What’s happening with Endex NL 12 o’clock settlement values?

Ever since the beginning of this year, we notice a strange phenomenon on the Dutch exchange for power forwards, www.apxendex.com. This exchange publishes settlement values twice a day. End-of-day values are published in line with other European energy exchanges. Particularly for the Dutch market, Endex NL is also publishing a settlement value at noon. Ever since the beginning of this year, we have noticed that these noon values are higher than the end-of-day values. Since the 9^th of May, for example, the Cal 13, baseload noon values ended higher than the end-of day values every single day.

 With the help of our analysts, I launched some further analysis. I found out that in the first four months of 2012, the noon values were higher than the end-of-day values no less than 77% of the trading days. This could be explicable in a fundamentally bearish market, however, this is not the case. In 50% of all days since the start of the year, the Dutch Cal 13 ended higher than the day before, meaning that essentially the market had as many bullish days as bearish days. The end-of-day price of the 2^nd of January 2012 for Cal 13 baseload was 51,3 euro per MWh. On the 27^th of April it was 51,4, which supports our argument that the market in the first four months was equally divided between bullish and bearish, making it all the more remarkable that on 77% of those days, the noon value was higher than the end-of-day value. As you can see in the graph below, the trend is clear, there is an increasing gap between noon values and end-of-day values, with noon-values ending higher on most days.

 

Our analysis unveils another astonishing fact. The noon values for endex NL 2013 baseload were on those 77% of the days on average 28 eurocents higher than the end-of-day values. If we look at the German EEX markets, we see that the intraday highs were on average just 24 cents higher than the end-of-day value. This indicates that the noon values on the Dutch Cal 13 baseload were pushed higher than the volatility on the German market over a whole day.

It is clear from the graphs above that something is going on at the Dutch power forwards exchange. We observe similar trends for the other contracts. It is recommended that the relevant authorities investigate what is going on. Especially since this upward tendency for noon values on the Dutch forward contracts is not without consequences.

About seven years ago a new type of contract was introduced in many European power markets, the so-called clicking or tranche model contract. Industrial consumers have en masse adopted this contract type.  A consumer agrees a pricing formula with his supplier, based on which he can “click” his price for a given period, for example a calendar year. The formula contains a market-based parameter, for example the Endex NL Cal 13 contract for fixing the price for consumption during 2013. By giving consumers the possibility of using multiple clicks, this contract type is a good response to the increased need for risk management of industrial consumers of power. Moreover, as the formula is based on a publicly available parameter based on effective trading, the consumers have the certainty of using a relevant and transparent pricing mechanism. Due to this, power exchanges such as Endex have gained extra importance in the liberalized energy markets. They are not only  a platform that allows suppliers to hedge the prices that they offer end consumers. They also constitute an important factor in the price determination for end consumers. Any problem with the pricing on these wholesale exchanges like Endex is not just a problem for suppliers, it is a problem for the market as a whole.

The noon value is of special importance to Dutch end consumers. They have developed the habit of fixing prices on that noon value. This is very comfortable. In other countries, buyers need to wait until the end of the day to know the value at which they are going to fix their price. In the Netherlands, the companies can arrange their price fixings over noon and go home at five. However, if these noon values are systematically inflated, the Dutch consumers are obviously paying a high price for this comfort.

We are not saying that there is not a plausible reason for the inflation of Dutch noon prices. But it is absolutely mandatory to find out what is going on and to exclude the possibility of manipulation.

Filed under: Market analysis, The market today, the Netherlands

The troubles with Endex

This morning a worried client called us to ask why the Dutch Cal 12 peakload had shot up by 3% yesterday whereas all other prices in the Dutch electricity market were down. The answer to that question is stupefying.

Somewhere last year, the members of the Dutch power exchange Endex started to complain that it is annoying in their international power trades that the peak hour definitions in the Netherlands are different than in Germany. Not strange, if you consider the amount of Dutch – German power trades. In the Netherlands peakload runs from 7:00 in the morning till 23:00 in the evening, whereas the German peakload runs from 8:00 to 20:00. Annoying, I can imagine, if you want to stage a Dutch – German cross-border peakload deal. So Endex listened to its members and introduced the Dutch “super-peak”, running from eight till eight like the German peakload.

However, the retail market departments of those members remarked that they had a few thousand contracts running with industrial clients that have pricing mechanisms where the price is built based on the old seven to eleven peak. So, Endex decided to continue publishing the old, normal peak. The Netherlands became the only country I know with three instead of two energy contract types: baseload, peakload and super-peakload.

And then the story takes the stupefying twist. Trading three contracts per time-period, that would be of course a difficult task in a market that isn’t really excelling in terms of liquidity. Multiplying the number of tradable contracts on an exchange where volumes on many products are already extremely thin is indeed not a very good idea. So Endex decided that trading would be limited to the new eight-to-eight peakload products and that the old seven-to-eleven peak would be ‘calculated’. So, if you have recently fixed a peakload price in the Netherlands, your price was not based on an a value coming from real market trades but rather from some sort of calculation. As such, all peakload prices clicked since the 29th of April 2009, when the super peak was introduced, were calculated prices.

Of course, the calculated price is derived from real traded prices, so you could claim its reliability. However, an important factor has been added to that reliability-question: the reliability of your calculation methodology. I haven’t taken the trouble of analyzing the arithmetic of the formula, but however, this is asking for trouble. Any formula, and this one also, will have some constant factors. The formula looks sophisticated, but it basically comes down to a simple principle. You take the twelve hour peak price and the baseload price and you multiply them with something. By doing that, you make the relationship between different market prices constant, whereas in practice it changes every day. So you can seriously question the practice of applying ‘calculated’ market prices.

What is even more absurd is that the formula sometimes turns out an unexpected result, namely a calculated seven-to-eleven peak that is higher than the eight-to-eight peak. As a proof that the formula is cranky, that one can count. How could it be possible that demand for electricity would be higher in the evening between eight and ten? We are not in Southern Europe, most Dutch people have stopped working and are sitting in their house with a small lamp on by eight o’clock. Many industries work on a nine-to-five schedule. Demand for electricity goes down in the evening in the Netherlands.

So Endex decided to ‘remedy’ that. They made an extra rule that whenever the price for the seven-to-eleven is higher than the eight-to-eight peak, they will reduce it by 3 euro per MWh. And that’s exactly what happened in the past weeks with the Cal 12 contract. The formula gave higher prices for the old peak, so it was reduced by 3 euro’s. Yesterday, the formula gave a normal result again and the minus three euro rule was no longer applied. The result was that the price jumped up by 2,22 euro’s. So, we now have peakload prices that shoot up and down by some euro’s, not due to the underlying economics, but due to the versatility of an ill-shapen calculus.

It would be funny if less money was involved. Just imagine that you are an owner of a CHP and that you have made a deal two days ago for selling Cal 12 seven-to-eleven peakload to the grid based on the Endex-price (a common practice). Yesterday, all of sudden, you could sell at a price that is more than two euro’s higher. Or an even more common practice. Power markets have come down in the past weeks. Let’s say that as a buyer you told your boss yesterday that you recommended not to buy the peakload because it was in a downtrend. How are you going to explain to him that it shot up by 2,22 euro per MWh due to some incomprehensible calculation?

This whole story raises two big questions:

1. This problem points to a larger problem regarding the continental European energy market. End consumers have fixed contracts with their suppliers where they use the power exchanges such as Endex as the benchmarks to set prices. That is quite logic, as the exchanges are a very transparent mechanism of price revelation. However, most of these exchanges so far, have failed in developing a liquid future market. Therefore, you can seriously question the reliability of their prices. This peak – superpeak farce is a sad illustration of that. How can we find a reliable price benchmark for retail contracts?

2. How is it possible that Endex and its members have manufactured this cranky solution, obviously without much consideration for its consequences for the end consumer of energy? Are they even aware of their huge responsibility as provider of price benchmarks for end consumer power contracts? How is it possible that inside power companies the trading departments ask for the creation of the superpeak, when this obviously creates a problem for their sales departments?

(Numbers of trades and trading volumes at the Endex NL power futures exchange have hardly changed in the past five years. In the first seven months of 2010 the average traded volume was a little bit more than 2,2 TWh. That is far too small to speak about a liquid exchange.)

Filed under: Market analysis, The market today, the Netherlands

Transparency & the European gas market

Europe’s continental gas markets are slowly making the transition to a different market model. The Hub market model, known in the UK and the US for decades, is to replace the system of oil-indexed gas deals. Historically, gas in Europe has been sold in long term deals. These deals were between on the one side companies in producing countries, companies that we now know under the names of Statoil from Norway, Gazprom from Russia, Gasterra from the Netherlands or Sonatrach from Algeria. In the consuming countries, (predecessors of) companies such as RWE, E-ON Ruhrgas, Wingas, Gaz de France, Distrigas, Eni, Gas Natural or others were the receivers of these deals. This deal-making implied heavy political interference, as ministers were often directly involved in the negotiations. A famous example is the Belgian minister Willy Claes negotiating the contract that brought Algerian gas to Distrigas in Zeebrugge. The traditional companies in the consuming countries built the network infrastructure necessary to receive, store and distribute the natural gas. When the continental European markets were liberalized, they were forced to create separate grid companies to run this infrastructure. This ‘unbundling’ is supposed to create the necessary independence of interests to allow third parties an open and unbiased access to the grid infrastructure. Such third party access is a necessary condition for gas market liberalization to be a success.

Last week, traders in the continental European markets had complaints regarding that third party access. They specifically blamed lack of transparency regarding available storage and transit capacities for the slow development of continental European Hubs such as Zeebrugge in Belgium, TTF in the Netherlands or NCG in Germany. And indeed there are some solid reasons why transparency regarding storage and transit in these markets is low. The first reason is that some of the infrastructure is still in the hands of certain market participants. The big German gas suppliers are also the owners of the large storage capacities in Germany. The second reason is the fact that many capacities have been blocked by historical rights of certain suppliers. Unlocking these capacities is a difficult exercise. Many years ago, the governments supported companies making long term contracts for the supply of gas. Can those same governments make those contracts obsolete by taking away the capacities that those companies need to honor these contracts?

The underlying difficulty is that it proves extremely hard to transpose the English gas market model – without or with limited long term contracts – to the continent. An important reason for this is the difference in pricing models. The long term contracts have pricing based on oil prices. The Hub markets function with gas-to-gas pricing. It is supply and demand of natural gas that sets the gas price (which is much more logic). Since the summer of 2009, the Hub prices have dropped far below the oil indexed prices. If this trend continues, the holders of historic supply contracts face a huge problem. They will have the obligation to take gas from the producers at higher oil-indexed prices than the Hub prices at which they can sell in their home market. It is therefore understandable that they are not very enthusiastic in developing the Hub markets. Therefore, developing liquid and transparent continental Hub markets is the main challenge for European natural gas market policymakers.

Filed under: Belgium, Energy policy, France, Germany, Natural gas, the Netherlands, UK

EPEX launched

‘Towards the pan-European power market’ says the website of the European power exchange that was launched today (www.epexspot.com). It is the result of the merger of the spot market activities of the German EEX power exchange and France’s Powernext. To the policymakers that originally worked on EU energy market liberalization this slogan must sound like music. For one of the original aims was indeed to create the ‘single copper plate’, an EU-wide electricity market. With the creation of Epex, this comes closer. The EU has adapted its policy by aiming for regional markets first and then for a pan-European power market. With Epex, a key regional market is taking shape.

It is not surprising that German and France merge their spot markets. With the improvement of cross-border connections and the allocation of cross-border capacities, we notice since a few years the emergence of a German – French – Belgian – Dutch – Luxemburg market. Prices in these markets have come very close to one another, not just in spot but in forward markets also. And the allocation of short term power plant capacities that is settled in spot power markets, has also become a cross-border affair. Dutch gas-fired plants heat up as unfavorable conditions in Germany cause a drop of wind power output or as French nuclear plants shut down for maintenance.

How important is this development for the end consumer? First of all, we have to understand that these are developments that only affect the wholesale market, not the retail market. The big power suppliers in the region such as EdF, E.On, RWE, Vattenfall, Electrabel, etc. currently have a retail market approach aimed at the separate countries, not at the whole regional market. If they do anything on a regional basis, it is buying companies in one of the other countries to establish a stronger national presence. Think about EdF buying EnBW, RWE buying Essent or Vattenfall buying Nuon. But if you talk to the sales organizations of any of these companies, it is clear that they are organized on a national and not a regional level.

But of course, the wholesale market developments are important, as they determine the price that the industrial consumer will ultimately pay. Creating wholesale markets for larger geographical areas is an important development. It adds liquidity to these markets. Especially in markets with liquidity issues such as Belgium or the Netherlands, such a development is positive.

We should also remark that Epex (for now?) is a spot exchange. Most end consumers buy prices based on forward prices. Both French and German power futures are now traded on the EEX. But it remains two separate prices and markets up until now. We hope that this will change soon.

Filed under: Belgium, France, Germany, the Netherlands

A North Sea full of wind?

How proudly were they spinning, the six 5 MW windmills that were inaugurated today as Belgium’s first off-shore windmill park. And they had several reasons to be proud:

- They stand 30 kilometers away from the coastline, no other windmill park is so far off-shore.

- They have a capacity of 5 MW each, which means that they are among the biggest windmills on the planet.

- It took a lot of pioneering engineering to build windmills at such a location. The concrete bases on which they stand, were constructed on shore in the port of Ostend and then dragged into the open sea. A huge crowd came to watch this spectacle.

- The investors in this project (C-Power) deserve applause for their perseverance. It took them eleven years to go from idea to realization. They had to edit 720 kilograms of files to apply for the 29 authorisations that were necessary for the windmills to be constructed.

I have the impression that in those eleven years the public attitude towards wind power has shifted remarkably. When plans for windmills in front of the Belgian Coast were first aired, they caused public outrage. Owners of appartments on the sea front didn’t want their sight blurred by spinning blades.  The protest of inhabitants and politicians of the posh seaside resort Knokke became symbolic. Today, inhabitants of Knokke have asked C-Power to invest in fixed binoculars on the promenade for them to see the windmills. (Which is quite ironic, the mills have been constructed so far from the promenade, to avoid that they could be seen.) In my hometown, two windmills have recently been erected. If there was any protest, it certainly was very quiet. I have heard none of my neighbors complain that those mills are destroying their quality of life. I have personally grown quite attached to them. You can see them standing from quite far. This means that when I’m driving home after a long trip, I have that nice ‘coming home’ feeling for a longer period then in the past. Maybe the images of icebears scrambling to find some ice left in the Artic have created enough of an impression for people to accept that we have to look for alternative ways of producing energy. Although ‘alternative’ is a badly chosen word. Wind energy has left the world of tree-hugging and has become an integral part of modern life. The technological achievement of constructing 5 MW windmills so far into the sea is clear proof of that.

So my guess is that when another eleven years have passed, many more windmills will have been erected. Maybe the ring-fence of windpower in the North-Sea that some European politicians dream about will have become a reality. This idea is all about constructing multiple off-shore parks in the Belgian, Dutch, Danish, Norwegian and British zones of the North Sea and connecting them with cables. Some Dutch politicians are talking about building up to 20.000 MW of wind power production capacity in the Dutch part of the sea. That would be equal to what the Netherlands today has installed in conventional capacity.

Such huge amounts of wind energy on the grid will create new market conditions. Wind power changes energy pricing in two perspectives: 1. as its fuel cost is zero, it reduces the marginal cost price of energy, 2. as it comes only when the wind blows, an important element of unpredictability enters the power markets. In countries like Germany and Denmark, with large windmill capacities, we can already see how this influences the markets. When the wind starts to blow spot power prices fall, when it is windstill, spot power prices rise. This changes the conditions for maximizing profits at e.g. gas-fired power plants. With wind power, the energy market economics become a lot more exciting! In the future, you will have to check the wind conditions on the North Sea not to plan your sailing weekend, but when you want to buy energy.

Filed under: Belgium, Climate change, Energy history, Energy policy, Energy technology, the Netherlands

The natural ressources blessing (or curse)

This week, the Dutch queen Beatrix visited the former beet field where geologists discovered in 1959 the Slochteren natural gas field. The event earmarked the start of festivities to celebrate fifty years of natural gas production in the Netherlands. To my many Dutch contacts: my sincere congratulations.

Some of you might respond: what is there to congratulate? The Dutch just happened to be lucky enough to live in a country where geophysics created the right conditions for natural gas formation in their soil. Moreover, when the gas was formed, there was no such thing as a Dutch people.  Having natural gas or other energy prizes such as oil or coal in your soil, is a matter of pure luck. If you take a look at the map of Europe’s gas fields, you realize that having gas or not is like a geological lottery. Some of the Dutch gas fields in the North Sea lie not too far from the Belgian waters. A bit more luck and Belgian King Albert could have visited gas fields also!

I congratulate the Dutch because they had the political clout to turn the natural resources which they had been blessed with into a real blessing and not a curse. The Netherlands sells its gas – at home as well as abroad – at prices that are comparable to those in the surrounding countries. Hence, they acquire money which is saved for the future. Thanks to this, the Netherlands is one of the few countries of Europe that is not facing a budgetary catastrophe as the ageing population starts to retire. And that such rational policies are far from evident, is obvious if you consider the fate of other countries ‘blessed’ with hydrocarbon riches, Nigeria, just to name one. The Dutch have also avoided another cliff: i.e. ‘subsidizing’ its own industry by giving them access to this gas at prices that are far lower than in other European countries. Such policies only breed energy spilling behavior. At present, the Dutch industry excels in its energy efficiency. From a macro-economic perspective, this is a very sound policy. Any MWh of gas that is not spilled at home can be sold abroad and brings in money for the future.

50 years of natural gas production obviously means that one should start thinking about the after-phase. Dutch policymakers are doing this. They want to transform the Netherlands into ‘the gas roundabout of Europe’, i.e. playing an important role in the distribution of gas to the different European countries. The combination of its geographical position and the presence of empty gas fields that can be transformed into massive storage, makes the Netherlands an excellent candidate for this. The development of the TTF Hub proves that the country is moving in that direction. But there are still some important hurdles that should be taken. To start with, it would be a good idea if the Dutch started charging gas by MWh and not by the normalized cubic meters that they alone use. Also, the Netherlands will have to invest in interconnection capacities with Germany and Belgium.  It is a pity that all too often, Belgium and the Netherlands are presented as competitors for becoming Europe’s most important gas transit country. I think that the combination of the Belgian transit grid and Zeebrugge Hub with the developments in the Netherlands make for a strong combination. Lastly, the home market in the Netherlands will have to move away from its dependence on one party, Gasterra. More gas will come in from abroad. How will Gasterra behave towards this unprecedented competition? The Dutch gas market presently is dull. It is a single-source market with everybody re-selling gas bought at the same price from one party: Gasterra. The result is that we see price offers that are all very close to one another in Dutch gas tenders. In other countries we see bigger price differentials as different suppliers have different sourcing possibilities.

As the Netherlands celebrates 50 years of gas production, there is good reason for reflection. My main reflection is: in which direction(s) will the gas flow in 2059?

Filed under: Energy history, Energy policy, the Netherlands

EU elections

I have just returned from the poll station where I participated in electing members of the European parliament. This is the largest election of the Western world. Still, it stirs a lot less enthusiasm than what we can see in the United States. In Belgium we are obliged to go and vote, but in countries where a voting right exists instead of our voting duty, turnout tends to be low. Since EU elections started, turnout continuously fell lower and lower. Many Europeans don’t seem to understand that many aspects of our daily life are now regulated at the European level. They think that Europe is an abstract political entity where ageing politicians can earn a lot of money for not doing much. They are mistaken. Europe is dealing with some very concrete matters that have a huge influence on our daily life. This is certainly the case for whatever concerns our energy supply. Without Europe there would be no open market. There would be no pan-European emission trading. Countries would not be pushed to switch towards renewable energy production. Such things would have been regulated separately in every European country. This would have complicated doing business immensely.

The people that get elected to the Brussels – Strasbourg parliament today will probably continue to have multiple discussions on energy policy during their term. Some very important issues need to be addressed:

• A post-2012 carbon dioxide emissions policy is to be negotiated with the rest of the world.
• The European emission trading scheme is to be continued into its third phase. We must hope that some of its flaws will be addressed.
• In the wake of the credit crisis, the call for more regulation of the world’s markets sounds louder than ever. French-style economics (le dirigisme) seems to grow in popularity. President Sarkozy even called for the world’s oil markets to be regulated this week. He wants the oil price to be set by a committee of producing and consuming countries. In how far will this influence the policy on the internal natural gas and electricity markets?
• With a new Russian – Ukranian gas conflict ahead http://www.atimes.com/atimes/Central_Asia/KF03Ag01.html, some important questions regarding diversification of gas supply are to be adressed. How will Europe support the Nabucco pipeline project? In January, we’ve heard some MEP’s utter the idea of subsidizing the construction of LNG gas import facilities. Will this become a reality in this next term?

I don’t believe in ‘le dirigisme’. Despite all the economic turmoil that we have suffered in the past year, I still believe that re-regulating markets would cause more harm than good. I agree that electricity consumers would have been better shielded form energy price inflation if the power markets hadn’t been deregulated. That is, in most countries, in the Netherlands and the UK this would not have been the case. But I am also convinced that the huge rise of oil prices in the past five years would have been a disaster without an open natural gas market. Industrials could now find suppliers willing to offer them hedging services that helped them to protect themselves against the rise of their gas price formula, pegged to the oil price. Many didn’t do it, because they lacked the experience and knowledge. But at E&C we are ready to help everyone doing it in a next bull phase. I continue to believe that an open economy is the best way of maximizing profits on investments and as such it is the most efficient way of allocating money. Just consider what is currently going on in the automobile industry. I’ve read this morning that even when car sales peaked, the car industry had 30% excess capacity. And now, with car sales down by 40%, local governments are pouring huge amounts of public money into their local car factories in the hope of keeping them open. This is the kind of economics that we will get with le dirigisme. Our tax money will get wasted in economically unviable projects because of electoral concerns.

To deal with the world’s huge energy supply issue, we definitely need more Europe. France, Germany or even the UK would be so much stronger if they would consistently talk to the world with one European voice. The politicians of these big (and even some smaller) countries ignore this. Together, we are the world’s biggest market for oil, natural gas and electricity. Isn’t that a good position to go and talk about security of supply with Russia or Opec?

We already know the results of the Dutch elections, and they don’t inspire much hope. The Dutch have elected several MEP’s with a clear anti-European position (most famously the PVV of Geert Wilders). This means that EU policymaking will be hindered by a faction that wants a minimal Europe. I was in the Netherlands last week, and I was surprised about the anti-European tone of the political debate over there, even among big parties. It is true that the Netherlands have a large financial contribution to Europe and doesn’t get much back in terms of EU subsidies compared to poorer countries. But from an energy market perspective, the Netherlands got a lot back from Europe. EU energy policy makes it easier for them to sell their natural gas to other countries and hence acquire wealth that will pay them their pensions. And look at the power market. In the past, when natural gas prices rose high due to rising oil prices, the Dutch power consumers paid up to 30% more than power consumers in surrounding countries. With more than 80% of all the electricity produced from natural gas, they were more than others vulnerable to rises in oil (and hence natural gas) prices. In last year’s gas price peak, the Dutch power price was not much higher than the Belgian, French or German. This was because cheaper French, Belgian or German power was flowing into the Netherlands, hence tempering prices there – or making it rise in the other countries. Whatever it was, arbitrage with surrounding countries protects the competitiveness of Dutch power-consuming industry. It is EU energy market policy that makes such cross-border arbitrage possible.

Call me naive, but I am still convinced that our best hopes for solving today’s energy market issues lie in Europe. I believe that pan-European natural gas and power markets where large companies such as EdF, E-On, RWE, etc. compete with one another and with smaller niche-market suppliers would be a good place to buy energy. And I hope that the people that we have elected today will make that happen.

Filed under: Energy policy, France, the Netherlands

RWE – Essent takeover: no to economic nationalism

The province of Noord-Brabant, shareholder of Dutch utility Essent, has approved the takeover of Essent by German energy market giant RWE. The Germans are paying a total 9,3 billion euro to the Dutch provinces and communities that were shareholders of Essent. RWE is acquiring an important market share in the Dutch power and natural gas markets, a range of power production assets and a reputed trading branche.

The deal had been announced months ago. Still, at some point it looked like it would not hold. The Dutch public reacted emotionally to the takeover of one of their top utility firms by a German company. Because of that, the shareholders were hesitant about selling. The fact that Nuon, another large Dutch company has announced that it also plans to be sold to a German company, Vattenfall, has added to the negativity. The two largest Dutch energy suppliers would fall in the hands of foreign owners. Have you ever seen a football game between the national teams of the Netherlands and Germany? You might understand that the fact that the two giant companies that take over Dutch crown jewels are German, is not particularly appreciated in the Netherlands. To my big surprise, I heard arguments smelling of economic nationalism discussed openly on the Dutch radio. I thought the Netherlands was one of the most liberal countries of Europe? Dutch businessmen pride themselves on doing business across the globe. I once heard at a Dutch business conference the remark: “we are Dutch, we sell the world”. Would they add to that, “but we don’t want the world to buy us?”.

The takeover of Essent was inevitable. What the Dutch public fails to understand, is that its utilities have a structural weakness in the European energy markets of tomorrow. Due to the specific structure of the Dutch gas market, they are limited to being gas traders. And with its over-dependency on gas-fired power plants, they lack the asset diversification that is necessary to become an important player in power production. If you have more than 80% of your power plants fueled by gas, the marginal cost economics is suffocating your profitability. When Dutch power prices ran up to 10o euro per MWh in 2008 (baseload), the gas price had also risen to 40 euro per MWh. If you know that you use 2,5 MWh of gas per MWh of electricity that you produce, you can quickly calculate that even with such high prices, gas-fired power production wasn’t exactly a sprakling business. If you imagine that companies such as EdF, Electrabel, RWE, E-On, Vattenfall, etc. could sell the electricity that they produce in nuclear or coal-fired power plants at that same 100 euro per MWh, you understand how much more profitable these production companies are. Dutch utilities have managed to compensate for this lower profitability of their production branches by developing excellent trading activities. It remains a structural weakness however.

However giant they might look to any Dutch consumer who is in contact with a call center to ask for an explanation of his energy bill, the Dutch utilities are medium-sized on a European scale. The Dutch market (15 million inhabitants) is not the size of those of France, Germany or the UK. Moreover, the Dutch market was historically divided among many different suppliers: Essent, Nuon, Eneco, Delta and then a whole range of smaller local utilities, many of which have been taken over by foreign companies such as Electrabel, E-On or RWE. This has been a boon to opening markets in the Netherlands. We can say today that the Dutch gas and power markets are the most open and competitive that you can find in continental Europe. But due to this fragmentation, none of the Dutch energy companies is really big on a European scale. And if you are medium-sized, you basically have two strategic choices:

1. You specialize and become a niche market supplier,
2. You team up with other companies to become bigger.

With limited possibilities of niche marketing in energy, it is obvious why Essent and Nuon chose the second option. It will be interesting to see whether Eneco follows this path. In the hands of RWE, Essent has now become part of one of the top three energy suppliers in Europe. From a strictly economical point of view this looks evident.

I understand the sensitivities of the Dutch public. As you can read in my post on the takeover of SPE by EdF, I feel rather uncomfortable with the situation in Belgium where almost all production capacity is now in French hands. There is an essential difference, however. GdF and EdF are both state-held companies, which means that in Belgium, it is the government of a foreign country that holds the power production capacity. Both RWE and Vattenfall are private companies. Moreover, they both have an international orientation. I don’t think either company would spoil the functioning of their recently acquired Dutch branches out of nationalist motives. In the next few months, we will see how this takeover process takes shape. Often this turns out to be not so easy.

Filed under: Energy suppliers, the Netherlands

Feverish headlines

‘Swine flu causes feverish energy markets’, I’ve read as a headline in an energy market report  sent to customers by a Dutch utility on Tuesday. My congratulations, what a beautiful headline. Connecting the ‘flu’ element with ‘feverishness’ in the market, great association! Just one little problem: the facts don’t really fit. Having read the headline, I immediately called our analyst. What was happening? Were we missing something? Because our analysis is that we see a very quiet market these past few days with low volatility. This low volatility in itself is news, after months of extremely high volatility. But, of course, ‘Swine flu causes a decline in feverishness in the energy markets’, that is not such a nice headline, is it? So the energy report sent a message into the world that the market was feverish.

This makes me think about the many times that I have been contacted by clients in panic about something they had just ‘read’ or ‘heard’. The panic that I felt myself when that news is contrary to our assessment of the market. The times I’ve called the analysts to ask them why we missed that news. And the many times that it turns out that the news was in fact something that happened a few days before and was already outdated by newer events. The many times that the news turned out to have been invented of an over-reaction.

Energy markets are like most other global markets, populated by masses that are being motivated by greed and fear, and these emotions make them nervous. Nobody wants to miss that tiny piece of news that can lead to a fantastic deal. In such a ‘feverish’ climate, it is not strange that information gets misrepresented. It teaches us how important it is to treat information (whatever its source) with caution and to verify it and trust the firsthand information, such as the price information itself.

Filed under: Forecasting, Market analysis, the Netherlands