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European Commodity Strategies Absolute Return Models |
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Power markets are driven by fuel prices
Power markets are fundamentally driven by the underlying generation mix of coal, gas, oil and emissions. In addition, these markets are also driven by regional price drivers such as weather, hydro balance, economic activity and generation outages. Exchanges provide financially cleared markets where trades are cleared on exchanges, which limits credit-risk and secures price transparancy.
Each regional market is driven by a different set of underlying fundamentals
European Markets are in different stages of liberalization and countries have varying success with market liberalization. Markets are also fragmented with different levels of size and liquidity but are interrelated in terms of price levels and market coupling. Gas prices are driven by gas-to-gas competition versus Gas-to-oil competition through long term indexed contracts. European markets have different fundamental underlying structures e.g.: Germany is coal and gas driven; France is hydro and nuclear driven; Switzerland is hydro driven; Nordic is hydro and nuclear driven; Italy is thermally driven; Eastern European market are coal and nuclear driven. These distinctions and characteristics can be exploited through fundamental research and state dependent trading cases.
The modelling framework capitalises both on market movements and market levels: ØPower markets are trending. ØIndustry structure creates systematic mispricing. ØDark and Spark spreads are mean reverting. ØExtreme events are often under priced.
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European Energy Markets |
