Rewiring the International Grid

Energy trading is now certifiably huge. The UK Financial Services Authority (FSA) estimates that in 2005 the value of the combined UK and Eurozone forward power markets was close to €150 billion ($192 billion) and the forward gas market was worth close to €90 billion. Even the nascent emissions market was valued at €2 billion ($2.5 billion). But the vision of pan-European energy trading taking on the form of a cross-border commodities or equities exchange is consistently blurred by geopolitical factors.

International standardization has never been a simple process, but the societal importance of electricity means that national governments have historically kept grid control close to their vests. Liberalization of the markets has occurred apace in the past few decades across most of Europe, but the existence of transmission service operators (TSO) that have evolved from former monopolies and the persistence of government and regulatory intervention on the distribution side makes it hard to foster cross-border cooperation. So says Peter Styles, principal consultant at Stratos, who also sits on the board of the European Federation of Energy Traders (EFET). "The fact that there are national regulators and that they have relationships with the national government and the national TSO does get in the way," says Styles.

To add to the complexities of multi-lateral and multi-lingual transactions across EU countries with diverse regulatory and technological systems, the union is in a state of flux, with a number of former Soviet Bloc countries acceding in 2004, and Bulgaria and Romania set to join in January. In some of these states, there are very different legacy systems and contract structures that could be a barrier to integration. Furthermore, Styles says, the last vestiges of the old regimes still contribute to a distinct mentality. "It is not only a question of the legislation or infrastructure," he says. "There is something you might call an intrinsic difference to the structure of the industry."

While this presents obstacles, Styles says that the relative under-development of these areas is an opportunity to create regional trading facilities based on the experiences of more established markets without the burden of entrenched systems. "It gives us the opportunity to contribute to restructuring and to implement new regulatory policies. Rather than do something ad-hoc as in the rest of Europe, we are able to do something harmonized and electronic from the start," he says.

Data is the lifeblood of power trading: Load data, grid capacity and disruptions are needed in real time, while reference data on seasonal and day-ahead interconnection capacities across borders, allocation mechanisms and results, scheduled exchanges and the lexicon of methodologies used to compute the various components needed to construct products are fundamental to proper valuation. As borders and markets open and multi-lateral trading increases, the requirement for harmonized data standards becomes even more important. "There is an infinite amount of data, and traders would want to see it all at once," says Carlo Degli Esposti, technical and economic adviser to ETSO, the association of European Transmission Service Operators, which has been polling energy traders to discover what information they consider most critical. What has been agreed, Esposti says, is that data on the availability of lines and plants on a European level is fundamental.

The difficulty, according to Esposti, is that it is exactly this data that gives the larger producers their competitive advantage. "Traders would like to see the highest degree of granularity, but producers want the opposite," he says. "In the end it might be up to the regulator to fix clear rules, but for the time being they cannot overtake the positions of the incumbent producers."

However, Esposti, like Styles, says that the regulators and their insistence on furthering national interests slow the process. "We are observing regulators that are too close to the national government," Esposti says. This proximity in terms of policy can see implementations of transparency requirements stall or be cancelled in the event of power changing hands.

Nevertheless, ETSO is among those pushing ahead on standardization. In mid-November the organization will launch a "transparency platform" online. Esposti says the Web site is designed "to reach every market sector and give access to all relevant market data." To this end, the association has set up the Electronic Data Interchange (EDI) taskforce, which is charged with the "preparation and diffusion of standards that can simplify the exchange of information." This has meant that EDI has found itself actively developing the protocols and processes for displaying and disseminating data from the ground up.

This cannot happen, Esposti says, unless the key companies can agree on the type of data they need and how to preserve competitiveness in a more transparent market. "Once we have got to this step, further standards can develop," he says.

The EFET is actively engaged in pushing the case for and developing standards in contract and market data standardization. In 2004, the federation founded EFETnet BV, a not-for-profit legal entity that aims to promote and provide a reliable information infrastructure for the energy-trading sector. "It's rather difficult to have a conversation without a telephone network," says Hugh Brunswick, the managing director of EFETnet. "EFETnet is trying to put in place a managed service out on the Internet."

Standards, such as those laid down by ETSO and EASEE-gas, are not reaching enough of the industry for the benefits to be felt, Brunswick says. For harmony to spread, it's imperative to have a "telephone network" of infrastructure and the unification of messaging formats onto the ebXML (Electronic Business XML) messaging standard for information passed between counterparties and brokers. By putting in place this exchange medium, EFETnet enables electronic confirmation matching between traders and brokers. As well as reducing the cost of processing deals, EFETnet officials say that it will bring transaction time down from one day to less than two minutes—which, though not at the level of equities exchanges, is still a marked improvement. The system covers a range of products in gas, power and emissions, including day-ahead, base on- and off-peak, shape trades and options, with the inclusion of energy swaps, coal and oil scheduled for the next release.

Brunswick says EFETnet offers open standards, and there is no obligation to use the software that it has developed. There are currently 19 businesses signed up, including Barclays Capital, Deutsche Bank, Shell, and Spectron, a broker. More are waiting in the wings. The next step, Brunswick says, is to get some of the major TSOs on board, and EFETnet is working with the ETSO in the nominations and supply area. The development of OTC clearing and settlement products is also under way, as the organization moves toward creating a "fully standardized electronic data exchange."

"You could liken it to a single, integrated electricity network for Europe," Brunswick says. All that is missing is political and regulatory understanding between the many states of Europe, and the cooperation of the multitude of very distinct national and international utilities.