While all eyes are on the complex London Stock Exchange and Deutsche Börse merger, another European bourse has been making rapid strides.
Earlier this month, Leipzig-based European Energy Exchange (EEX), Europe’s largest trading platform for energy-related products and derivatives, announced surging 2016 trading volumes, with substantial growth in power derivatives, gas trading, and emissions rights trading.
In an interview with Handelsblatt, EEX chief executive Peter Reitz said he welcomed the proposed merger, which he sees as providing new impetus for his company’s planned global expansion. Deutsche Börse holds a majority stake in EEX.
Mr. Reitz said EEX’s record year confirmed that the company – which began as a regional electricity market – has become the international player its ambitious name suggests. He added that strong growth in 2016 reflected EEX’s progressive expansion of all product categories, including a broadening of trade in gas, coal, carbon emissions rights, and other energy-related commodities. The company’s acquisitions in Singapore also expanded its horizons beyond Europe, incorporating markets in freight, iron ore, and ship diesel, Mr. Reitz pointed out.
Strong growth in 2016 reflected EEX’s progressive expansion of numerous energy-related categories.
Still, despite the rapid expansion, the electricity trading market continues to make up half of EEX’s revenues. Mr. Reitz said it would remain their business foundation and had its own prospects for growth. While EEX claims less than 40 percent of all German electricity derivatives trading, it has rapidly been capturing market share. The key selling point has been the security they offer as a clearing house for electricity trading. EEX guarantees payment and electricity delivery to the counterparties in every deal – a key commitment during uncertain times when “the electricity industry is in the middle of major upheaval,” he added.
This is why for Mr. Reitz, the ongoing stability of supply in the German energy industry and energy market remained crucial. As he formulated it rhetorically: “Have you ever flicked a switch and the light did not come on?” As he points out, changes to the industry were contributing to oversupply. This is because conventional power plants were still producing large quantities of electricity, while renewable power quickly came on stream.
Overcapacity and legacy inflexibility have led to some recent market oddities, said Mr. Reitz, referring to occasions in recent years when German power companies have charged “negative prices” for electricity: in other words, they have paid customers to use electricity. “Many large power plants still cannot respond flexibly to demand fluctuations. At times, it was more economic to give away electricity than to reduce power output if you had to increase it a few days later. Increased flexibility would take time to introduce."
While EEX claims less than 40 percent of all German electricity derivatives trading, it has rapidly been capturing market share.
Mr. Reitz said he sympathized with the complaint from retail purchasers of electricity that slumping wholesale prices have not been reflected by falling retail prices. But he emphasized that electricity “had a long journey from the wholesale market to the home,” and that wholesale power prices only comprised around one-quarter of the final retail price, with the rest made up of network charges, taxes, and environmental levies. In short, a fall in wholesale prices had little impact on consumer energy bills. And EEX, as a market platform, had no influence on retail prices.
On the proposed fusion of Deutsche Börse with the London Stock Exchange, Mr. Reitz said that he saw it “all very positively.” With EEX in effect the “commodity arm of Deutsche Börse” and LSE barely involved in that market, EEX could look forward to considerable expansion. “We can only profit from this merger. A globally-active parent company can open more doors for us,” he added.
European competition authorities, as well as regional regulators, have yet to rule on the proposed LSE–Deutsche Börse merger, which is thought to be worth around €26 billion, or $28 billion.
Michael Brächer is a financial editor on the investment desk in Frankfurt. To contact the author: [email protected]