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Nord Pool Spot Chosen as First UK Virtual Power Hub

by Simone Goligorsky

On April 13, 2012, it was announced that Nord Pool Spot (NPS), the Norwegian operator of the day-ahead and intraday energy trading markets, has been chosen to develop and operate the United Kingdom’s first virtual energy hub. The decision was taken following a competitive tender process run by the UK’s National Grid Interconnectors Ltd., the operator of a 2,000MW high voltage direct current link between the UK and France. The aim of the virtual hub is to integrate the UK into the proposed North West Europe (NWE) coupling project, with the ultimate goal of creating a single European market by 2014.

According to a statement released by NPS, the new hub is due to facilitate the pooling of GB liquidity. As the market currently operates, each power exchange may have different prices. However, it is envisaged that the creation of the hub will allow for the formation of a common, more robust, reference price for electricity across all participating UK power exchanges by the end of 2012.

Currently, the UK is the only country involved in the NWE market that allows for multiple power exchanges and interconnector operators to participate in the market. The launch of the new hub is designed to assist access to the numerous power exchanges, as well as establishing one electricity price for the UK. Market participants will continue to maintain their existing contractual relationships with their power exchanges, with the virtual hub being designed to ease inter-exchange transactions and arrange interconnector flows with interconnector operators. 

The NPS statement went on to state that their experience in market coupling has already allowed for the successful integration in the Nordic countries, and Estonia, with NPS currently working with the Polish power exchanges to establish price coupling between the Nordic markets and Poland. Under the NWE umbrella, NPS is aiming to deliver market coupling and capacity allocation into the UK, the Central Western Europe region and the Nordic areas. 

The announcement regarding NPS comes a month after further steps were taken to create a third electricity interconnector between the UK and mainland Europe, this latest interconnector being a joint project between the National Grid and the Belgian transmission operator Elia. The project involves putting in place an interconnector between Kent in South East England, and Belgium.

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Impact of the MiFID II Proposals on Commodities Businesses

by Thomas Morgan

The Markets in Financial Instruments Directive (MiFID) came into force in November 2007 and aimed to enhance investor protection, improve cross-border market access and promote financial market competition across the European Union (EU).  In December 2010 the European Commission (EC) published an expansive review of MiFID.  The EC unveiled its package of legislative proposals revising MiFID in October 2011.  These proposals are more comprehensive than initially expected.

The amended text of MiFID and the new Markets in Financial Instruments Regulation (MiFIR), together are referred to as MiFID II.  The proposals extend the scope of the original legislation in terms of the types of instruments and businesses affected.  The prospective legislation subjects EU commodity market participants to significant compliance challenges and increased scrutiny of their energy trading businesses.

Commodities businesses will be some of the most heavily impacted by the introduction of MiFID II. In its current form, MiFID II will:

  • Extend regulations to commodities and commodity derivatives trading, by removing or narrowing current exemptions, notably in relation to commodity firms who are currently exempt from MiFID when dealing on their own account in financial instruments.
  • Extend regulations to Organised Trading Facilities (OFTs). The definition of OTFs is broad, capturing organised trading platforms that are not currently regulated under existing categories.
  • Introduce new safeguards for algorithmic and high frequency trading.
  • Increase the transparency of trading activities by imposing position reporting obligations on trading venues. Such information must be available to the regulator upon request and, upon exceeding certain thresholds, to the public each week.
  • Allow stronger supervision of commodity derivatives markets. The proposals give national regulators and the European Securities and Markets Authority (ESMA) greater powers to monitor trading activity and allow them to ban specific products, services or practices to support liquidity and prevent market abuse.
  • Give power to ESMA to move standardised over-the-counter (OTC) derivatives contracts to exchange-traded platforms and/or clearing through central counterparties.

The EC estimates one-off compliance costs of MiFID II across all sectors to be in the region of €512 to €732 million, in addition to ongoing costs ranging from €312 to €586 million.  Firms should ensure that any synergies in processes required by MiFID II and other regulatory legislation coming into force are identified to minimise cumulative implementation costs.

The MiFID II package of proposals is currently under negotiation by the EC, European Council and European Parliament.  This means there is still an opportunity for firms to present the concerns and objections of their businesses to regulators and law makers before the text is finalised.  There is no published timetable for these negotiations, although it is unlikely that such negotiations will be concluded before the text of the European Market Infrastructure Regulation is finalised.

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