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Abu Dhabi, UAEFriday 14 December 2018

Weather forecasts offer power plays for energy traders

New breed of traders works with high-tech to take advantage of wild swings in prices by dealing electricity across national borders

The Danish city of Aarhus is home to a growing energy trading industry based on daily fluctuations in demand and prices. EPA
The Danish city of Aarhus is home to a growing energy trading industry based on daily fluctuations in demand and prices. EPA

On a sunny and windy autumn day, scores of energy traders are glued to banks of screens in offices ranging from a tiny basement to some of the plushest buildings in the Danish city of Aarhus.

Most of them are in their 20s or 30s and form a new generation seeking to make a living by predicting the wild swings in electricity prices caused by a few more hours of sunshine, a fresh blast of wind, or rain and snowstorms.

That means understanding the weather has never been more important. Forecasts now include millions of data points for everything from rainfall in the Nordics to temperatures at Spanish beaches.

Europe’s unprecedented shift toward renewable energy helped quadruple activity last year in the region’s biggest market for power delivered on the same day. It’s no coincidence these men and women have congregated in or around Denmark’s second-biggest city, founded by the Vikings and known for its centuries-old timber houses and large university. This is where Henrik Lind, a legend in their world, founded his specialist short-term trading company in 2004 where many of them got their start. He still owned most of Danske Commodities before the $470 million sale to Norwegian oil and gas major Equinor this year.

Mr Lind’s encouragement of his employees to see themselves as entrepreneurs and giving a lot of responsibility to new starters is a big reason why people open their own companies, said Simon Rathjen, who launched MFT Energy two years ago.

"We learned the fundamentals of power trading there and now we are doing this for ourselves," Mr Rathjen said. "The entrepreneurial spirit at that time gave us the ideas and dreams to try to make it on our own."

After making 9 million Danish kroner (Dh4.4m) in profit last year, Mr Rathjen hired former Danske executives Torben Nordal Clausen as chairman and Cagdas Ozan Ates as chief executive. He’s also got another 13 employees working in a partnership model and the company is outgrowing its top-floor office above the city’s train station with views toward the city hall.

The companies employ more than 300 people in Aarhus for this niche market, split across at least six firms including Danske. Many of them specialise in helping power producers to keep the grid in balance. They match surpluses and shortages by dealing across national borders and pocket a share of the arbitrage.

The market has expanded as more nations adopt renewable energy to meet stricter climate targets. And with nations from Germany to Britain at times generating the majority of the power from intermittent solar and wind, the challenges for utilities and grids are significant - both in managing supply and demand and how to handle price risks.

On a night in late October, German intraday prices were particularly volatile. One evening hour traded between as low as €52 to as high as €1,299 per megawatt-hour as traders waited for a fresh wind peak to arrive and producers were in the market to cover their exposure.

The traders have developed sophisticated software to give them an edge. Some use robots to buy and sell, too, and more than 40 per cent of the deals in the German intraday market were automated last month, according to Bloomberg.

As a result, the market has become much more liquid and effective, with computers able to post hundreds of bids within seconds, compared with the manual clicks by a few active traders not long ago. Activity on Epex Spot’s intraday market now covers 10 per cent of Germany’s annual power demand.

New technologies have been disrupting many regulated industries including banking and finance, transport, energy, telecoms, health, defence and government.

The UAE’s aspiration to support and become a leader in the 4th industrial revolution – with its blockchain and AI strategy - is likely to help it transform and diversify its economy. Given its growing digitisation over the past decades, the banking and financial sector is a leading candidate for disruption, The National reported in the summer.

Total global investment in the fintech sector was $122 billion over the past three years, with 2017 alone seeing investments to the tune of $31bn, ,according to Kpmg. The US remains the largest player, accounting for some two thirds of the investments, but China is fast catching up in this space. As the fintech grows, increased focus should be on its economic development potential: given widespread availability of smartphones, fintech is an enabler for financial inclusion and access to finance.

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But humans still play a vital role.

"Despite the increasing use of automated trading applications, you still need specialised traders who understand the dynamics of complex energy markets," said Mr Lind, who still runs Danske after the sale. "Going forward, traders will focus more on analysing market fundamentals and developing trading strategies and algorithms rather than executing trades," he told Bloomberg.

Mujo Islamovic, managing partner at Nordic Energy House and who learned his craft at Danske, agrees. After setting up on his own this summer, he says knowledge still beats robots every time an unexpected event causes more extreme price movements. And it’s very difficult to get that expertise from outside a short-term trading house.

The city is also home to Vestas Wind Systems. Along with the world’s biggest turbine maker, the trading companies have put Aarhus firmly on the map, according to local mayor Jacob Bundsgaard. More of the thousands of graduates from Aarhus University every year are staying put instead of trying their luck in Copenhagen or abroad, he said.

Danske emerged as a real force in the short-term power market in the past decade. Without any actual plants it has held its own against some of Europe’s biggest utilities. The financial crisis helped recruiting as opportunities in banking for the brightest students at the local university were limited. Grabbing local talent is still very important and Danske has has almost 50 students working right now, said Mr Lind.

"One of the reasons for this niche to have grown in Aarhus is that we have some very talented people working in this field for quite some time," said Mr Bundsgaard. "It’s a very important industry for us because they employ a great number of people and fit in very well with our strategy."

Now based in an office near the city’s main shopping district, Anders Rasmussen was the first Danske alumni to start his own business in 2014 after the company had a set-back and had to reduce its staff.

But setting up Powermart in 2014 wasn’t just about copying a proven strategy. The emergence of automated trading means that robots are boosting the liquidity and squeezing profit on a lot of arbitrages previously identified manually. Traders have to use their knowledge about weather and react quicker to unexpected events to find deals that are not possible to program into a robot today, he said.

Mr Rasmussen’s team still needs to do hundreds of deals a day to get in the black. His company reported a profit of €2.4m in the year through June.

"If you do the same things you did five years ago then you would not go anywhere at all," he said. "You have to follow and grow with the market."

So what does the future hold for the Aarhus set?

It will to some extent depend on whether Europe’s success with intraday markets to integrate solar and wind can be expanded to other parts of the world, said Jesper Severin Johanson, chief executive officer at InCommodities - one of the fastest-growing newcomers also expanding into gas trading.

"The big question for the next five years will be if the European market design becomes the preferred market design globally and how a company like ours can benefit from it."