Analysis of activity in the energy markets 2011
For the tenth consecutive year, we (the FSA) have written to UK energy market brokers to ask
for information about volumes and values in the gas, power, coal and emissions traded markets
(‘the market(s)’) they operate in. We aim to gather information on favoured routes to market
and market size to help assess firms’ potential market impacts. This information also helps to
focus our efforts in identifying risks to the market through our market surveillance programmes.
Our analysis is for the 12 months of trading to 31 July 2011 (‘this year’). We surveyed
the same participants as last year (12 months of trading to 31 July 2010) and, because the
analysis is focused on the UK energy broker market, we have not attempted to include any
exchange-traded figures. Our analysis is based on data provided by respondents, which we
collated without verification.
Routes to market
Table 1: Routes to Market (% of deals executed), 1 August 2010 to 31 July 2011
(previous year’s figures in brackets)
UK GAS EURO GAS UK POWER EURO COAL EMISSIONS
POWER
Electronic 64 65 46 63 40 27
Platform (64) (48) (56) (60) (49) (46)
2011
Voice 36 35 54 37 60 73
brokered (36) (52) (44) (40) (51) (54)
Electronic
2007-2011 71 51 59 61 49 48
Platform
Cumulative
split* Voice
29 49 41 39 51 52
brokered
Electronic
2006-2010 72 53 59 60 47 47
Platform
Cumulative
split* Voice
28 47 41 40 53 53
brokered
* The split is simply calculated as the percentage of screen and voice trades over the entire period for each asset class.
This year’s results continue to show no dominant preferred route to market across the six asset
classes under consideration, with both screen and voice trades each shown to be the preferred
route to market in three of the six markets surveyed.
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Voice trades were the favoured route to market in UK power, coal and emissions. For all
three of these markets, this marked a notable shift away from their historical trends, as
defined by the historical cumulative splits we have presented above. It is not clear at this
stage whether this represents the start of a long-term trend towards voice trades in these
markets, or shorter-term variances around the mean historical average.
The rise in the proportion of trades executed by voice in the UK power and coal markets
reverses the increasing popularity of the screen seen last year. However, the largest shift
in favour of voice broking was in the emissions market, which saw a 19% rise in use of
voice-brokered deals. This might be explained, at least partially, by the need for
participants to manage their exposure more carefully in light of the widely reported
alleged registry phishing attacks during the reporting period.
The proportion of trades executed on screen in the European power market increased
slightly this year to 63%, though this remains well within the historical norms we have seen
previously. The European gas market witnessed the most significant increase in screen executed
trades, rising to 65% of deals recorded. However, the preferred routes to market in the UK gas
market remained the same as last year, with 64% of deals being executed on the screen.
The cumulative splits we present in Table 1 show that, historically, participants in the
European gas, coal and emission markets have executed a relatively even proportion of trades
through the screen and over the phone. However, the UK gas, UK and European power
markets have historically shown more of a bias towards screen trades.
Figure 1 provides further context for year-on-year trends in the routes to market for each asset
class since 2004/5. The figures are based on responses to previous energy broker surveys.
Figure 1: Historical routes to market across all surveyed asset classes,
1 August 2004 to 31 July 2011
100%
80%
60%
40%
20%
0%
2004/2005/ 2006/ 2007/2008/ 2009/2010/ 2004/ 2005/2006/ 2007/ 2008/2009/ 2010/ 2004/2005/ 2006/2007/ 2008/ 2009/2010/
2005 2006 2007 2008 2009 2010 2011 2005 2006 2007 2008 2009 2010 2011 2005 2006 2007 2008 2009 2010 2011
UK Gas Eur o Gas UK Power
Screen traded quantity as % of total traded quantity Voice traded quantity as % of total traded quantity
100%
80%
60%
40%
20%
0%
2004/2005/2006/2007/2008/2009/ 2010/ 2004/2005/2006/2007/2008/2009/2010/ 2004/ 2005/2006/2007/2008/2009/2010/
2005 2006 2007 2008 2009 2010 2011 2005 2006 2007 2008 2009 2010 2011 2005 2006 2007 2008 2009 2010 2011
Euro Power Coal Emissi ons
Screen traded quantity as % of total traded quantity Voice traded quantity as % of total traded quantity
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As noted last year, the charts in Figure 1 demonstrate that the breakdown between screen
and voice trading in each asset class can, at times, fluctuate quite markedly year on year.
This sometimes makes it difficult to identify meaningful trends. We also recognise that it can
be difficult for brokers to categorise trading activity that includes elements of voice and
screen brokering.
Nonetheless, the charts in Figure 1 do provide additional useful context to the cumulative splits
we present in Table 1. For example, Figure 1 shows that the proportion of screen-executed
trades in the emissions market has been falling since it peaked in 2007/8, so the fall seen this
year could be viewed as a continuation of that trend (albeit probably a trend that has been
exacerbated by the need for more direct interaction with the broker over the phone to help
manage risk following the alleged EU allowance thefts earlier this year).
A further interesting observation relates to the UK power market, which saw its highest
proportion of voice-brokered deals recorded in the last seven years of broker survey results.
This could be viewed as a continuing general decline in the proportionate use of screen deals
since 2004/5.
The charts in figure 1 also show that this year, the proportionate number of screen
trades executed in the European gas market have increased compared with the previous
two years, and that the 65% of deals executed on the screen this year is the highest figure
seen since 2005/6.
Market transaction volumes
Figure 2 compares traded volume for each asset class over the last two years of the broker
survey. As we highlighted last year, we think it important to analyse trade volumes with
caution because trade volumes taken in isolation do not account for the clip sizes of those
transactions, nor are the units of energy between asset classes directly comparable.
Figure 2: Absolute number of trades across all surveyed asset classes,
1 August 2009 to 31 July 2011
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
Coal Euro Gas Euro Power Emissions UK Gas UK Power
2009/10 2010/11
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Firstly, we may observe that all asset classes, barring emissions and UK power, saw a
year-on-year increase in the absolute number of trades for the 12 months ending
31 July 2011. For the other four markets that saw transaction volume growth, the
proportionate increases were relatively modest – ranging from nine to 15%.
Transaction volumes declined most notably in the UK power market, falling by 56% to 75,737
trades. The fall in transaction volumes reverses the slight increase we witnessed last year. We
would, however, caution that this does not necessarily represent a decline in market-wide
transaction volumes as our survey focuses on the UK broker market.
The emissions market was the only other market to witness a decline in transaction volumes,
decreasing by 43% from last year. This represents a steeper fall than last year’s decline of
15%. The further decline is likely to be a reflection of two factors – the continued success of
the exchange-traded emissions contracts alongside the temporary decline in market confidence
following the phishing attacks earlier in the year, which temporarily affected transaction
volumes across the entire emissions market.
Reported total market size
Table 2: 1 August 2010 to 31 July 2011 (% change in the traded market size
compared to last year is in brackets)
Estimates notional value of annual
Reported size of market
traded market (rounded)†
£299bn
UK gas 562,897 million therms (+28%) (average ICE Futures Europe (ICE) front
month settlement price of 53.17pp/th)
††
6,259,668 GWh (+27%) €121bn
Euro gas
[equivalent to 213,568 million therms] (average price of €19.39/MWh applied)
£49bn
UK power 918,765 GWh (-29%) (average ICE front month baseload
settlement prices of £53.30 applied)
€318bn
Euro power 6,200,339 GWh (+27%)
(average baseload price of €51.40 applied)
$269bn
Coal 2,210,378,453 metric tonnes (+2%)
(average price of $121.91/mt applied)
€39bn
Emissions 2,553,945,866 metric tonnes (-13%) (average ICE front month EUA & CER
settlement prices of €15.32/mt applied)
† The estimated notional value of annual traded market should be considered an indicative guide because it is derived by multiplying the
total size of the traded market with the respective daily average price over the period of the year.
†† We apply an average Dutch Title Transfer Facility (TTF) price to European gas volumes, which is a representative proxy for the
notional average price of the European gas market over the period.
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To help provide a complete picture, Figure 3 shows the trends in traded size and the average
price in each of the surveyed markets since 1 August 2003.
Figure 3: Size of the traded market vs. notional value across all surveyed asset
classes, 1 August 2003 to 31 July 2011 †††
Size of traded market
Size of traded market
Price
Price
M illion
therms UK gas Pence
M WH E uro gas
600 600
€
7,000 25
Millions
500 500 6,000
Thousands
Thousands
20
400 400 5,000
4,000 15
300 300
3,000 10
200 200 2,000
100 100 1,000 5
0 0 0 0
2003/ 2004/ 2005/ 2006/ 2007/ 2008/ 2009/ 2010/ 2003/ 2004/ 2005/ 2006/ 2007/ 2008/ 2009/ 2010/
2004 2005 2006 2007 2008 2009 2010 2011 2004 2005 2006 2007 2008 2009 2010 2011
Size o f traded market
P rice Size o f traded market
P rice
M WH
UK pow er
£ M WH Euro pow er €
1,400 60 7,000 80
Millions
70
Millions
1,200 50 6,000
1,000 5,000 60
40 50
800 4,000
30 40
600 3,000
20 30
400 2,000 20
200 10 1,000 10
0 0 0 0
2003/ 2004/ 2005/ 2006/ 2007/ 2008/ 2009/ 2010/ 2003/ 2004/ 2005/ 2006/ 2007/ 2008/ 2009/ 2010/
2004 2005 2006 2007 2008 2009 2010 2011 2004 2005 2006 2007 2008 2009 2010 2011
Size o f traded market
P rice
Metric Size of traded market M etric
tonnes Price $ to nnes E m issions €
2,500 Coal 140 3,500 25
Millions
Millions
120 3,000
2,000 20
100 2,500
1,500 80 2,000 15
1,000 60 1,500 10
40 1,000
500 5
20 500
0 0 0 0
2003/ 2004/ 2005/ 2006/ 2007/ 2008/ 2009/ 2010/ 2003/ 2004/ 2005/ 2006/ 2007/ 2008/ 2009/ 2010/
2004 2005 2006 2007 2008 2009 2010 2011 2004 2005 2006 2007 2008 2009 2010 2011
††† We consider the values for the traded market in UK gas and European power in 2006/07 to be overstated.
This year, four of the six markets surveyed increased in total traded size. The UK gas market
saw the highest proportionate growth in traded size as it increased 28% on last year, further
confirming the UK’s status as the most liquid gas market in Europe. The traded size of the
European gas market grew by a similar proportion, at 27%.
However, on a proportionate basis both the European and UK gas markets grew at a slower
rate than last year, when the traded market size rose 52% and 33% respectively. This year we
also note that an additional brokerage firm from the existing pool of brokers we survey
became active in the European gas market, which could signal growing interest and further
growth potential in this market.
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This year we also saw strong growth in the European power market, increasing 27% to over
six million GWh, up from 19% last year. This year we also note that two brokerage firms, of
the pool we survey, became active in this market. Germany’s decision to decommission its
nuclear power plants tightened supply fundamentals and resulted in increased German power
imports, which in turn is likely to have supported the increase in traded size of this market.
Growth in the coal market was modest at two per cent, confirming a trend we have seen in the
last two years for relatively stable increases in traded size of this market.
The traded size of the UK power market witnessed the biggest decline, contracting 29% from
last year, reversing the 14% growth we reported last year. The traded size of the emissions
market also fell, by 13%. While we have already noted some possible reasons for this decline,
it remains to be seen whether this will continue next year. Next year will see the aviation sector
included in the EU Emissions Trading System (EU ETS) for the first time, increasing the
number of participants with an underlying compliance requirement and therefore most
probably market volumes (although clearly an increase in market-wide emissions volumes will
not necessarily increase the amount that is transacted through brokers).
Notional market value
We have again provided the notional traded market value for each asset class by applying an
average price to the traded size of each market. It is interesting to note that average prices in all
six of the surveyed markets rose compared to last year’s figures. The entire global energy
complex has found support, at least in part, from the recent geopolitical and global
macroeconomic events. Factors such as increased gas demand in Asia, reduced nuclear capacity
and, political instability in commodity producing nations arising from the Arab Spring have all
contributed to volatility and higher prices in a number of energy classes.
Market values across four of the surveyed markets have increased significantly from last year,
whilst market values in the other two markets remain broadly flat. The most notable increase
occurred in the UK gas market, where the value increased to £299bn, up from £146bn last
year. This was driven by a 28% increase in market size combined with average prices rising to
53.17 pence per therm.
Market values in UK power and emissions markets remained broadly flat as the declines in
the traded size of both markets almost precisely off-set by the increase in the average prices
for the year.
Position types
Five of the six surveyed markets continue to be dominated by forward positions, with coal the
exception. The coal market is the only market where participants use swaps in the majority of
trades. Options trades also continue to constitute a small fraction of total positions in most
markets. While the use of options did increase this year in four of the surveyed markets, their
use fell in the UK and European power markets. The one exception is in emissions where
option positions now account for 17% of the total market.
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More information
If you would like any further information, please contact:
Raihana Braimah
Associate, Derivatives Team, the FSA Markets Division
25 The North Colonnade, London E14 5HS
Telephone: 020 7066 1262
Fax: 020 7066 1263
Email: Raihana.Braimah@fsa.gov.uk
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