emcc: The German Market

The German Market

The German energy mix is dominated by nuclear, lignite and hard coal generated energy, all of which to almost equal parts. Germany is officially committed to phasing out nuclear power until 2020. In order to reach this objective, renewable energies such as wind and biomass are strongly enforced and supported.

The German consumer market is one of the largest in the European Union. While the world’s consumption of energy is growing, Germany’s is nearly constant.

Market Liberalisation

Originally, the supply with power was regarded to be a natural monopoly. The liberalisation process on the German power market began with the enactment of the Law on the Fuel and Electricity Industries in the version of 24 April 1998, which transposed the EU Energy Directive 96/92/EC into national law. The free selection of the power supplier by the final consumer and the rules regarding access to the transmission system constitute central elements of the law. The integrated price for power generation, power trade and network use became transparent. Thus, energy became a tradable commodity.

The Need for Power Exchanges

In recent years, all European countries have moved from regulated regional monopolies to liberalised power markets. In this context, the fact that bilateral trading alone cannot fulfil the requirements of the power market has become obvious. One reason for this is that supply and demand for power always have to be balanced even in case of high volatility. Therefore, speed constitutes an essential factor for efficiency and clearing of a power spot market. Ultimately, only centralised, multi-lateral market organisations can provide the required transparency on prices and shortages at the speed which is required for an efficient allocation and co-ordination of generation, transmission and balancing power.

Because of the lack of storability of electricity, power exchanges require comparatively complex rules and regulations and a careful consideration of numerous ancillary technical conditions. It is therefore central that power auctions generally comply with these demanding requirements. At the same time, power auctions are embedded in a highly dynamic market architecture which is subject to constant change in the framework of European harmonisation and co-ordination efforts.

EEX

During the initial stage of liberalisation both long-term and short-term power were exclusively traded bilaterally (so-called “over-the-counter” or “OTC” trading). Very soon, however, power exchanges also evolved as central power trading markets. In 2001, the German power exchanges of LPX (Leipzig) and EEX (Frankfurt) merged to establish the new Leipzig-based EEX AG, where short-term trading is done on the spot market and long-term contracts are traded on the futures market.

The decentralised form of organisation under the exchange model ensures that market prices can drive decisions and that generating companies can optimise the use of power plants independently in all stages.