New Portuguese power futures auctions to help retailers

Portuguese power retailers are set to benefit from a new auction system approved by local energy regulator ERSE for the sale of futures products to the main last-resort supplier in continental Portugal, EDP Servico Universal (EDP SU).

Under the approved directive, Iberian energy derivatives exchange Omip will run auctions in an "indicative monthly periodicity" whereby companies will offer wholesale electricity that EDP SU — a subsidiary of utility EDP — will need to buy to supply its regulated customers.

ERSE will define volumes that could have monthly, quarterly and annual maturities before each auction, based on EDP SU's estimated procurement needs. The auctions will have a system of descending prices, with starting prices also to be set by the regulator based on prevailing market values.

But volumes in excess of EDP SU's needs for each delivery period will be destined for other companies that also register as buyers in the auctions. Any company listed as a trading member with Omip will be able to participate in the auctions, either as a buyer or a seller — although they will not be allowed to simultaneously place sell and buy offers for the same futures product.

The new auctions are mainly designed to bring better risk management and cost stability to EDP SU's wholesale procurement, which in turn will lead to a "greater predictability" in the process of setting regulated power tariffs in Portugal, ERSE said.

Apart from regulated end-user prices that would be "closer to market levels", the new auctions could also help drive liquidity in the Portuguese futures market, energy retailers association Acemel president Ricardo Nunes told Argus today.

Currently, the lack of liquidity in futures contracts for delivery in the Portuguese zone at Omip means local companies resort to the corresponding Spanish products for their hedging needs.

Portuguese futures are only traded every three months, when Omip runs auctions for the sale of quarterly and annual contracts for power from the country's special-regime production. Retailers can then buy that energy in the auctions for their own customers and have the option to choose between financial settlement and physical delivery, but cannot sell their positions in the Portuguese zone because of the low liquidity in the futures market.

"What a retailer can do at the moment to sell its Portuguese positions is to sell them with financial settlement in the Spanish zone, which has more liquidity — but you end up with higher costs as you need to place guarantees on both sides," Nunes said.

The new auction system will allow retailers to directly sell their Portuguese positions from now on, he said.

Retailers will be able to participate as sellers in the new auctions only if they have enough open positions to cover their offer volumes, according to ERSE's directive.

The regulator is yet to release a calendar for the auctions, which may start with offers for delivery as soon as the fourth quarter of this year.

EDP SU's annual needs for 2019 were estimated at 2.55TWh. This would represent 5pc of Portugal's annual power consumption of around 50TWh, and 8.5pc of the total power derivatives traded at Omip last year relating to the entire Iberian region.