hedging options ahead of zone split

The liquidity of Austrian power futures is unlikely to pick up soon without a market maker, and traders are now considering other ways to hedge their price risk in Austria.

The issue has reared its head because the country’s common power price bidding zone with Germany is due to be split from 1 October 2018 (see ICIS briefing on the zone split here ).

After the split, separate day-ahead power prices for Germany and Austria will be calculated at the exchange-traded day-ahead auction. This means the requirement to flow power between the two countries should be lower, resulting in less loop flows – transit flows that sometimes congest the networks of neighbouring countries.

For a number of years, Austrian companies have used German futures on the over-the-counter (OTC) market and German-Austrian Phelix futures offered by the EEX exchange to hedge their price risk, but this approach would not work well if German and Austrian spot prices were to differ.

Wait and see

EEX recently launched separate Phelix futures for Germany and Austria alongside its German-Austrian product.

But there has been no trade on EEX Austrian futures since one contract changed hands on their first trading day of 26 June. The Austrian Cal ‘19 traded at €29.35/MWh while the equivalent German contract was at €28.05/MWh around that time.

The Austrian contract had traded too high relative to Germany, a trader at a German energy management company said.

On the OTC market, where some brokers have launched Austrian futures screens, liquidity also dried out after some initial trading interest, market sources said.

Companies appear to have taken a “wait and see” approach regarding Austrian forwards and futures. “We are not going to be the first ones,” a trader at an Austrian energy company said about trading the products. The company would trade Austrian futures if they became liquid, he said.

A trading source at another Austrian energy company said his firm had taken a similar approach.

Proxy hedges

If liquidity does not pick up, then Phelix German-Austrian futures are probably the best way to hedge Austrian price risk as they at least have an Austrian component, the second trader said.

The third source said his company would rather use German futures as a proxy, as German-Austrian spot price differences should not be large if commercial transmission capacity between the two countries will be at least 4.9GW as both national regulators have agreed.

“It doesn’t make sense to have three [Phelix] contracts,” he said. He was surprised that liquidity had not shifted quickly from German-Austrian to German Phelix futures.

A trader at a German energy management company with customers in Austria and no EEX futures access said if Austrian forwards liquidity does not pick up OTC, it expects to buy German futures OTC instead, sell them back via the German spot auction and buy the same volume back at the Austrian auction. This would allow the company to hedge the risk of power to be delivered in Austria.

German-Austrian spot price differences would create complications though, he conceded.

Looking ahead

A market maker is needed for Austrian futures liquidity to pick up, the energy management source said.

An individual company should be prepared to become a market maker for EEX Austrian futures, but only if another company also takes this role, one of the sources said.

EEX offered no comment regarding a market maker for the product, a spokesman for the exchange said.

German and Austrian regulators are going ahead with split preparations despite eastern European countries not satisfied with the plans and preliminary results of a European bidding zone review conducted by the European Network of Transmission System Operators for Electricity (ENTSO-E) indicating the German-Austrian zone should stay intact or even be enlarged (click here to read story).

Uncertainty over the split, and in particular the German-Austrian spot price differences it would create deters market participants from trading Austrian futures, sources said.

“When the spot markets become separate [in October] next year, then perhaps there will be some liquidity, the fourth source said. But currently most people are waiting to see what will happen.” laura.raus@icis.com