Finance Has Desks for That
Energy Desks II: Where European flexibility markets still have functions to build. Opportunities?
Finance became scalable by separating recurring market problems into specialised functions. European energy has sophisticated trading infrastructure. For flexibility, however, optimisation, structuring, financing and risk-taking are bundled into bespoke deals. A mapping from the relatively immature state of flex-swap contracting to unbundled functions in finance may show us paths to future development and opportunity. (The development of this article was supported by Fable-Sol-MiniMax.)
Energy Desks: a classification
Power-market volatility is creating new instruments and new roles. “Variability swaps” transform volatile power-market outcomes into fixed, floored, indexed or otherwise stabilised cashflows.
When we picture market action we’re most likely to think of front-office functions. They are, by definition, the most visible, most talked-about, they are most ‘available’ in terms of our exposure to them in media and popular culture. To many, the idea of a trading desk carries a sort of ‘halo.’
So it’s natural that the European battery market has no shortage of well-publicised “front-office ambition.” Optimisers decide when to cycle with their domain expertise and proprietary algos. Flow traders work day-ahead and intraday markets. Structurers design floors, tolls and swaps. “Trading desks” manage to pay fixed and receive floating. Asset owners assemble portfolios. Virtualisers turn physical batteries into accessible capacity.
The “front desks” are developing. The places are filling up in an increasingly crowded market. Yet mature markets are not defined only by the quality of their front offices.
Let’s dig a little deeper.
Finance developed by separating recurring problems into distinct functions: origination, execution, structuring, valuation, financing, collateral, custody, clearing, performance measurement and risk distribution. The sophistication lies not merely in each desk, but in the interfaces between them.
A portfolio manager need not be a custodian.
A structurer need not supply the capital.
A market maker need not originate the underlying asset.
An index provider need not trade the product.
A clearing house need not take a directional view.
European energy already has an impressive machinery around established products. Trayport connects traders, brokers and exchanges. Volue and similar providers automate short-term execution. ETRM systems capture trades, positions and risk. Equias supports confirmation and reconciliation. enmacc provides an OTC venue. EEX, EPEX and ECC provide organised markets, clearing and settlement.
This infrastructure grew around relatively familiar objects: a megawatt-hour, a nomination, a forward contract, an exchange order, an EFET transaction.
Flexibility introduces stranger ones:
degradation budgets,
slices of battery capacity,
dispatch rights constrained by warranty terms,
merchant-revenue floors,
a virtual toll backed by several assets,
or a floating return manufactured through thousands of operational decisions.
The plumbing might exist, but the new object does not always fit through it.
That is where opportunity may lie…
