with Bert den Ouden, Founder and CEO of APX-ENDEX, APX-ENDEX
As one of the founders and ever since CEO of APX-Endex, could you briefly introduce the organization through its main milestones since 1999?
The main milestone since the foundation of APX in 1999 was its expansion towards the UK market. Soon after, we realized that the Dutch energy market in itself was too limited – gas, for instance, is a much bigger commodity market. Besides, we were active only in the spot markets, not derivatives.
Hence, back in 2002 our conclusion was that we had something small of something small of something small. Something that needed to be changed since this industry is all about size and quality. This reasoning made us enter the UK market in a strategy that has proven extremely successful. In two years we bought three market exchanges – two power exchanges and one big gas exchange. By doing so APX became the biggest gas spot market of Europe.
From that moment on, APX rightly positioned itself in the gas market, which allowed us to start up markets on Title Trading Facility (TTF) in the Netherlands. This was only possible thanks to the infrastructure we bought in the UK.
In a way this was also a make or buy decision. Would we build up our markets here in the Netherlands from zero or buy existing ones in the UK and use the acquired infrastructure in a more effective way. The second choice proved to be the most interesting and cost efficient plan, allowing APX to recover the initial investment promptly.
The second milestone after the acquisitions in the UK was the market coupling initiative with the Belgians and the French. This project led to such a big impact, even more positive than foreseen that it successfully caused a price convergance in the electricity market. It also provided considerable extra quality to the Dutch market. From that moment on we have seen a continuous growth in the Dutch spot market. It nowadays represents around 30% of the Dutch electricity consumption, quite significant for a spot market.
The third milestone was APX’s integration with ENDEX. The future market was split off in the early days of the APX, but soon we realized that it would be better to merge it back again. As a result of the current exchanges’ consolidation process, we have only one body for the Netherlands and the UK. The complete integration was finalized in the end of 2009. Since this process started we have seen some substantial growth, showing that this is definitely the right way to go.
Besides, APX was very proud to grow in a year of downturn. Our growth was focused especially on the gas market. One of the prime targets of the APX and Endex’s merger was to create an exchange that could really create the lead on gas – that’s extremely important.
As you mentioned, the market coupling initiative was a very important project for the further integration of the European Energy Markets. This seems in line with the projects of companies and the Dutch national government in promoting the Netherlands as the Energy Hub of Europe. How can APX-Endex facilitate such ambitions?
As a specialist in market integration, APX-ENDEX brings markets together. Once markets communicate, greater liquidity is created, bringing increased trust to the market and providing a better role for traders – when they have an open position they can trade out in a better way. As a result, the Dutch power market has become more and more stable over the years. It naturally follows the trends, but it is much less volatile than before. Nowadays, it is much easier to close a position without large price deviations being caused. You not only have a larger volume but also many bids behind the volume whenever there is a price deviation. In the gas market we are still lagging behind in these regards, but we are improving there as well.
One of the biggest challenges faced by the Dutch market was solved recently. We used to have two different gas qualities in the market high caloric and low caloric. In order to cut inefficiencies, we created a virtual hub for both qualities, which had a very positive impact on the market. On the Dutch Gas hub, the so-called TTF.
Through out Europe one of the main challenges is that there are many bilateral long-term contracts and also long-term contracts that are not freely delivered on hubs but are usually delivered for direct use. All over Europe we have come to a sort of portfolio traded world in which standardized contracts in hubs are becoming the norm and not the exception. In electricity this switch has been made already. The bilateral contracts are already the exception and standardized contracts are the rule.
In the gas sector this seems to be a more difficult transition to be made. We are going that way, and once we achieve it we will see a robust market emerging. The UK is far ahead than anyone else in Europe and this is why they have a much bigger market in gas.
We have to move towards a portfolio driven world instead of the bilateral dedicated purpose contracts. For that to happen still some further improvements have to be made on the TTF market. We should not go to half way solutions. If you take the example of the UK they have made the transition in a short – perhaps even painful way – but after that all was done. The open question we see in the Netherlands is whether we will do the transition in a long and painful way or short, painful but efficient way?
Do you believe the Netherlands is heading in the fast track direction?
I believe there is still some reluctance to go all the way, but sooner or later we will have to do it, especially if we really want to become the European Gas Roundabout.
Mr Lankhorst, CEO of GasTerra, among others in the industry, was very optimistic about the future role of Gas in energy markets. According to him, natural gas is the perfect bridge towards a cleaner economy. As the main trader of the product, what’s your assessment of the future of natural gas as an energy commodity?
I see natural gas as an important commodity in its own right. It is actually becoming the most important energy commodity for the European market. Besides, gas is definitely one of the prime bases for a green development, as there will be necessary some bridge towards renewables and other alternative fuels. Apart from that, I believe that a lot of efforts will be put on energy conservation – the best energy is the energy that you don’t need because you saved it. For instance, what’s the best use for silicon, solar cells or LEDs? Most people would guess photovoltaic, but when you look at efficiency the LED is by far the best way: it returns a larger CO2 reduction for a lower investment.
Besides, gas will play a very important role with the increase of renewables because it facilitates the use of smart grids by being a flexible and responsive fuel. In short, smart electricity grids and gas supply go very well together.
My vision is that when we are really serious about reducing CO2 emissions than we should try to be as efficient as possible. We have to be very pragmatic. My general vision in this debate is that it is often that people become fond of a particular technologic option – this is wrong. If the objective is to cut emissions, than lets do it the best and most viable way.
How can APX-ENDEX help in the transition towards a sustainable carbon neutral economy, for instance with carbon trading?
APX has not a CO2 trading market yet. However, we are facilitating energy exchanges via Climex. APX has always promoted carbon trading as an important part of the scheme going towards low carbon world. But ideally the system should be such that the carbon price is part of economic optimization. Instead, I see a world where carbon have prices that do not reflect scarcity. To avoid this reality by promoting fragmented national policies for a global issue won’t really help the world from stopping global warming.
Looking towards the future, what are your main ambitions and expectations for APX-ENDEX in the coming years?
On the power business we really see an end game in terms of market integration. Europe has to further implement the market coupling – which APX has already done with Belgium and France – and create an integrated European market. Once Europe is totally integrated, than naturally we will have successfully reached the end of the coupling mechanism.
That’s a big challenge but it will happen. In order to do so, APX is working with Germany; with the UK in a cable that will integrate the Dutch and the British market in 2011; and with the Norwegians to build a cable connecting Norway to the rest of Western Europe. This cable is already in place but we still have to work on integrated solutions. Besides, France and Spain are very interesting spots and the entire south and central part of Europe will be eventually integrated.
The most interesting integration will happen between North-Western Europe and Scandinavian countries because that region has an enormous amount of renewable energy – both storage and non-storage. For instance, look at the hydroelectric power.
Should we do all the renewables here or should we have more links to Scandinavia? Their Hydropower can be a buffer to wind energy much better than what we can offer locally. Hence, the link between these two regions will really determine as to weather Western Europe will be successful with renewables or not.
As for gas, APX sees an important gas hub emerging, with TTF being part of it. It will be further facilitated by the LNG terminals being built in the Port of Rotterdam. Besides, we will see further market integration with countries such as Germany and the UK – which are already quite integrated with prices being almost the same. The complete integration of these markets brings great opportunities not only for APX but also for the Netherlands as a whole since it wants to play the Gas roundabout role of Northwestern Europe.
APX expects a continued growth in our gas exchange market since we will launch new products such as spreads and swaps. Over time I think that the importance of gas trading will overtake electricity and it won’t be a small difference – APX being the greatest facilitator of this process.