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10 Questions

with David Kučera
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By Riva Froymovich
Staff Writer, The Prague Post
July 25th, 2007 issue

KURT VINION/THE PRAGUE POST
David Kučera hopes Prague's new exchange will bring lucidity to the electricity market.
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THE KUČERA FILE

Job title: Secretary general, Prague Energy Exchange
Nationality: Czech
Former position: Financial director, Atel Energy AG
Education: Czech Technical University in Prague, Faculty of Electrical Engineering, and Clemson University in South Carolina, U.S.A.

Launched on the morning of July 17, the Prague Energy Exchange became the first major electricity bourse in Central and Eastern Europe. That afternoon, the exchange’s new director, David Kučera, met with The Prague Post. Previously, trades here were hatched through annual wholesale electricity auctions conducted by the energy utility ČEZ. Now, there will be more transparency on the electricity market, says the exchange.
➊ What was your preparation for the launch today?
For us, today was just switching on the computers. Most of the work was done in the last six months. Which currency we should trade — Czech crowns or euros? We decided in March to go with the euro, based on a survey among potential market participants. Another question was the presence of clearing banks [which act as financial intermediaries between buyers and sellers]. That service didn’t exist in this country three months ago. We basically started from scratch there. And the clearing has to be in euros. Banks in the system are Komerční banka, HVB, Česká spořitelna, ČSOB, and recently we’ve also finalized discussions with Citibank. Everything is based on the existing system at the Prague Stock Exchange.
➋ How does it all work, exactly?
Basically, you put your order in a system. The order specifies the amount of energy you are willing to sell or buy and at what price you are able to do that. And other market participants do that at the same time. And then there is a matching system. The market participant never knows the counterparty. It goes through the Prague Energy Exchange, [because] they didn’t want to show the public the sale price. It’s a common practice throughout Europe. The only company who wasn’t afraid of showing was Enron ... but, afterward, I haven’t heard of any company who was willing to announce the prices.
➌ Other than the much-touted reason of market transparency, what other effects will the exchange have?
It will help solve risk management issues. If you are a trader, you have contracts or guarantees with several companies. Once you have an exchange, you have one guarantee against the exchange. This can help bring more liquidity to the market.
➍ How did you convince ČEZ to cede their auctioning power in favor of an exchange?
When the Prague Stock Exchange was looking for some diversification into commodities, they came up with the idea to start with electricity. What was essential for this exchange was the support of ČEZ. If you don’t have the biggest market participant, then it would be difficult to create a market here. ČEZ liked the idea. I think it’s attractive to everyone who wants to trade electricity because it’s an additional platform. For traders, it creates a new option.
➎ What about gaining the participation of other companies?
We went to the E-World conference, probably one the biggest fairs, in Germany. We met there with many market participants, asking them whether they’d like to have an exchange and we received support. We established a trading committee, invited a mix of international market players and local companies, like EDF Energy, E.ON, Atel Energy. And then we contacted our Czech independent power producers. We invited distribution companies and we also invited Česká spořitelna, who showed interest in being a market participant. We structured the exchange, more or less, based on the consensus of majority voting of this committee. In most of the questions involved, we followed the wishes of market participants.
Today, we have more market participants from the Czech Republic than international players, because it is more difficult to conclude contracts with the clearing banks, which are key elements in the whole thing. By the end of this month, I expect we will have 20 market participants.
➏ Why was the launch of the exchange delayed from the July 1 target date?
We really started work in January. I haven’t heard of an exchange that was ready to run in seven months. So, we were looking for a suitable date. And actually, we were more or less ready June 1, but this doesn’t mean you can start trading. Banks were not ready to offer clearing services to clients. We had to allow the market participants time to see documentation with banks.
We started the exchange today, but we don’t expect there will be a huge volume traded in the next few weeks. Some of the participants are struggling with implementation with the clearing banks. They have to come here [to the PSE office near náměstí Republiky] to pick up security certificates by hand.
➐ Electricity prices in the Czech Republic, along with Poland, are currently the lowest in Europe. A number of analysts have suggested the creation of an energy exchange here will attract speculative investors and increase electricity prices. Will this happen?
I think this is based on the fact that people actually have no information about the market. In between annual auctions, nobody knew what was going on on the electricity market. With the exchange, you’ll have information every day of what’s going on, like in the oil market. We have nothing against the speculators. Actually, we would welcome them here. Speculators are important for a market. Speculators bring liquidity. We just want to avoid a hysteric price spike. For example, last month there was a tender in Slovakia and the closing price there was 62 euros [$86/1,750 Kč] per megawatt. Delivery in Germany is 55 euros, 56 euros. This was only, we believe, because of how this energy was auctioned. We believe this was an artificially high price.
➑ Is that why you’re launching a two-year product with a fixed 2008 price?
Starting July 25, we are introducing a compound product. This is a two-year delivery for 2008 and 2009. We are buying 2008 for a fixed price and then 2009 for a variable price. If you look at the prices in Germany, or anywhere else, the day-ahead market is most volatile. The two-year-ahead market is less volatile. And 2008 delivery is more expensive than 2009, based on market data in Germany. If the market participant believes that we priced this 2008 delivery wrong, which will probably be 90 percent of the case, then they will reflect this in 2009 pricing.
➒ Many exchanges today are creating partnerships, merging or being bought out, but the Prague Energy Exchange is starting something new, independently. Do you think you’ll join in this trend?
I think we’ll be part of that process in the future as well. We would like to cooperate. We don’t really have any regional preference. First, we have to develop a fully functioning market here.
➓ What are your plans for the future?
We need to improve our spot market [for immediate trading of electricity]. The electricity-market operator, Operátor trhu s elektřinou, has a spot platform. We want to start discussions with them on how to improve. Once we are done with that, which we hope to be in the middle of next year, then we can look at developing new products and evaluate whether we want to start trading other commodities.
Want your top manager to answer our 10 Questions? Send a message to Paul Voosen at pvoosen@praguepost.com

Riva Froymovich can be reached at rfroymovich@praguepost.com


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