We have summarized the Greek energy market and its transition towards the Target Model by reference to the establishment of the Hellenic Power Exchange (HPE) introduced by Laws 4425/2016 and 4512/2018. The intention of the summary is not to analyze in details the energy market but rather to provide an overall insight of the main characteristics of the Greek power market set up and the restructuring effected by reference to the Hellenic Power Exchange
We have summarized the Greek energy market and its transition towards the Target Model by reference to the establishment of the Hellenic Power Exchange (HPE) introduced by Laws 4425/2016 and 4512/2018. The intention of the summary is not to analyze in details the energy market but rather to provide an overall insight of the main characteristics of the Greek power market set up and the restructuring effected by reference to the Hellenic Power Exchange.
1. General remarks – Introduction - Compulsory Auctions of Electricity (Mandatory Pool)
Within the model of mandatory pool, the available power is provided through compulsory auctions (defined as the "Power Pool”).
Each producer (except for self-producers) submits to the authority responsible for the market operation, offers for the capacity capable of disposing to the system, in a specified period of time, in exchange for a specific price. Respectively, suppliers submit to the market pool operator declarations of the load they will absorb from the system in the respective specified period of time. The price of the electricity formulated from such power transactions within the Power Pool emerge from the combination of the offered prices and of the capacity of each previous day for the day-ahead and the hourly load demands per every dispatched period (defined as the "system marginal price”).
The basic characteristic of this model of organization of the wholesale market between electricity power producers and suppliersis its obligatory nature. Whoever intends to enter into (electricity) power transactions is obliged to participate in this compulsory auction.
Any transaction outside such mechanism between supply and demand is prohibited. On the one hand, the party that makes the offer, i.e. the producers and importers of electricity power, offer the available power for sale to the Power Pool. On the other hand, the parties which have the demand, i.e. the suppliers and the exporters, obtain through such Power Pool access to the power.
The obligatory nature of the participation of producers and suppliersin the Power Pool mechanism is preferred for the ensurance of competition conditions especially among the producers. This aims for the protection of the new producers from the dominant position held by those market producers which have been organized as monopolies for a long time. The Power Pool works to the benefit of the producers that recently entered the market due to the fact that same would not have been able to offer competitive prices (i.e. lower prices) in comparison to the prices offered by the dominant enterprise.
Even though, the power pools do constitute a type of a stock exchange market, they should not be confused with the operation of the actual "stock (exchange) markets”.
Under the operation of a mandatory pool system,no bilateral contracts between initial sellers and end buyers for the goods at sale, can be concluded.
In contrast, in an energy market organized as a power exchange market, the conclusion of standardized transactions by interested enterprises is optional.Every participant is free to participate in a power exchange market, without the obligation to follow this transaction mechanism as he can elect to transact directly on a bilateral contractual basis.
2. Power Exchange Transactions and Bilateral Power Transactions (outside a Power Exchange)
Power Exchange Markets when established restrict monopoly and contribute to the development of competition. The basic expectation, which is connected with the organization of an energy market in the form of a Power Exchange Market, is the meeting of the supply and the demand under conditions of liquidity and reasonable and transparent configuration of prices and reduction of the associated transaction costs. For the optimization of a Power Exchange an adequate number of participants must be involved.
In any case, the (electricity) power exchange markets have important differences from the stock exchange markets trading stocks or goods. Hence, electricity power exchange markets are subject to greater volatility than the traditional stock markets. This happens because the electricity power cannot be stored and consequently, any change in the demand or the production is immediately reflected in the market price. Even though electricity is not an exchangeable good, because it cannot be disposed without the support of infrastructure (i.e. transmission and distribution networks), this does not render it an obstacle for the organization of the energy market as a power exchange market.
The negotiation of any good at the level of an Exchange Market requires, at the same time, the possibility of same to be standardized. An organized negotiation presupposes standardized goods. Standardization means the definition of specific packages and unities of electricity power based on the criteria of time delivery or way of delivery. Power Exchange markets cannot always cover through the standardized energy products they offer for negotiation, the special transactional needs of the producers and suppliers.Special reasons do justify, and not rarely, the formation of bilateral contracts between producers and suppliers outside a generally organized power exchange platform (known as, transactions concluded Over the Counter – OTC).
Specifically, producers may aim for the conclusion of long term contracts, in order to protect themselves from the risk of not finding sufficient clients to absorb the energy they will have produced. Suppliers, in their turn, may aim through long term - over the counter - contracts to ensure the security of their supply under profitable terms regarding the quantity and the price. Supplier’s interests are advanced when their energy portfolio enables them to meet consumers’-clients’ demands under favorable terms, even if the prices for short term physical deliveries of energy may increase in the future.
Bilateral over the counter transactions of electricity power cannot accommodate the entire volume of the transactions re: sale and physical delivery of electricity within a short period of time. In this sense, such transactions (over the counter) function as supplement to the organized power exchange markets. The contractual flexibility, however, of such over the counter contracts, for which private autonomy is not constrained by the standardization introduced by the power exchange, has as a result in developed markets the performance of the majority of electricity power transactions to be concluded on a bilateral contractual basis, outside the power exchange market.
A significant difference between a transaction concluded and cleared at the level of a Power Exchange, on the one hand, and at the level of bilateral over the counter contract, on the other hand, is the risk mitigation of each counter party. At the level of a Power Exchange Market the credit risk is mitigated by the Clearing entity entrusted to perform such transactions. In contrast to the above in the case of bilateral over the counter contracts same are cleared without an intermediate institutional body. Moreover, these contracts are not subject to mechanisms of mandatory clearing. Hence, in bilateral transactions between producers and suppliers, each contractual party bears the risks which may arise due to the other contractual party.
3. The evolving structure of the Hellenic Power Exchange market
I. The market structure before Law 4512/2018 and Law 4425/2016.
The mandatory pool regime
As a result of the distinction of the process of production and the process of supply of electricity power, consumers do not transact directly with electricity power producers. The market is liberalized in the sense that each consumer can choose which producer will give him access to the good of electricity power (article 47§1 and 14 of Law 4001/2011).
The consumer, however, must conclude with a supplier a contract for supply (article 47§2 of Law 4001/2011). Besides, the fact that the client does not transact directly with producers already emerges from the definition of the contract for supply provided by the law. Article 2§3 of Law 4001/2011 defines the contract for supply as the contract for the supply of electricity power "without the inclusion of an electricity power producer”.
Conversely, producers themselves are equally not allowed to enter in their capacity in a transactional communications with consumers of electricity power. Producers must avail their produced energy to suppliers in the context of transactions between actors in the wholesale market. Under the regime of production, transmission, distribution and supply unbundling, the liberalization of the electricity power market is based on the operation of the wholesale market between producers and suppliers.
During the initial form of the regime, via Law 4001/2011, the legislator introduced the mandatory pool model for the organization for the wholesale electricity power market. Until the introduction of the Hellenic Power Exchange (HPE), the Greek wholesale market operates based on this mandatory mechanism of the day ahead wholesale under the Day Ahead Scheduling (DAS). This mechanism is, in essence, an auction which is subject to certain rules of operation and price formation.
The accounting/settlement price of the Day Ahead Scheduling is defined as System Marginal Price (SMP). SMP is configured by the operation of the wholesale market based on the submitted offers and primarily according to the rules of a free market, i.e. based on the demand and the supply.
In this mandatory wholesale market, the entire capacity of the electricity power and of the supplementary goods is transacted and no physical bilateral transactions are permitted between participants of the wholesale market.
II. The multilayered market after the establishment of the Power Exchange market
1. Modification due to the adaptation to the target model and market coupling
The evolution of the European energy markets is going through increasingly complex stages towards the completion of the Target Model. In the context of Directive 2009/71, Regulations 713/2009 and 714/2009 were published and subsequently, Regulation 2015/1222.
The fundamental rules regarding the target model have been introduced by Regulation 714/2009 which also introduces the rules for the cross border exchanges and the introduction of a fair mechanism for the compensation of the cross border electricity flows.Regulation 2015/1222, known as Market Coupling Regulation, leans towards the unification of the national electricity markets in a European level.
2. Law 4512/2018 and Law 4425/2016 and the transition to the Power Exchange market
The Hellenic Republic enacted in September 2016 Law 4425 in order to reorganize the electricity power market in accordance with the Union rules, for the completion of the single European market. In its initial version, Law 4425/2016 adopted some hesitant liberalization steps, which, however, were considered inadequate. The law was criticized for having pending regulations and that it was stated that the law primarily announced instead of introducing a completely open operation of the specified energy markets.
Similarly, Law 4425/2016 in its initial version was criticized for establishing solely the foundations for the modernization of the domestic energy market, without, however, completing the particular attempt. This hesitation could be explained in light of the reservations concerning the maturity of the Greek energy market and its readiness to become subject to drastic competitive modifications. Every power exchange market can operate successfully only to the extent that it possesses sufficient financial liquidity and a considerable number of transactional parties.
However, Law 4512/2018 already takes decisive steps and aimed for the establishment of the Hellenic Power Exchange (article 9 of Law 4425/2016). The establishment of the Hellenic Power Exchange is followed by the structural reformulation of the particular and individual sectors of the Greek energy market.
The new structure of the power market is developed in more levels. From the perspective of the form of the individual sectors of the electricity power market, the provision of article 7§1 of Law 4425/2016 is fundamental. According to this provision, the electricity power transactions are carried out in four markets.
Following the distinctions specified by law, there is the organization of the day ahead market, the intraday market, the balancing market and the energy derivatives (financial products) market. In particular, transactions over power financial products can be concluded outside the relevant organized exchange market through bilateral contracts directly between the contractual parties (as provided by article 7§1, part b of Law 4425/2016, as amended by article 77 of Law 4512/2018).
3. The organization of the Hellenic Power Exchange market and the reformulation of the existing power market
The newly created market structure is primarily based on the day ahead market (new article 7 & 2 A of Law 4425/2016, as amended by article 77 of Law 4512/2018).In this market, the electricity power transactions are carried out on a "physical delivery” mode. Thus, it does not involve transactions of forward energy products, but cash settled transactions of immediate delivery. Every power exchange market operating on physical delivery has a day ahead market, at which, the hourly electricity power contracts for physical delivery within twenty four hours from their conclusion, are the primary subject matter of negotiations.
The everyday ahead market must be coupled by an intraday market and a balancing market. The intraday market is particularly significant primarily because it allows participants to trade electricity power in proximity to its real consumption time. This provides them with the discretion to balance or rebalance their commercial position in the energy market.
The new structure of the Greek market responds to the transactional need of an assurance of the ability to carry out transactions with this function. The new article 7 § 2 B of Law 4425/2016, as amended by article 77§2 of Law 4512/2018, provides for the operation of the intraday market. In the intraday market, physical delivery transactions are carried out according to orders submitted after the end of the submission period in the context of the next day market. The day ahead market and the intraday market contribute already in advance to the balancing between offer and demand since such function relies on the estimations of the day ahead demands. This is the importance of the imbalancing market which is the mechanism for the account of imbalances between offers and demand of electricity, given that if there is an imbalance in the performance of the contracts for the delivery of electricity products on an hourly basis such imbalances are settled ny the balancing market.
4. Power Exchange market and the intro of the financial instruments related to the power exchange
In addition to the restructuring of the existing, as of today, sectors of the Greek electricity power market of physical delivery, Laws 4512/2018 and 4425/2016 establish a significant expansion of the available electricity power trading mechanisms.
It is about the introduction of the so-called energy financial instruments - products according to the new article 15 of Law 4425/2016, as introduced by article 86 of Law 4512/2018. In a market of this type, said financial means are negotiable. Such financial means provided that that same are related to energy goods, are defined as the financial means which are provisioned in the cases 5-11 of Annex 1 of the MiFID II Directive.
The operation of a market for energy financial means may create new opportunities under conditions for the market participants. Such energy financial means are basically long-term agreements, in which a certain time period elapses (months, weeks or years) between the date of conclusion thereof and until their final performance of the undertaken obligations. Their function primarily is associated either with the hedging of the risk of fluctuations in electricity power prices or on arbitrage.
In order to expose the magnitude of the enhancement of the institutional capacities of the Greek energy market, it is sufficient to mention certain categories of energy financial products – agreements. In particular, option contracts, futures contracts, swaps contracts and forwards are a number of agreements which fall under this category. Depending on the maturing and the widening of the Greek power market, it is now institutionally possible for such contracts to appear in the Greek energy reality. It also remains to be seen in the future whether said agreements shall be formulated so as to be cleared-settled only through the physical delivery of electricity power (since according to the new article 117 C§ 3 of Law 4001/2011, as added by article 96 of Law 4512/2018, only physical deliveries are acknowledged for such agreements) or through cash (economic) settlements.
Options agreements provide the beneficiary with the right to purchase or sell the underlying value (i.e. quantity of electricity power) in the future for a predetermined price. It is agreed, between the parties, that the purchaser will have the right to make a unilateral declaration at a certain point in time or up to a certain point in time that will result in the conclusion of a contract with pre-defined terms. Such products may be useful for consumers and suppliers of electricity power, in order for them to be protected against any future price changes. For producers, energy options may act as tools to improve the efficiency of their production and for the increase of their revenues.
Future contracts are contracts for the sale of a certain quantity of electricity power at a predetermined price at a certain time in the future. The architecture of the so called forwards contracts is similar. Through the sale of a futures contract, one can i.e. be protected against the risk of the fall in energy prices in the future. In such case, the futures contract is required to act as a risk management tool for price fluctuations in the electricity power market of physical delivery.
A more complex category of energy financial means are the so called swaps contracts. In international energy markets, swaps contracts are traded on a bilateral basis over the counter (OTC), while their content is negotiable and not standardized between the contracting parties. In light of this, their advantage is that they are flexible to accommodate the needs of the contracting parties. However, the over the counter transactions of swaps contracts are defined neither by their particular liquidity nor by their transparency, while the transactional parties in such contracts are exposed to the risk of their counter party in a greater level.
5. The specialization of the new regulatory landscape – from Codes to Regulations
The adoption of the Regulation of the Power Exchange Market is expected within the time period running from the date of the entry into force of the new legislative framework upon the recommendation of the Administrative Board of the Energy Stock Market and after approval by the Regulatory Authority for Energy (RAE) (new articles 10§8 and 18§2 of Law 4425/2016, as amended by articles 81 and 90 respectively of Law 4512/2018). The aforementioned Regulation needs to set out the terms and conditions on the operation of the day-ahead market, as well as the intraday electricity power market on the basis of objective and transparent rules in the absence of any discrimination with regard to the access of the participants in those markets. Out of this Regulation the rules and procedures for conducting the transactions in such markets also need to arise together with the connection of the transactions concerned with the settlement mechanism. In the same Regulation the effects of the infringement of its rules should also be specified.
Furthermore, the new electricity power law requires the adoption of a Regulationof the Balancing Market by the Independent Power Transmission Operator (ADMIE S.A.) after approval by the Regulatory Authority for Energy (RAE) (new article 17 § 2 if’ and 18 §. 2 of Law 4425/2016 as amended by articles 88 and 90 of Law 4512/2018). The foregoing Regulation of the Balancing Market should lay down the terms and conditions on the operation of the balancing energy market and the balancing power market on the basis of objective and transparent rules in the absence of any discrimination relating to the access of the participants in the markets in question. In addition, the rules and procedures for carrying out the transactions in those markets as well as the connection thereof with the settlement mechanism and the consequences of a breach of its rules need to be established by means of this Regulation.
Besides the aforementioned, the provisions for the adoption of a Regulation on the Settlement of transactionsconstitute an innovation of the new energy legislation (articles 12 § 13, 13 § 2, 18 § 3 of Law 4425/201, as supplemented by articles 83, 84 and 90 of Law 4512/2018). The law seeks to provide new grounds for the concept of settlement according, on the one hand, to the type of the transactions settled and, on the other hand, the intermediary who undertakes the relevant role which is crucial for the operation of the market. For reasons of methodology, it nevertheless seems appropriate to expose herein the conception of Law 4425/2016 and Law 4512/2018 regarding the regulatory acts which need to govern the settlement of transactions.
The new article 18 §3 of Law 4425/2016 stipulates the material content of the Regulation on the Settlement of transactionswhich is to be adopted by reference to the specific topics. The topics contain the rules for access to the settlement, the obligations of the so-called clearing members, the rules governing the risk management along with the provisions relating to the securities for safeguarding the claims incurred from the transactions settled.
Specifically, Law 4425/2016 and Law 4512/2018 appears to establish the foundation for the operation of additional models of transactions settling based on the conditions that will exist in the market. In the basic version of the law (new article 12 § 1 of Law 4425/2016as supplemented by article 83 of Law 4512/2018), the transactions settlements of the day ahead market and of the intraday market are carried out by the Power Exchange Market whereas the settlement of the balancing market is carried out by the Greek IPTO (ADMIE as per Greek initials).
In relation to thefinancial instruments of the power market, according to the new article 16 § 1 in combination with the new article 15 § 1 of Law 4425/2016, the transactions settlement is carried out by the administrator of the market i.e. the Hellenic Power Exchange.
Based on the second version of the new article 12 § 1 of Law 4425/216, transactions settlement is carried out by the special settlement authority. This can happen both in the day ahead marker and the intraday marker (new article 12 § 1 a’) and also in the balancing market (new article 12 § 1 b’). In the cases where the settlement authority has been appointed, there must be the adoption of the Regulation of the Settlement Authority, after its approval from RAE, according to § 2 of the new article 13 of Law 4425/2016. In the Regulation of the Settlement Authority, one must look for the regulation of certain issues, such as, for instance, the access of the settlement members in the settlement processes under a regime of transparent and objective criteria and without any discrimination.
A third version of transactions settlement is the assignment of the settlement operation regarding transactions of the day ahead market and the intraday market, to the other, central, contractual party of the EU Regulation 648/2012 (new article 12 § 1 of Law 4425/2016). Under this version, there must be the adoption of the Settlement Regulation of the other, central, contractual party, after the submission by RAE and the approval of the Securities and Exchange Commission (new article 12 § 13 of Law 4425/2016 law). Within the above rules and their scope of application, the potential settlement of the balancing market by the other, central contractual party of the EU Regulation 648/2012, is also applicable expressis verbis.
Also, the structural alterations by Law 4512/2018, gives birth to the need of the adoption of the Code of RES Administrator & Guarantees of Origin (new article 118A of Law 4001/2011as introduced by article 97 of Law 4512/2018). Under the new framework, the Market Operator (LAGIE) must contribute for the establishment of the Hellenic Power Exchange S.A. all of the activities that are relevant to the Day Ahead Scheduling (see article 117B of Law 4001/2011as supplemented by article 96 of Law 4512/2018). After the completion of the spin off, LAGIE is renamed to Administrator of RES and Guarantees of Origin S.A. (new article 118 § 1 of Law 4001/2011,as replaced by article 98§ 5of Law 4512/2018) and its relevant activities must be carried out in accordance with the Code of RES Administrator & Guarantees of Origin, as defined by § 1 of the new article 118A of Law 4001/2011as introduced by article 97 of Law 4512/2018.
6. The Hellenic Power Exchange
In the context of reform of the Greek energy market, towards its harmonization with the requirements of the target model, Law 4512/2018 introduces the establishment of theHellenic Power Exchange(new article 9 of Law 4425/2016as introduced by article 80 of Law 4512/2018). The authority responsible for the administration and the operation of theHellenic Power Exchangeand specifically, of the day ahead market, the intraday market and of thefinancial instruments related to the power exchange, will be the Hellenic Power Exchange Market S.A.
According to the new article 117c §§ 1 and 3 of Law 4001/2011, said company should obtain the approval for the operation of the day ahead and the intraday day market from RAE, whereas it will obtain the approval by the Securities and Exchange Commission for operating, as the administrator of thefinancial instruments related to the Greek power exchange.
The introduction of the institutional framework for the operation of energy financial markets is one of the greatest innovations in the energy field. The negotiated, in these markets, energy financial instruments of physical or cash settlement delivery create important transactional dangers for the enterprises that participate in the transactions. As a result, the legislator created special rules for the settlement mechanisms of the (energy) financial transactions and for the allocation of the risk in the case of non-fulfillment of the obligations.
The new article 117G § 3 of Law 4001/2011 states that the Hellenic Power Exchange S.A. enters into agreements with the Athens Stock Exchange Market S.A. and its subsidiary Company "Transactions Settlement Stock Market of Athens S.A”., in order to assign to the later the responsibility of transactions settlement of the energy financial markets.
7. Power Exchange Regulations under Public Consultation
The Power Exchange Regulations, that specify the terms of operation of the Day Ahead Market, the Intraday Market, the Balancing Market and the Energy Derivatives (Financial Products) Market, have been submitted for public consultation:
-The Day Ahead Market and the Intraday Market:
The terms of operation of the Day Ahead Market and the Intraday Market are specified in the Power Exchange Regulation which was issued by the Hellenic Power Exchange in June 18, 2018.
- The Balancing Market Regulation
The terms of operation of the Balancing Market are specified in the Balancing Market Regulation. The Regulation was issued by ADMIE S.A. in June 29, 2018.
Both Regulations have been submitted for public consultation until the 29thof July 2018.
- The Energy Derivatives (Financial Products) Market:
The terms of operation of the Energy Derivatives (Financial Products) Market are specified in Articles 15 and 16 of the Law 4425/2016 as amended and applicable today.
KYRIAKIDES GEORGOPOULOS LAW FIRM