* Rise in renewables has pulled down forward prices
* Traders find it difficult to adjust to variable renewables
* Exchange, cleared market share grows at cost of OTC
By Henning Gloystein
LONDON, Oct 17 (Reuters) - The German power market is unlikely to expand and may even shrink as traders struggle to adjust to the rise of renewable power generation, the chief operating officer of European Energy Exchange (EEX) said on Thursday.
Germany is Europe’s biggest wholesale power market, trading around 300 terawatt-hours (TWh) of electricity derivatives a month, and the share of renewable electricity generation has risen from under 7 percent in 2000 to almost 20 percent in 2012.
This boom has pulled down wholesale forward prices by almost 60 percent from a 2008 peak before the financial crisis back to levels last seen in 2005. In the spot market, weather-based price volatility has soared, and many traders have had difficulty adjusting to it.
“If you look at the market size, it looks to me to be flat or shrinking, and the issues we have faced were dramatic because of the rise of renewables,” EEX’s chief operating officer, Steffen Koehler, said during a media briefing in London.
“Although a lot has been done to address the challenges, there are still open questions such as whether new regulation will mean such high costs that small companies can’t afford trading anymore,” he added.
Koehler said the rise of renewable power generation has also led to a shift from forward trading to spot trading in power and gas markets.
Because forward contracts are worth a lot more than spot deals, this means that the overall value of the market has dropped.
Despite this trend, Koehler said that record volumes of forward contracts traded on the EEX platform this year, increasing its market share from 14 percent in mid-2012 to 25 percent as of September.
Europe’s power markets are dominated by so-called over-the-counter (OTC) trading through brokerage firms.
“The overall market development cannot be the reason for our record volumes, so it has to be the market share,” he said.
That gain has probably been a result of rising demand for cleared products, which EEX also offers, as well as political pressure to move more trading away from OTC brokerages towards more transparent exchanges, he added.
Koehler said the German gas market was growing much faster than power, at annual rates of up to 80 percent, and that this market would continue to grow.
Germany’s gas market is still relatively young and lags behind more developed markets in Britain and the Netherlands, even though the country is now Europe’s biggest gas consumer.
Koehler said that EEX was also in discussions with market participants aimed at boosting its coal trading, which currently hardly takes place on its platform, and added that specific measures are likely to be announced in early 2014.