Importance of asset backed trading

To enable electricity surpluses or shortages to be balanced ahead of delivery, the market is split into different trading platforms by timeframe, e.g.:

• Forward market: where transactions are made from weeks to years ahead of delivery 

• Spot market: where trades are made in a day-ahead timeframe 

• Intraday markets: where transactions take place in close to real-time  

Transactions are made either on energy exchanges, via bilateral (over-the-counter) contracts with other market participants or with a grid operator such as Swissgrid or Terna.

Connecting Alpiq’s production assets to the energy markets by anticipating the risks, prices and opportunities on these different markets is the mission of Alpiq’s Asset Trading unit. The unit is organised into different teams according to the process, the type of asset (e.g. hydro, thermal) and the time horizon.

We spoke to the Head Asset Trading, Christoph Bellin, to find out more about asset-backed trading.

Christoph, why is asset trading so important to the security of supply?

Well, a secure and efficient electricity supply requires electricity trading. The needs of consumers in the short and long term creates price signals on the market. Energy consumption, as well as parts of the power plants such as the renewables, nuclear or coal fired units, can only be controlled to a certain extent. However, other electricity production technologies such as (pump) storage hydropower or gas-fired CCGTs can be dispatched very flexibly according to the needs of consumers. As Alpiq with our highly flexible assets, we are very well positioned in this market.

So, it is mainly about finding the right mix of power plant profiles?

No. Asset Trading’s role is to anticipate the price signals from the markets and enable the most efficient use of a power plant for Alpiq. Our main purpose is to optimise the dispatch of each production asset for the benefit of Alpiq as a producer and but also for the electricity consumers. 
We achieve this by trading a wide range of products on different market platforms across the entire time horizon from near real-time to several years ahead.

What does a typical day look like on the asset trading team?

To put it in simplistic terms, we run a set of optimization models and algorithms every day to calculate the best-possible production schedule (dispatch) for each of the assets in our portfolio, taking into account the price forward curves as well as the given constraints. This provides a snapshot view of the theoretically optimal result. While this view supports the decision-making process, many other factors have to be considered in the real-world environment.

Such as?

We have to assess the outcome of the optimization run and combine it with an expert view on the expected evolution of prices, as well as anticipate the market uncertainties and risks. We then also need to consider our existing position in the various markets and commodities. Adding to the complexity is the fact that a flexible asset portfolio is exposed to hourly production profiles. Price forward curves cannot always deal well with those profiles and hourly trading products are only available on the short-term market. An asset trader therefore has to understand and assess those aspects and derive the respective trading strategy from it. The result is a daily or often intra-daily adjusted trading strategy across all time horizons, which is then executed by the long-term, short-term, and intra-day asset trading teams on the different markets.  

So, is asset trading a risky business?

The aim of trading per se is to reduce risk. We carefully assess what risks we already hold, what risks we need to mitigate, and what new risks we might want to take. However, there is some element of risk connected to our business.

What risks are we confronted with?

Let me give you an example: in the case of the Swiss production portfolio, we are per se confronted with an illiquid Swiss market environment given the size of our portfolio. Although we try to sell as much of our flexible energy production to Swiss customers, we still have a large residual production profile that needs to be optimized and traded with our neighbouring countries due to the lack of liquidity in our domestic market. In this example, asset trading is exposed to a risk in terms of the evolution of the price spread between Switzerland and our neighbours.

Is it really necessary to sell electricity to neighbouring countries? Shouldn’t we focus on serving Swiss needs?

It’s important to understand that cross-border trading does serve Swiss needs. As demand and supply in Switzerland varies daily and by season, Switzerland, and Alpiq, benefits from exchanging energy with our neighbours. The combination of Swiss hydro flexibility and cross-border trading is a strength in our current situation, for example allowing us to preserve water in our hydro reservoirs by importing energy on days with lower prices driven by high renewable production or low demand in those countries. Likewise, we can export electricity when demand is low in Switzerland. Take the Swiss hydro reserve this winter, for example. Alpiq contributed substantially to this reserve, among other things also thanks to cross-border trading.

You mentioned market liquidity in Switzerland. Is that also a factor?

Yes, certainly. Often, producers such as Alpiq would like to trade more in Switzerland, but production needs to match demand. Up till now, many consumers in Switzerland have not seen the need or did not have the possibility to secure their energy supply in the long-term. Therefore, if a producer like Alpiq needs to secure the value and reduce the risk of an asset portfolio, it often has little other option than to use the more liquid markets in our neighbouring countries.

In Switzerland, we’re very proud of our flexible hydropower. If electricity prices were to rise next week due to cold weather, could we sell the additional need out of our flexible hydro portfolio?

Yes, in theory. However, as the water stored or expected to arrive in the form of inflows has been potentially sold, or hedged, already, we would potentially need to buy back the amount of water at another time in the future. The market might not offer sufficient liquidity or the corresponding product at this moment to make this transaction right now. Asset trading therefore warehouses those risks until the position can be closed again. The team is constantly offsetting those risks in the optimal way using the products available on the market.

Is it easier with other assets such as our CCGTs?

It’s different. In the case of our international gas-fired assets, the optimal risk hedge would be to sell electricity and acquire gas and emissions certificates at the same time. In real-life, this is often not possible due to the offerings on the market at that time, or it is not wanted because we have a view on an upcoming price movement. In the latter case, Asset Trading needs to hold that risk, subject to the price view of the asset trader in charge and the given risk limits. We’re in safe hands: our team of asset traders is highly experienced and they’re supported and governed by our risk management team. Managing risks is the core of our daily business. 

We’ve been talking a lot about asset-backed trading. What differentiates asset trading from “other” types of energy trading? 

While risk management skills and energy market expertise are essential, a good asset trader also needs to fully understand the characteristics and constraints of the underlying asset portfolio and its optionality profile. It’s not enough just to feed those elements into a model. Every asset in Alpiq’s portfolio is unique and not everything can be modelled – ultimately, it’s people who make the difference. Moreover, asset-specific markets like the ancillary services market operated by transmission grid operators are unique to asset-backed trading and require special expertise.

What do you need to be able to trade assets successfully?

Asset trading is a key component of the asset-backed value chain, but it’s not the only one. We rely on a well-functioning and quite complex end-to-end process that requires a lot of different skills and capabilities – both in our teams and also in all the other functions we rely on internally. Because of this complexity involved, close collaboration among everyone in the value chain is a key success factor. It’s also essential to have a robust IT infrastructure and the right tools and solutions.  

What role will asset trading play in the future?

The massive build-out of renewable energy sources, the increase in electricity demand and the introduction of new technologies will drive even more volatility in the energy markets. Asset trading will play a central role in bridging demand and supply. There are many uncertainties out there, but one thing we can be certain of is that our industry will grow substantially, the competition for talent will increase, and best-in-class technology will be key to stay competitive. Using our skills and capabilities, we will contribute to achieving a more sustainable and cleaner energy ecosystem.

Thank you for these insights, Christoph!