EEX has been involved in the GO market for several years. An earlier attempt to establish a GO market in 2012 did not succeed, with trading volumes remaining near zero when it was discontinued around 2018. However, since then, the GO market has seen increased trading volumes, greater participation, higher prices, and stronger volatility.

EEX has also accumulated more experience across the entire GO value chain through its operations via Grexel, EEX, and EPEX SPOT. These include registry services and public GO auctions. Additionally, in 2022, EPEX SPOT, EEX, and European Commodity Clearing (ECC) jointly launched a pan-European spot market for GOs. In 2023, approximately 5.5 TWh were traded, with a maximum 1.12 TWh in October 2023.

Since the original marketplace’s launch in 2012, these developments have set the stage for the potential success of exchange-traded GO futures, according to EEX. However, the growing focus on granularity—both regional and temporal— and PPAs could pose risks of further market fragmentation and hence to any standardised GO product.

Participation barriers: fees and accessibility

Although EEX’s trading fees— Eurocents 4.1 /MWh, or Eurocents 2.05 /MWh each for buyer and seller with potential rebates of up to Eurocents 0.48 /MWh for higher trading volumes—are competitively priced compared to other trading platforms and broker screens, the high fixed membership cost remains a barrier.

The Environmental and Emerging Markets Membership, which includes access to trading emission rights, Power GO Futures, and other products, costs EUR 5,000 annually. This fee, along with the rebates for increased trading, may limit participation to large brokers, portfolio managers, and other larger companies, potentially restricting the market’s accessibility.

Balancing act: standardisation vs. flexibility

The EEX GO futures contract tries to offer a balance between standardisation and flexibility. While the contracts are standardised to facilitate exchange trading, they offer some degree of customisation with the choice to opt between different technology types (hydro, wind, solar or any technology) and yearly vintages.

We have seen an increasing focus on granularity in the European Union (EU), with the recent changes to the Renewable Energy Directive (RED) explicitly opening for sub-hourly and sub-MWh GOs, policies in Germany with geographical matching requirements, and monthly disclosure requirements in France as examples.

In Switzerland, a referendum recently voted to move towards quarterly disclosure periods in 2027 to better reflect the physical realities of electricity and increase credibility in the market. Still, EEX has also opted to ignore variations such as regional differences, sub-yearly temporal factors, and subsidy-related distinctions that could fragment the GO market into submarkets, focusing instead on standardising into a unified category and scaling traded volumes up.

To address the complexities of varying national GO schemes—such as differences in expiry dates and transfer delays—EEX has implemented specific measures. One key approach has been the introduction of buffer periods, scheduling the third-to-last Exchange Day in January to align with the disclosure deadlines of most countries, typically set for March 31.

Additionally, trading is currently limited to GOs corresponding to power production between March and December, as those produced in January and February could introduce further complications related to delivery of contracts. For example, some GOs have a 12-month expiry period.

If a GO corresponding to power production in January of year X and has a delivery deadline of January of year X+1, delays in transferring the GO between two AIB domains could result in the certificate expiring before it even reaches the EEX registry or before it is recorded in the consumer’s registry account for cancellation.

Market dynamics: granularity and hedging in the GO market

The trend toward increased granularity, such as sub-yearly disclosure and hourly or 24/7 time-stamped GOs, presents a challenge for standardisation. Exchange-traded products inherently require a certain level of standardisation to ensure efficient trading and clearing. The EEX GO Futures contracts, while offering some flexibility in terms of technology type, are based on annual production periods and do not specify particular regions or countries of origin.

This lack of granularity could pose challenges, especially for market participants who need to align their GO purchases with specific monthly consumption patterns. For example, the annual production cycles of these contracts may not perfectly match the monthly disclosure requirements in countries like France.

EEX is exploring solutions, such as the potential introduction of regional or country-specific contracts and shorter-duration contracts, to address these issues. However, accommodating more granular GOs on an exchange could lead to market fragmentation, reduced liquidity in each submarket, and increased trading complexity.

While the standardised nature of exchange-traded products brings benefits like centralised clearing and increased liquidity, it can also introduce basis risk. This risk arises when the standardised contract does not perfectly match a hedger’s specific needs. For example, a company may require GOs from a specific region or technology type that is not covered by the standardised contract, leaving them exposed to price risk even after hedging in GO futures.

To illustrate further, a consumer looking to hedge their Spanish exposure might purchase a standardised European GO futures contract on EEX. While Spanish and AIB GO prices generally move in tandem, there are instances—especially in late February and March due to the Spanish import deadline—where prices diverge. This divergence can expose the buyer to the risk of price differentials between the two markets, potentially undermining the effectiveness of the hedge.

Current over-the-counter (OTC) GO markets offer the advantage of contract customisation, allowing market participants to tailor contracts to their specific needs, thereby minimising basis risk. In contrast, the standardised EEX GO Futures may be less effective in managing risks related to regional or temporal specificity.

However, while EEX’s standardised GOs fails to meet more granular requirements, the exchange can also be used to hedge against risks associated with markets of more granular products, at least as long as there is a market also for standardised GOs.

Some ways to hedge against these risks can be by using EEX GOs for price benchmarking in OTC market for pricing granular GOs or by using swaps that can bridge the gap between standardised futures and granular GOs, allowing companies to hedge specific exposures more effectively.

Additionally, risks such as a country potentially exiting the AIB or the EU—similar to when GOs from Iceland were banned or the Norwegian government’s consideration of exiting the AIB—could impact the availability and value of GOs from that country, further complicating risk management for market participants.

Market impact

The introduction of exchange-traded standardised GO products may increase the liquidity of the GO market and present new ways of hedging risks. However, this requires a sufficient demand for standardised GOs.

With most countries in the AIB using annual disclosure periods and some also allowing GOs to be used across years as long as they have not expired, we do see a sizeable market for exchange-traded standardised GO products. This is also reflected in the current OTC market. Under these conditions, the launch of a GO futures exchange could enhance market liquidity and increase trading volumes. However, its potential to do so is also dependent on its ability to attract market participants and their willingness to hedge future prices using standardised products in an ever-changing market.

The launch of GO Futures could significantly impact various market players, particularly existing brokers and traders. Brokers might see increased trading activity and new commission revenue as more participants enter the market. The high fixed cost of membership may deter smaller companies, leading them to rely on brokers for trading access. However, there is a risk that larger companies may bypass brokers altogether, opting to trade directly on the marketplace, which could reduce brokers’ client base and revenue.

For traders and portfolio managers, EEX’s role in handling processing, clearing, and collateralisation will allow them to concentrate on delivering value-added services, such as market analysis, risk management advice, and tailored trading strategies, especially for large companies.

As the market grows, the entry of new participants, like banks and investment houses with extensive trading and risk management expertise, could make the trading environment more dynamic but also more competitive. While this increased competition could pose challenges, it also offers traders more opportunities to capitalise on market movements.