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Brexit Hands Traders a Lucrative Way to Play Power Markets

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(Bloomberg) — Traders have found a new way to make money in the U.K. electricity market since the country left the European Union.

Since Brexit, the price of short-term U.K. power is being set on two exchanges at different times, allowing traders to exploit any deviation between the results. The price for the same contract should be the identical but the difference can be as much as 500 pounds ($697) per megawatt-hour, a seven-fold increase over the average next-day rate.

Using two auctions creates a market inefficiency that increases costs for consumers. It may also give larger players that own multiple power stations too much market power, according to Rajiv Gogna, a partner at Lane Clark and Peacock LLP.

“Larger portfolios will possess more information not visible to the market and have the collateral to operate on both auctions, giving them the theoretical ability to price arbitrage in some situations,” Gogna said.

For about a decade, U.K. prices for whole-day and hourly power contracts have been settled jointly through auctions on Nord Pool Spot AS in Oslo and Paris-based Epex Spot SE. That co-operation ended after the Brexit transition period. Nord Pool now settles its daily prices about 30 minutes before Epex.

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Traders “are happy to try and use the new arrangements to their advantage,” said Phil Hewitt, a director at energy consultancy Enappsys Ltd. “Getting a good spread between the two auctions is good if you call it right, you can book healthy profits in 30 minutes.”

Epex has about a third of the trading volume and the participants tend to be small traders and asset providers, while Nord Pool members are usually larger and more well established, Hewitt said. Companies are increasingly getting access to both exchanges to take advantage of the arbitrage opportunity.

Price differences have been widest on days when Britain is short of power supplies — such as when wind generation is low or there are unplanned outages at power stations.

The reason for the price gaps comes down to the different companies using the exchanges and the type of generation in their portfolio. Renewable generators, with fewer fixed costs, might be willing to take a lower price for their output than gas-fired power plants.

Ultimately the market’s inefficiency will increase costs for consumers as the risk and trader margin will need to be priced in to the cost of supply, said Hewitt.

Both exchanges have expressed willingness to synchronize their U.K. auctions and future trading arrangements are expected to see the British market re-connected in some form with the EU. For most of Europe, trading is linked up in one big marketplace, a project that has taken 15 years and which the U.K. is now excluded from.

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Nord Pool’s U.K. market has gained new members since Brexit, which it attributes more to its dominance in the day-ahead market and “not specifically related to spreads between the two auctions,” said Emma McKiernan, the director of Nordic, Baltic, U.K. and Ireland at Nord Pool.

Epex has also seen a surge in trading since the beginning of the year in its markets, including the U.K. where the number of participants is the highest ever.

“The growing activity is partly due to arbitrage, but mainly a shift in the structure of the electricity trading sector itself,” Epex said.

©2021 Bloomberg L.P.

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