Message-ID: <12290764.1075854940875.JavaMail.evans@thyme> Date: Tue, 23 Oct 2001 09:39:42 -0700 (PDT) From: issuealert@scientech.com To: issuealerthtml@listserv.scientech.com Subject: U.S. Power Firms Plunge Into Europe's Trading Market; U.K.'s NETA Rules May Set Continental Standard Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \MHAEDIC (Non-Privileged)\Inbox X-Origin: Haedicke-M X-FileName: MHAEDIC (Non-Privileged).pst Today's IssueAlert Sponsors:=20 SCIENTECH is currently interviewing 1,500 utilities on CIS/CRM and customer= care in the United States and Canada to determine:=20 The leading software providers=20 Drivers of utility technology decisions=20 Analysis of license sales versus ASP sales=20 New market opportunities=20 Growing/shrinking software markets=20 Download a sample prospectus for an introduction to this new survey at: and=20 contact Jon Brock at 505-244-7607 for more details. October 23, 2001=20 U.S. Power Firms Plunge Into Europe's Trading Market;=20 U.K.'s NETA Rules May Set Continental Standard=20 By Will McNamara Director, Electric Industry Analysis=20 [News item from Reuters] U.S.-owned Entergy-Koch Trading (NYSE: EKT) is boo= sting its European electricity and weather trading business with expansion = in Germany and the Netherlands. "After a successful start, we plan to subst= antially increase our volume of European power, power options and weather t= rading next year," said Uday Narang, managing director of European trading.= EKT also completed the paperwork needed to start trading electricity in Fr= ance and Austria, although its immediate focus would be Germany and the Net= herlands.=20 Analysis: The announcement from Entergy-Koch Trading that it will significa= ntly increase its European power trading business is by no means unique. In= fact, a recent scan of announcements from U.S. power firms tells a similar= story. Dynegy announced last week that it is seeking acquisitions to stren= gthen its European operations, in an effort to "replicate its strong U.S. e= nergy trading platform in Europe." TXU said that it expects "sharply higher= profits this year" from European energy trading as its electricity trading= volumes have soared across the Continent. For the first nine months of 200= 1, TXU reportedly traded 211 terawatt hours of wholesale electricity in con= tinental Europe, mostly in Germany, which compared to 97 terawatt hours in = all of 2000. Further still, UtiliCorp just announced that it and an unnamed= financial partner will be purchasing Midlands Electricity, the fourth-larg= est regional electric utility in the United Kingdom, which in addition to 3= 8,000 miles of electric distribution lines owns a 1,875-MW power plant. The= unrelated announcements have a common denominator: U.S. power firms are pl= unging into the European energy trading market in droves, despite some inhe= rent governmental challenges and resistance toward embracing electric compe= tition among some European countries. A new model in the United Kingdom, kn= own as the new energy trading agreement (NETA) rules, appear to be facilita= ting more efficient trade in that country and could become the standard acr= oss the Continent.=20 The appeal of Europe's power market for U.S. energy companies is perhaps ob= vious. According to a Financial Times Energy report from late last year, de= mand growth for electricity in European countries over the next five years = may prompt the need for an additional 69,000 MW of generating capacity to b= e built (an amount roughly equivalent to the generating capacity of ERCOT i= n Texas). In addition, like other developed areas of the world, Europe's en= ergy consumption has grown over the last two years. U.S. power firms, who p= erhaps see their competitive opportunities as being rather limited in this = country, have expanded operations in Europe, where electric privatization i= s occurring on a country-by-country basis. Consequently, the companies ment= ioned above join Williams, Enron, Duke, AEP, and Mirant (to name a few), wh= ich have established London trading offices.=20 Moreover, many of the U.S. power firms that expand into Europe start by acc= umulating generation assets in the United Kingdom, as represented by the Ut= iliCorp and Dynegy announcements. Much of this has to do with the fact that= the United Kingdom began privatizing its electric market in the early 1990= s and completed the process in May 1999 (after Norway, but well ahead of ot= her European countries). However, there is a more important reason why U.S.= energy firms may be drawn to U.K. power trading, and that is related to th= e area's unique rules for energy transactions, which were outlined in NETA = and took effect in March of this year.=20 To appreciate the significance of the new NETA rules, it is important to fi= rst understand the context of the European market as a whole and the tradin= g system that had been in place in the United Kingdom until earlier this ye= ar. The European Union has directed countries across the Continent to open = their electric markets to competition. Toward this end, the commencement of= competition in various European countries has included the following three= approaches: 1) allowing end-users the right to select an alternative provi= der; 2) giving generation companies the right to use an incumbent power sup= plier's transmission and distribution network, otherwise known as third-par= ty access; and 3) the introduction of energy trading, which has allowed an = incumbent supplier to buy power on the wholesale market. This last point is= significant, because some of the European countries have dismantled previo= usly integrated, state-owned utilities and mandated the divestiture of gene= ration assets.=20 At the end of 2000, approximately 68.4 percent of the European Union (EU) e= lectricity market was open to competition. Privatization has theoretically = enabled European power companies to expand beyond their traditional service= territories and business lines into other countries (at least those that a= re open). That is the good news. However, the basic problem with this appro= ach is that the European Union did not put standardized deadlines for the t= ransition to a fully competitive marketplace, and thus various countries in= Europe have developed their own timetables. For instance, Germany is fully= privatized, while France has been notoriously hesitant to provide third-pa= rty access to competitors. In practice, this often means that one country m= ay have an extremely complex system for transmission tariffs while its neig= hboring country may have not developed any standards at all. The other prob= lem is that physical interconnections between countries are often deficient= , which makes it difficult to transport power across borders. As a result, = wholesale competition across the Continent is considered rather heterogeneo= us and lacking in comprehensive trading standards. The lack of standards is= particularly acute as it relates to rules and tariffs for third-party acce= ss to the national grids on the Continent.=20 While these fundamental problems on the Continent are being resolved, the U= nited Kingdom has moved ahead with what is generally perceived as a more ef= ficient market because it offers one grid system, one balancing and settlem= ent code, and one contract format. However, even the power trading market i= n the United Kingdom did not get off to an easy start. Up until March of th= is year, the U.K. power market operated under a pool / auction system. Unde= r that model, generation companies offered electricity for sale, which was = then pooled into an auction system where day-ahead bids were made and power= was sold in half-hour increments. The model was quite significant because = it was one of the first attempts in the world to create a competitive marke= t for generation and it operated outside of governmental oversight.=20 However, the pool model in the United Kingdom became fraught with problems,= mostly because observers believed that excessive opportunity existed for m= arket manipulation. Given the concerns with the pool format, the United Kin= gdom began to formulate new rules for power trading in October 1998, which = culminated in the NETA model that started this year. The key tenets that ma= ke NETA different from the previous pool model are:=20 Forwards and futures markets, which allow participants to form power sale d= eals using standardized contracts either on-the-day or several years in adv= ance (as opposed to only day-ahead bids).=20 More flexibility regarding the kinds of contracts that buyers and sellers c= an negotiate (bilateral and multilateral contracts are allowed in the Unite= d Kingdom).=20 A new balancing mechanism covering ancillary services overseen by National = Grid Co. (operating in a role similar to an ISO), which facilitates the var= ious transactions to ensure reliability.=20 The administration of contracts linking wholesale supplies with demand (rep= resented by individual meters), and the threat of strict penalties for part= icipants whose positions do not match their metered volumes of electricity.= =20 In a nutshell, NETA essentially sharpened the rules surrounding power tradi= ng in the United Kingdom to allow less opportunity for gaming. The system i= mprovements have been successful, and more international power firms appare= ntly believe that they stand a better chance of competing in the United Kin= gdom due to the NETA rules. Installation of the NETA system reportedly has = caused a 315-percent increase in the number of contracts traded, a 25-perce= nt drop in wholesale prices and a six-fold increase in the variety of produ= cts offered. As of early summer 2001, about 150 new participants had regist= ered to participate under the NETA system, as compared with about 12 under = the former model.=20 As noted, many believe that the NETA model will become a standard for the C= ontinent as other European countries proceed with opening their wholesale m= arkets to competition. In addition to the U.K.'s model, there are several a= ctive trading exchanges in Europe presently, although more are expected to = emerge as the market becomes more competitive. The Nord Pool, with about 60= members, organizes trade in standardized physical and financial contracts,= and provides current prices on electricity in both spot and futures market= s. The Dutch Amsterdam Power Exchange has about 25 members and operates a s= pot market for electrical power. Smaller European exchanges, offering both = spot and futures contracts, include the Switzerland Exchange and Germany's = Leipzig Power Exchange in Frankfurt. In the meantime, I think we will conti= nue to see additional U.S. power firms expanding into the European trading = market, and using the United Kingdom as their launch pad.=20 An archive list of previous IssueAlerts is available at www.scientech.com =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz . Advertising opportunities are also available on o= ur Website.=20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission & distribution, retail markets, new tech= nologies, I/T, renewable energy, regulatory affairs, community relations an= d international issues. Contact consulting@scientech.com or call Nancy Spring at 1-505-244-7613.=20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. 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