In this free-to-read update, ICIS analyst
Robbie Jackson-Stroud provides an update and
forward view on market liquidity, as part of a
Power Foresight monthly analysis series
assessing trade activity.

If you are interested in a trial of the new
Power Foresight model, contact our Lead Analyst
Matthew Jones (matthew.jones@icis.com).

Major European hubs have seen a drop in
liquidity in April, and whilst this is typical
as a new quarter begins, this seems to be
related to dwindling interest in this winter.

High premiums on winter-23 seems to be moving
traders elsewhere, as
forecast last month. Lack of hedging
incentive is also playing a part, with price
support schemes and lower wholesale prices
leaving traders less restricted than in 2022.

Long-Term Development

• The below charts display total forward
  curve liquidity for OTC and the EEX exchange.
  • The UK does not have EEX volumes
    displayed due to negligible trade volumes,
    with almost all forward curve trading
    completed bilaterally.
• April typically sees trade volumes drop,
  with lower demand summer months ahead, as well
  as a drop off in seasonal and quarterly
  products compared to March, where there is
  often a pickup in trading before the nearest
  curve products begin delivery.
• There appears to be liquidity still to
  recover, as both UK and French liquidity for
  April is below that of April-22.
• The price levels of front curve products
  and their associated volatility remained low in
  April, though there has been a slight increase
  in annuals and seasonal prices. The correlation
  with these and liquidity has weakened,
  potentially signalling that we have reached a
  low enough price level for other factors to
  have a greater influence on trade activity.
• Something to note is the continued
  migration of trade volumes from OTC to the
  exchange. EEX has 62% of forward curve trade in
  April, a 9% increase since last year. EEX
  offers clearing for bilateral trades, which
  offers better security in a market that has
  seen many companies struggle with rising costs
  and hedging, leading to companies going bust
  and defaulting on trades.
  • French markets are not seeing the same
    shift in volumes to exchanges. EEX trade
    shares have been falling from 50% in
    June-22 to 38% in April.

 Monthly
Development

• There were few within-month trends
  noticeable for any of the three countries,
  though there is a clear drop in trade activity
  following the end of March.

• The UK season ahead contract has not
  recovered since March, signalling less trade
  activity for the winter-23 product than the
  summer-23.
• There is also less trade activity around
  the Y+1 contracts for Germany and France,
  whilst the Germany Q+1 product has been much
  more actively traded in the last few weeks.
• The German month ahead contract has shown
  increasing liquidity through March and April.
  This is typical at the end of the winter
  period, as ‘shoulder’ months such as March,
  April, September and October often have weather
  that is less comparable to the rest of their
  season. They also have the most variation in
  average temperature and therefore demand,
  leading traders to often pick up weekly
  products to more accurately balance their
  monthly position.
• Forward curve volatility and price
  movements during April may explain some of the
  hesitance surrounding some of the larger
  contracts. As discussed in a previous piece,
  nuclear uncertainty in France among other news
  drove a small bullish recovery in forward curve
  prices at the start of April. This correlated
  with the lower trade volumes.
• Volatility increased in early April,
  incentivising traders to wait for the market to
  settle before committing to large volumes.
  There will also have been some speculation on
  whether the bearish move. Once prices fell
  back, we can see a pick-up in trade activity.

 Point of
interest – Low Winter Activity

• Whilst nearly all contracts lost liquidity
  during April, it is beyond the near curve that
  has seen the largest drop in trade volumes. As
  you can see in the chart below, specifically
  Quarterly contracts beyond Q3-23.
  • For the UK, Q3-23 only accounted for 3%
    of trade volume during April, down from 12%
    in March.
  • French quarterly liquidity beyond Q3-23
    dropped 63%.

• A lack of activity on the contracts could
  in part be down to high prices.
• Q4-23 and Q1-24 are well above Q3-23 prices
  in all three countries.
  • French nuclear uncertainty has lead to
    prices that are
    overvaluing winter products.
  • Neighbouring countries are also
    impacted due to the interconnectivity of
    power. Last year nuclear underperformance
    drove the UK to become a net exporter to
    France for the first time in 20 years.
  • If prices are too high, trade interest
    will lower as it incentivises buying close
    to delivery, using the spot market or month
    ahead contracts.
  • Despite EDF confirming a new
    nuclear inspection plan, there is
    still a large risk premium in the power
    market.
  • Based on this, it would make sense for
    liquidity to pick up once we have seen a
    stronger bearish correction for these
    contracts, given no news.

• Hedging policy should also be partly
  responsible. Many countries and sectors of
  industry are being supported by government
  schemes to protect consumer costs.
  • UK’s energy price guarantee is
    continuing until June 23, where after the
    price cap will limit the cost of any
    variable tariffs.
  • With this in mind, there is little
    incentive for suppliers to take a strong
    position in the power market, unless they
    are confident they can undercut the support
    scheme and make profit.
  • Similar support schemes in Germany and
    France hold reserves of cash to support
    business and domestic energy bills, which
    in turn lowers incentive to compete for
    energy customers, or indeed spend cash on
    forward hedging.
• Recent history may have also changed power
  hedging behaviour towards the riskier winter
  months. For the last two years, the forward
  price for winter months has far exceeded that
  of the spot market, and this will not have gone
  unnoticed.
  • With less upside market risk now that
    Russian gas makes up such a small share of
    volumes, there will be more appetite for
    less strict hedging strategies, that
    utilise spot and front month trading.

Outlook

• Our Power Foresight model sees the forward
  curve, particularly Winter-23 as overvalued. If
  the market sheds some risk premium and corrects
  lower, expect liquidity to pick up in May
  around these contracts.
• Without bearish winter prices, liquidity
  should continue to move to spot and monthly
  contracts, with traders keen to get ahead of
  any climate developments.
  Reservoir levels could become a concern,
  and induce buy interest in Q3-23.
• The increasing renewable share in the power
  mix as we move into summer is likely to
  encourage liquidity in the spot markets and
  front month. This will increase exchange
  liquidity vs OTC trading as Month ahead volumes
  make up a greater share of trades.