Towards a single European energy market

The basics of wholesale energy trading

The role of EFET
Our vision for further market development
 EFET Statement of Purpose
EFET promotes and facilitates European energy trading
in open, transparent, sustainable and liquid wholesale markets,
unhindered by national borders or other undue obstacles.

______________________

EFET Statement of Activities

We improve the operation of European wholesale energy markets and enhance the performance of
traders and their support functions in those markets. We reinforce the markets’ functionality and
facilitate their liquidity and transparency.

We do this in particular by:

n Providing standard solutions to the repetitive aspects of wholesale energy transactions,

such as contracting and data exchange;

n Advocating policies and regulatory measures, which allow electricity and gas trading to
develop freely in parallel, and which minimise obstacles to trading in related instruments and
products, including futures and forwards, other derivatives, emission allowances and “green”
certificates;

n Encouraging probity, good risk management practices, responsible corporate governance and
proper accounting among energy traders.
Foreword by the Chairman and the Secretary General of EFET

Towards modern, sustainable and competitive energy markets in Europe

Energy trading is at the heart of Europe’s liberalised energy markets. Competitive, liquid, sustainable and
transparent wholesale energy markets are essential to deliver secure low-cost supplies to Europe’s energy
consumers. They also help energy producers, suppliers, intermediaries and large consumers to reduce risk-
management costs. Moreover, transparent price discovery not only generates confidence among investors, but
also, if properly appreciated, should reassure policymakers, regulators and consumers.

EFET has played a pivotal role in the development of liquid wholesale energy markets across Europe and
continues to promote the conditions that would allow wholesale markets to thrive. In particular, we foster:

n Efficient design of power, gas and environmental markets,

n Effective energy policy and regulation, and
n Standardisation of business contracts and procedures. Paul Dawson
Chairman of EFET

The practical advice and proposals for market design, rules and regulation of the energy sector offered by
EFET have helped the European Commission, National Regulatory Authorities (NRAs), Transmission System Operators (TSOs) and the rest of
the industry on accelerating the delivery of truly open and transparent European markets. The EFET Master Contracts for wholesale over-
the-counter (OTC) transactions in gas, power and related products have also been a tremendous success and are now used as a general
reference point by traders conducting business with counterparties throughout Europe. In addition, established in 2005, EFETnet, a subsidiary
organisation with over seventy users, facilitates the application of the EFET standards to electronic data exchange between traders.

Despite the considerable progress made over the past decade, many challenges remain in achieving a single
European energy market. These include:

n Ensuring that national political interventions do not interfere with the ability of markets to deliver
competitive outcomes, or with the independence and powers of energy regulators;
n Integrating renewable energy sources and supplies into pan-European electricity markets;
n Optimizing international transactions and flows across interconnected European grids through more
effective cooperation between TSOs and through greater use of market-based mechanisms.

The near future, of course, continues to be influenced by the European financial and economic crisis and the
ensuing fall in energy demand and regulatory disruptions. In these complex conditions, wholesale traders have
to navigate through the perilous waters of price volatility and policy uncertainties, greater aversion to risk and
the increased appetite for regulatory control. Nevertheless, they remain focused on achieving the goal of value Jan van Aken
EFET Secretary General
chain optimization to the benefit of European society.

Amid these profound challenges, we are confident that energy traders will continue to help ensure effective competition with a high degree
of professionalism, responsibility and integrity. As the voice of energy traders across Europe, EFET will face the very different challenges of
the next decade with the same dedication and optimism that we have shown over the last decade. We will continue our active cooperation
with other representatives of market participants, regulatory authorities and European institutions in the quest for truly modern,
sustainable, transparent and efficient wholesale energy markets across Europe.
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Table of Contents

Foreword by the Chairman and the Secretary General....................................................................................1

A. What is wholesale energy trading?......................................................................................................3
• European electricity markets.......................................................................................................4
• European gas markets................................................................................................................5
• Energy trading essentials............................................................................................................6
B. How is EFET contributing to the development of sustainable and competitive wholesale energy markets?...............7
• Market design, policy and regulation..............................................................................................7
• National and regional implementation............................................................................................7
• EFET member companies.............................................................................................................8
• Contractual and transactional standardisation................................................................................ 10
• Principles of Good Conduct for energy trading................................................................................ 11
C. What are the key questions facing European wholesale energy traders?....................................................... 12
• Do energy marketplaces and energy traders need to be regulated?........................................................ 12
• Should wholesale energy transactions be centrally cleared?................................................................ 13
• Trading on exchanges vs. trading OTC: can both survive?.................................................................... 14
• Can the achievement of environmental goals go hand in hand with the vision of a common European market?... 15
• Can the EU ETS remain the leading instrument for achieving a low-carbon economy?.................................. 15
D. What is the next phase in building a single European energy market?......................................................... 16

EFET General Meeting 2011

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A. What is wholesale energy trading?

Wholesale Energy Trading is the process of buying and selling in the market with the purpose to connect supply and demand at realistic price
levels. It also provides an efficient means to manage physical and financial risks associated with the supply of commodities.

Wholesale markets have operated across a broad range of commodities since the start of human commerce. Wherever prices were set by
competitive forces rather than by a monopoly, and wherever a high number of buyers and sellers could participate, open and transparent
wholesale markets had a chance to develop.

The emergence of efficient and competitive wholesale markets in electricity and

gas faces a particular challenge, as these are network-bound energy commodities.
They cannot be freely traded unless there is equitable third party access to
the transmission grid and gas pipelines respectively. In this regard, wholesale
energy trading resemblances services such as rail transport, stevedoring, post
and telecommunications services, which cannot be provided on truly competitive
terms unless enterprises that do not own the relevant essential infrastructure are
allowed access on equal terms and conditions to the facilities of those that do.
The common factor is the existence of a natural national or regional monopoly in
the infrastructure. For example, it is not normally viable to replicate a mainline
rail network, a large-scale commercial port, or local telecom connections to
buildings, once each has been built to serve a particular group of cities, hinterland
or district.

For already more than a decade, energy market participants and European regulatory authorities have made important commitments to
improve market transparency and liquidity, with the ultimate goal of creating a single European market in electricity and gas. As a result
of these efforts, successful electricity markets have been established in a number of European regions and considerable progress has been
made towards the development of functioning gas markets across Europe.

Why are wholesale energy markets important?

n The functionality of wholesale markets helps energy companies to optimise supply and demand, creates room for new entrants, and
affords opportunities to attribute risks –for example price, default, interruption and credit to those market participants best fitted to
absorb or hedge them.
n Open and accessible wholesale markets in energy facilitate real
competition at the production and retail levels, and thereby
“Energy trading is not about ‘short-term opportunism’,
minimise costs and the need for regulatory intervention.
which in the long term will be detrimental to society;
n Wholesale markets in energy organised across national
it is about responding to market incentives
boundaries enable lower cost energy, produced or imported
to optimise the energy value chain;
in one region, to be moved into a neighbouring higher priced
and this response in turn benefits all energy users.
region and tend to multiply the benefits derived from purely It is, thus, the responsibility of us all
wholesale trading arrangements. to create and maintain a pan European truly open
market environment, in which trust and integrity prevail.”

- Paul van Son, Honorary President and past Chair of EFET

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European electricity markets

Wholesale electricity can be traded as a standard product in liquid

forward and spot markets. In a liberalised and competitive power IllustrationofthedevelopingEU
market contractual “products” are traded bilaterally, over-the- electricitymarket
counter, or on exchanges. Competing Competing
Producers(including Suppliers
ancillaryservices)
As the number of players and the frequency of their transactions grow,
Electricity
 ContractualFlows
forward markets become increasingly liquid. In turn, the spread between Producers
buying and selling prices -that is, the “premium” paid by market
participants for managing their wholesale market risks- narrows. This Energy Energy
results in improved short and long-term efficiencies in the linking of traders Regional traders
Wholesale
Industry
supply with demand: Market
Suppliers-
marketers
n Efficient sourcing and consumption. With a readily observable price Customer
for each time period, generators can choose to generate themselves Suppliers-
choice
marketers
or to buy contracted deliveries from the market. Large consumers
with tariffs linked to wholesale prices may choose not to consume at Transmission Distribution
particular times of the day or year to avoid relatively high prices.
n Efficient risk management. Forward markets allow market
participants to buy and sell electricity over many different periods Physical Consumers
and to fine-tune their portfolios as their expected requirements Flows
change.
n Effective competition in generation and retail. The presence of a
IndependentNetworkOperators
liquid wholesale market significantly reduces the barriers to entry for
independent generators and retailers.
n Efficient investment and improved security of supply. Liquid MarketPricesOTCandonPowerExchanges
wholesale markets, which are soundly based on a stable, physical
infrastructure, provide signals several years into the future on the
level and pattern of prices, facilitating decisions on new investment in generation. Over shorter timescales, the ability of spot market
prices to rise, reflecting temporary shortages of supply or increases in demand, may furnish a signal to utilise stand-by generating
capacity, accelerate maintenance, or defer consumption. The wholesale market offers the most natural means to ensure security of supply
in a competitive environment, as it brings clearly to light imbalance between demand and supply.

Fair, transparent, and non-discriminatory access to the high-voltage transmission network is of critical importance for the functioning of
a competitive wholesale market for electricity. Trading in an open market also facilitates the efficient use and expansion of transmission
infrastructure. Clear signals are provided, for example, of the value of interconnections between regional wholesale markets in continental
Europe, assuming auction mechanisms determine who uses the capacity. When market participants can freely access the capacity at
interconnections, power is efficiently transferred between regions and congestion on those interconnections is optimally managed. In
turn, this provides efficient longer-term signals as to the value of expanding transmission capacity to facilitate more flows between
regions.

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European gas markets

Liquidity at most gas trading hubs in North-Western Europe has grown

rapidly in recent years and trading in other parts of Europe has begun at EuropeanGasMarket
“virtual trading points” in several pipeline systems. Market areas have (nearfuture)
also continued to merge. In the South and East of Europe, however, Competing Competing
Producers(including Suppliers
the absence of reliable, transparent spot gas prices creates difficulties ancillaryservices)
in hedging and in devising reliable financial instruments to manage
Gas ContractualFlows
risk. Incompatible pipeline access continues to causes geographical Producers
fragmentation within regions.
Energy Energy
Robust wholesale markets that can support consumers’ needs throughout traders traders
HUB Industry
Europe still need to be established. Real progress is being made in three
key areas, but more must be done: Suppliers-
marketers
Customer
n Guaranteeing fair access to gas infrastructure. Priority access has Suppliers-
choice
Storage marketers
been a problem at almost every high-pressure pipeline interface in
Europe, but the new EU Capacity Allocation Network Code should LNG Transmission Distribution
ensure that all primary capacity is made available to the market
through auctions. Ensuring that the market is involved in the
decision-making process for new (incremental) capacity remains Physical Consumers
a missing element, but there is a commitment from Regulators to Flows
address this.
n Establishing market-based balancing. Combined balancing zones
have emerged in Germany, but in order to create supra-national gas IndependentNetworkOperators
grids and trading zones that transcend national borders, operational
rules need to be simplified and harmonised, with a greater reliance MarketPricesatTradingHubs
on the market to provide efficient solutions to gas balancing.
Independent operators, responsible for several combined pipeline
networks, will need to be established, sometimes covering parts of more than one country.
n Improving information provision. Most operators have improved the level of information that they provide on the physical use and
availability of gas infrastructure, but this is rarely available on the ‘near-realtime’ basis as required by the Gas Regulation EU/715/2009.
Full compliance is essential, with a consistent and coherent approach taken to information provision across Europe.

“The members of the EFET Gas Committee come from

a diverse range of companies and bring a rich variety of perspectives
to our internal debates. What binds us together is our shared goal
of establishing robust and liquid gas trading throughout Europe.
We never forget that competition can only occur if there are competitors.
A substantive gas market needs gas traders as much as companies need the market
to monetise their gas assets, balance their portfolios or manage price risk.”

- Colin Lyle, Chair of the EFET Gas Committee

5
Energy trading essentials

The optimal development of wholesale trading in power and gas requires:

n A clear and stable regulatory framework

n Harmonised cross-border access rules
n Full unbundling of the transmission function
n Abolition of long-term full supply contracts
n Liquid-power exchanges and gas hubs
n Regional rather than exclusively national markets
n Standardisation of contracts and electronic data exchange
n Co-operation between transmission system operators
n A strong association of traders to balance other sector interests

EFET remains committed to the establishment of a transparent, liquid and robust single European wholesale market in
electricity and gas throughout Europe. We believe this is essential to the realisation of maximum benefits from retail
competition. Without effective wholesale trading, any apparent choice among suppliers for European consumers would
ultimately prove illusory.

Jan van Aken (EFET Secretary General) and Peter Styles,

Thomas Niedrig (Former EFET Board Member) Chair of the EFET Electricity Committee

“The continued development of a transparent,

liquid and open wholesale energy market throughout Europe
will bring important benefits to electricity and gas consumers.
Those benefits will accrue by means of enhanced security of supply and realistic pricing,
determined by the market-driven, efficient operation of all parts of the energy value chain.”

- Peter Styles, Chair of the EFET Electricity Committee

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B. How is EFET contributing to the development of sustainable and competitive wholesale energy markets?

In the last few years, European wholesale energy markets have moved into a market EFET Members
design implementation phase, involving the elaboration of rules and codes common to
the whole of Europe. EFET has been participating intimately in this process, as well as
in discussions on environmental policy, climate change and the supervision of energy
Secretariat / PR / Communication /
market transactions. General Support Board Education

The EFET opinion is appreciated and sought by the main actors on the European
energy trading scene. The relevance of the association’s analyses of these issues is
made possible by the experience of our geographically diverse membership and by Market Design, National and Regional
Contractual
and Transactional
our emphasis on maintaining a flexible organisation, in which decisions are reached Policy and Regulation Implementation Standardisation

by consensus.
EFET Organisational Chart
Market design, policy and regulation
The advocacy work of EFET is carried out by three main committees covering electricity, gas and market regulation, supplemented by a number
of sub-groups focusing on specific market design, policy or regulatory issues.

The mission of the Electricity Committee is to identify obstacles to electricity trading throughout Europe and to propose solutions for their
effective removal. Its members promote policy change and modes of regulation likely to stimulate the efficient and harmonised functioning of
European wholesale electricity markets. The Committee is in a continual dialogue with the European Commission, the Agency for the Cooperation
of Energy Regulators (ACER) and the European Network of Transmission System Operators for Electricity (ENTSO-E). It is also an active participant
in the Electricity Regulatory (Florence) Forum and regional mini-fora.

Within the framework of the Electricity Committee, the Task Force on Renewable Electricity advocates the effective integration of renewable
energy into the European power market, while the market for carbon emissions under the European Emissions Trading System (EU ETS) is covered
by the Task Force Emissions Trading.

The Gas Committee foresees the development of transparent and liquid traded gas markets throughout Europe. To this end, the Committee
focuses on the improvement of the interconnection and liquidity across Europe’s widely varying national gas markets. The development of regional
markets is already on the regulatory agenda of the Gas Committee. In the context of the Gas Regulatory (Madrid) Forum and other communication
and cooperation frameworks, the members of the Gas Committee engage in a continuous dialogue with regulators, TSOs and other relevant actors.

Legislation and regulation dealing with energy and financial market integrity and transparency are addressed by the Market Supervision
Committee. The Market Supervision Committee seeks to ensure a proper regulatory supervision framework for wholesale energy markets,
facilitating consistency and efficiency of respective regulatory policies affecting the industry. It focuses in particular on the development of the
ongoing EU financial and commodity markets reforms (such as MiFID, EMIR, CRD, MAD etc.) and the related implementing rules (REMIT).

National and regional implementation

The growing need for co-ordination in finding regional or European solutions is reflected in the wide range of national and regional EFET task
forces: Belgium/Netherlands (gas), Central and South-Eastern Europe (electricity & gas), France (electricity & gas), Germany (electricity & gas,
within the framework of EFET Deutschland), Iberia (electricity & gas), Italy (electricity & gas), and Switzerland (electricity). In this context EFET
is co-operating with other trading associations such as TOE for the Polish market or EDT in Turkey. EFET operates physical offices in Amsterdam,
Berlin, Brussels, London and Rome.
7
EFET member companies

Dufenergy

GERMANIA

8
9
Contractual and transactional standardisation
EFET has also made a considerable contribution towards finding standard solutions to the repetitive aspects of wholesale energy transactions through
our work on the standardisation of gas and electricity spot physical contracts and IT-based data exchange between wholesale counterparties and
related business processes. Contractual and transactional standardization processes are developed by, respectively, the EFET Legal and Business
Process and IT Standardisation Committees.

The standardisation of data exchange and processing by electronic means is one of the main areas of EFET work, mostly channelled through
our subsidiary organisation EFETnet (www.efetnet.org). A common IT architecture, coupled with standardised data formats, content and
communications protocols, supporting automated processing related to lifecycle events of cleared and OTC-transactions deliver significant cost
savings and increase the efficiency of traders’ front, middle and back office operations. Unbundling, the internationalisation of the power and gas
sectors, shorter reaction times for supply optimisation and convergence between commodities are bringing about an acute need to exchange data
in a standardised way between counterparty organisations and other service providers, including transmission system operators, exchanges, clearing
houses, clearing banks and the broker community. That, in turn, allows computers to substitute digital means for costly manual work. Substitution
frees up employees to focus on the management of exceptions and other commercially beneficial tasks. It also translates to fewer mistakes and
helps mitigate operational risk. EFETnet offers cost-efficient solutions for electronic regulatory reporting (eRR) as required by regulation. Building
on its success in electronic Confirmation Matching (eCM), EFETnet has moved on from peer-to-peer matching to centralized matching based on
open standards. EFETnet has also implemented an industry standard solution for automating give-up and take-up for cleared transaction (electronic
eXchange Related Processes – eXRP and eRR for electronic Regulatory Reporting).

EFET has had a substantial influence on legal OTC-standards by creating a generally accepted and reliable contractual standard for physically settled
energy wholesale transactions. The EFET Master Agreements have been translated into several languages in order to assist their market uptake,
and have received acceptance outside Europe in emerging OTC markets, such as Brazil. The reliability of EFET Agreements has been supported by
multiple legal opinions and case law, for example during times of supply turbulence or in case of insolvency of trading participants. Contractual
standardization has also brought about the need to co-operate with other associations where contractual standardization is pursued, such as ISDA.

In EFET we ourselves can work on and produce standards for traders to use in the OTC-portion of the wholesale energy markets of Europe (the portion
in which continent-wide the majority of transactions are carried out). Certainly, to achieve the implementation of contracted transactions in the
commodities power and gas we rely on the cooperation of TSOs, gas hub companies and gas storage owners. Equally, we have collaborated with the
brokers’ community to achieve a broader take-up of the IT-standards promulgated by EFET. We are encouraged that the association representing
energy exchanges, Europex, is developing a permanent secretariat and becoming more engaged in both the regulators’ Electricity Regional Initiatives
and EU-wide market design programmes under the Florence Forum. Particularly in the case of cross-border market coupling projects focused on the
day-ahead electricity timeframe, there is much work to be done collectively by exchanges, TSOs and market participants.

Peter Styles Colin Lyle Jan Haizmann Hugh Brunswick

Chairman of the Electricity Committee Chairman of the Gas Committee Chairman of the Legal Committee BP & IT Standardisation and
EFET Board Member EFET Board Member EFET Board Member Managing Director of EFETnet

10
Principles of Good Conduct for energy trading

EFET aspires to the adoption of values within its member companies, in which we, as an industry association, believe:

n Integrity of action, for example in dealing with counter-parties and business stakeholders;
n Respect for others, such as fellow employees, competitors, and professional advisors;
n Open communication, subject to observing legitimate business confidentiality;
n Professionalism, ensuring that only qualified parties and staff are involved in trading activities; and
n Observing the spirit of a truly open and sustainable wholesale marketplace.

The “10 Pillars” of Good Conduct

Companies engaged in trading in energy markets will:

1. Respect free and fair competition as the basis for

7. Establish compliance policies setting out the company’s
trading energy.
procedures for fulfilling all legal and regulatory
2. Not engage in any activities which would amount to
obligations and any related corporate governance
market abuse, market manipulation or fraud, nor relay
rules relating to their energy trading functions.
information known or strongly suspected to be false or
8. Ensure that their traders are suitably qualified and
misleading.
properly supervised to carry out their duties, including
3. Deal with each other in accordance with established
where appropriate to have taken relevant industry
market practices and the standards expected of
examinations.
professional market counterparties.
9. Prohibit their employees from giving or receiving
4. Deal with customers fairly and with integrity and
bribes and from indulging in other corrupt behaviour
manage any conflicts of interest that may arise
in all circumstances; and establish policies governing
appropriately.
gifts and hospitality, highlighting acceptable and
5. Organise their energy trading business effectively,
unacceptable practices.
respecting appropriate segregation of staff duties, and
10. Maintain accounts related to trading transactions and
exercise diligent control over trading functions.
risk books in accordance with relevant accounting
6. Establish effective risk management policies and
standards, and respecting normal audit practices.
control procedures governing the key risks managed
by their energy trading functions.

All new EFET member companies have to sign up to these ten principles before their membership application can be accepted by the EFET
Board.

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C. What are the key questions facing European wholesale energy traders?

Do energy marketplaces and energy traders need to be regulated?

It is our strong belief that in order to be effective and constructive, regulatory developments aiming to ensure energy market transparency
and integrity should evolve with a close view to the specifics of the energy sector. If the scope of regulatory measures designed for the
financial markets is extended too far into the physically traded energy markets, there is a real risk that the liberalisation objectives of
the European Commission (EC) for the energy sector, enshrined in the Third Energy Package, would be seriously undermined.

The implementation of an effective, EU-wide coordinated supervision of European wholesale energy markets is already at an advanced stage.
With the EU Regulation on Energy Market Integrity and Transparency (REMIT), legally binding in all EU Member States since 28th December
2011, a new comprehensive EU regulatory framework for physical power and gas has been introduced. This framework aims to prevent abusive
practices in the wholesale energy markets through increased transparency and enforcement at both the EU and the national level.

As a consequence of the financial crisis, the European Commission has also set out a legislative process that seeks to enhance transparency in
the financial service sector. The scope of these regulatory developments has, however, also been extended to cover commodity and energy
trading activities. In their proposals to replace the existing Markets in Financial Instruments Directive (MiFID) with a new restated Directive
(MiFID 2) and a new supplementary EU Markets in Financial Instruments Regulation (MiFIR), the EU is tackling issues like modernising market
structures, enhancing investor protection, carrying out over-the-counter (OTC) derivative transactions on electronic trading platforms, post-
trade transparency and position limits for commodity derivatives.

Those firms that are brought within the scope of MiFID would need to hold significant, and potentially damaging levels of capital to cover
their exposures under the current Capital Requirements Directive (with potentially additional obligations based on changes arising from
the forthcoming review). They would also be subject to mandatory central clearing of all of their OTC derivative transactions under the
European Market Infrastructure Regulation
(EMIR) proposed by the EC. This would
impose a significant cash liquidity risk which
many firms will find impossible to manage
at a reasonable cost. Moving the boundaries
of regulation for physical transactions to
financial regulators will have a negative
impact on electricity and gas markets. It
will hamper the development of integrated
and efficient European energy markets
by reducing liquidity and the number of
competitors and by creating financial
liquidity and commodity risks for energy
trading firms.

EFET Market Supervision Committee

12
Should wholesale energy transactions be centrally cleared?

With a view to reducing systemic risk in the financial sector, G20 leaders agreed at the 2009 Pittsburgh Summit that “all standardised
OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central
counterparties by end 2012 at the latest”.

In Europe, the Regulation on OTC derivatives, central counterparties and trade repositories (EMIR) of 4 July 2012 translates the G20
commitment by creating a reporting obligation for all OTC derivatives, clearing obligation for eligible OTC derivatives, measures to reduce
counterparty credit and operational risk for bilaterally cleared OTC derivatives, common rules for central counterparties (CCPs) and for
trade repositories, and governance rules for CCP interoperability. Similar steps have been taken in the US with the Dodd-Frank act, although
implementation may differ on each side of the Atlantic.

While EFET does not question the motives behind the G20 decision, we believe that the goal of mitigating systemic risk does not justify
mandating central clearing for all energy OTC derivatives transactions. Energy transactions do not pose the same systemic threats to the
economy as financial transactions, and energy trading companies have successfully used other credit risk mitigation tools, such as bank
guarantees, lines of credit, external ratings, detailed credit risk assessments, and advanced risk monitoring. The additional cost and liquidity
constraints that are triggered by mandatory clearing will result in reduced market liquidity on traded markets, less competition and
investments in new generation capacity, and a higher dependency on financial markets which, in turn, may lead to higher systemic risk.
The International Monetary Fund itself has questioned the effectiveness of the G20 agreement, specifically mentioning the risk of creating
clearinghouses that could become “too big to fail” themselves.

As the regulatory process marches on, EFET continues to convey its message and strives to avoid that energy transactions are caught up in
one-size-fits-all financial market supervision regulations.

EFET Gas Committee

13
Trading on exchanges vs.trading OTC: can both survive?

EFET emphasises the importance OTC markets in supporting liquidity in European wholesale energy markets, as at times OTC trading is often
the only competition for a particular exchange in a given geographic/ product market. The competitive environment between “transactions
service providers” proves to have a positive effect in promoting best practices supported by market needs and ensures that exchange managers
have an incentive to keep the fees charged for exchange trading at reasonable levels. EFET believes regulatory concerns about a lack of
transparency in OTC markets should be managed in a proportionate manner through the introduction of transparency and reporting rules,
thereby encouraging efficient supervision and better price discovery of standard products, rather than by artificially skewing the regulatory
framework in favor of exchange-based transactions.

As EMIR aims to provide the framework for implementing the G20 commitment in the European post-financial crisis context, European
legislators are currently working their way to move standardised OTC derivatives contracts to exchange-traded platforms and/or clearing
through central counterparties. The revision of MiFID will introduce requirements for the trading of derivatives on “organised markets”
(applying an additional liquidity test to determine suitability for venue trading), as well as a harmonised and mandatory approach for pre- and
post- trade transparency. In addition, the Capital Requirements Directive IV package will define the capital treatment for OTC derivatives,
which is likely to affect the supply and demand for these products.

In aggregate, these changes are expected to lead to a significant shift of business away from OTC trading over time. In the current fast-moving
market environment where new venues emerge and existing ones adapt to the regulatory requirements, it is critical that market participants
preserve a continuing choice of a trading venue wherever feasible.

EFET Gas Committee Hugh Brunswick and Liam Dunne, EFETnet

14
Can the achievement of environmental goals go hand in hand with the vision of a common European market?

The EU has committed itself to ambitious long-term goals to reduce greenhouse gases and increase energy security. A substantial part of that
target is to be reached in the generation of electricity (estimated at 34%). These targets are ambitious even collectively. In fact, according
to their National Renewable Energy Action Plans, the majority of EU Member States expect to achieve their national targets on an individual
basis. Hence, there is a diverse range of country-specific support schemes across the EU, such as feed-in tariffs, quotas fulfilled by redemption
of certificates, tenders, tax breaks or investment grants.

The persistence of national targets and nationally isolated support schemes will not be able to support an increase in the share of RES to 20%
and beyond in an efficient way. We are convinced that only the introduction of market mechanisms can optimise cost savings at the EU level
and beyond the boundaries of Europe. Furthermore, early adoption of market mechanisms will significantly reduce inevitable harmonisation
costs in the internal market at a later stage.

The achievement of environmental goals also needs to be consistent with other objectives. In particular, a RES target should be pursued in
a manner which is compatible with the vision of a common European energy market operating without distortions. A level playing field can
only be reached if RES-E generation and output are integrated economically into the current energy market design at the European level,
which makes the integration of RES-E an important aspect of the development of the common market. The EU ETS is a successful example
of how environmental policy can be pursued according to a market-based design, harmonised and internationally compatible across Europe
from the start. Currently, many of the national arrangements impede the effective functioning of the single market in electricity, while 27
different national support schemes hamper the development of a potential common market for deploying and developing renewable energy
technologies. Therefore, EU level reforms are urgently needed.

Can the EU ETS remain the leading instrument for achieving a low-carbon economy?

EFET considers the EU Emissions Trading System (ETS) to be the leading instrument for the transformation of the EU energy sector and
for the development of a low-carbon economy. The EU ETS has proved to be a successful mechanism for the cost-effective reduction of
carbon emissions. It has set an international precedent and has encouraged many countries to set up their own emissions trading schemes.
Its fundamental role is to provide long-term investment signals for low carbon technologies and to trigger the use of existing, already
competitive, carbon-abating technologies, such as fuel switching or onshore wind.

Today, however, the carbon price is lower than expected due to worsening of market fundamentals, exceptionally strong economic recession,
and regulatory uncertainty both at the EU and at the international level.
As a result, the EU ETS falls short of delivering on its objectives.

To revitalise the EU ETS and to preserve it as the leading instrument to

reach European climate targets, EFET encourages the development of a
long-term strategy for revising the EU ETS, accompanied by efforts to
ensure coherence with other EU climate policies, such as energy efficiency
and renewable energy support schemes. Such a reform would be taken
as a measure of political commitment to the EU ETS, which will have a
positive effect on the robustness of the system. It is essential to reaffirm
the commitment of the EU to the 2°C target by formally adopting the EU
Energy Roadmap 2050 and deducing from this an interim greenhouse gases
(GHG) emission target for 2030.
EFET Task Force Emissions Trading

15
D. What is the next phase in building a single European energy market?

The EFET Vision and the way forward

Here in outline are some of the major challenges, which EFET will need to address in the coming years, with particular focus on those
pertaining to the pan-European energy market design and the related EU policy and regulatory framework:

n Undue national intervention continues in some cases to delay or distort the process of establishing price signals in wholesale energy
markets. As the fully liberalised energy market becomes better established, market signals should more reliably inform the right
decisions about investments in terms of fuel choice, location and capacity.
n Despite the efforts of national regulators, there remain serious unresolved cross-border access difficulties. Authority at the EU level needs
to be strengthened to deal with the interfaces between transmission systems. TSOs and exchanges still need to recognise the importance
of developing healthy markets in transmission capacity rights, as well as in the underlying commodities of power and gas, across the
continent.
n The effective unbundling of monopoly transmission infrastructure, to ensure that there are independent system operators providing
market participants with fair and non-discriminatory access, remains in many countries, more notably in the gas sector, an unfulfilled
prerequisite for successful EU energy market opening.
n Improved information transparency remains essential across the energy markets, particularly the provision of information from
infrastructure operators and the accountability and clarity of regulatory decision-making. The immediate goal with respect to transparency
should be for all generators, operators and regulators to match the highest standards already achieved by their peers in other EU countries.
n To maintain secure energy supplies consistently across the EU, priority must be given to the development of robust gas and electricity
markets, in which vibrant competition, non-discriminatory grid access, objective regulation and good transparency give confidence to
all market participants, from producers through wholesale intermediaries to consumers. It is illusory to imagine that individual nations
within the EU could separately, as if in some kind of race, beat each other in the security game by signing bilateral inter-governmental
deals with third countries or by favouring so-called national champions.

To achieve our Vision and fulfill our Purpose, EFET will continue to promote further progress in implementing a unified wholesale market
design for the power and gas sectors. Growth in the liquidity of energy trading, and corresponding improvements in the objectivity of terms
of access and in the transparency of information available to traders are essential. In order to reach these goals, traders must continue to
seek enhanced cooperation with policymakers, competition authorities, sector regulators, exchanges, transmission operators, producers and
consumers.

16
 EFET Vision

We foresee energy markets throughout Europe,

in which traders efficiently intermediate in the value chain on the basis of clear wholesale price signals,
thereby optimising supply and demand and enhancing security of supply,
to the overall long-term benefit of the economy and of society.

Colofon

art-direction, design and printing:

DesigN & PublisH

Executive editors:
Ilaria Conti, Maria Popova and Irina Nikolova

Reviewing editors:
Peter Styles, Jan van Aken

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EFET promotes and
facilitates
European energy
trading in open,
transparent,
sustainable and
liquid wholesale
markets,
unhindered by
national borders
or other undue
obstacles.

www.efet.org