1. Trade in electricity The treatment of electricity forwards in the German BoP Deutsche Bundesbank Balance of Payments Working Group, 27-28 November 2012 Document BP/12/41 Item 12 of the Agenda

2. Introduction The recording of goods in IMTS and in the BoP is methodologically different (cross-border vs. change of ownership).  Therefore, BoP compilers have to adjust IMTS data. The necessary adjustments have been comprehensively discussed in the Task Force on the Reconciliation between Balance of Payments and Foreign Trade Statistics. In Germany the value of these adjustments has increased rapidly in the last years. 28. November 2012 Page 2 Deutsche Bundesbank

3. Introduction 28. November 2012 Page 3 Deutsche Bundesbank The presentation gives a short overview on the reason for this development (trade in electricity) and asks member states for their experiences.

4. Introduction Reason for the increasing of trade in electricity With the directive 2003/54 the Commission liberalized the electricity market within the EU. In Germany the liberation led to a rapid increase of trade in electricity between residents and non-residents. Most of the traded electricity is produced and consumed in Germany. Due to the German rules, transactions with non-residents on goods not leaving the territory must be reported by enterprises. Therefore trade in electricity has an increasing effect on the goods account. 28. November 2012 Page 4 Deutsche Bundesbank

5. Introduction Special characteristics of the electricity market As there are limits to the amount of electricity that can be stored, all electricity produced is immediately consumed at any point in time.  Trade is only possible via Futures and Forwards mostly with the condition of physical delivery. Most of the trade is done directly between traders.  High share of over-the-counter (OTC) trade. 28. November 2012 Page 5 Deutsche Bundesbank

6. Futures and Forwards Definition Futures and Forwards are unconditioned contracts with an underlying item (e.g. electricity) which are settled at a certain point in time. These contracts can be settled in cash settlement or by the physical delivery of the underlying. Futures are standard contracts of organized exchanges. Forwards are individual OTC-contracts. 28. November 2012 Page 6 Deutsche Bundesbank

7. Futures and Forwards Forward–type contracts have to be settled between the two counterparties. Once a contract is open it can usually only be closed by one side by opening a new contract with opposite conditions with a third party. Example: A opens a forward-type contract with B with physical delivery of goods at 1. January 2013 at a fixed price. If B decides that he does not need the goods anymore he cannot resale his contract with A to C. Therefore B has to open a new contract with C with the condition to deliver goods at 1. January 2013. Now two contracts exist for delivering the same good at the same time. One between A and B and one between B and C At 1. January 2013 the goods change ownership first from A to B (contract 1) and in a second step from B to C (contract 2). 28. November 2012 Page 7 Deutsche Bundesbank

8. Futures and Forwards Forward-type contracts with physical delivery of goods are usually used by companies to reduce risks of price changes. The underlying is typically an input for the production process and can be stored if not needed.  The underlying of a single forward contract with physical delivery is not traded several times. For the trade in electricity demand and supply have to be the same at any point in time. The actual demand can hardly be predicted by traders well in advance. The closer the date for delivery comes, traders foresee better which amount of electricity is needed and if this is in line with the amount predicted when opened the contract. Usually this is not the case for the total amount.  The underlying electricity gets traded several times before delivery. 28. November 2012 Page 8 Deutsche Bundesbank

9. Futures and Forwards Recording in BOP At the time of the opening of the Forward the value of the contract is zero, because the price risks are the same for both partners  no recording in BOP. A settlement with physical delivery of the underlying good (e.g. electricity) has to be recorded in the Goods Account (BPM 5 § 402, BPM 6 § 8.40b), valued with the market price at the time of delivery. The difference between the market price at the time of delivery and the agreed price of the Future/Forward has to be entered in the Financial Account/Derivatives. At the time of physical delivery a certain commodity can change ownership more than once between residents and non-residents and therefore must be recorded several times in the BOP! 28. November 2012 Page 9 Deutsche Bundesbank

10. Futures and Forwards Example 28. November 2012 Page 10 Deutsche Bundesbank Country I Country II A B C Future/Forward Contract Change of ownership Physical Delivery Contract 1: price of good 100 Contract 2: price of good 105 Country IGoods Credit Goods Debit DerivatiesCurrency & Deposit Contract 1107-7-100 Contract 21072105 Sum107 55 Recording of the physical delivery: Market price: 107

11. Trade in Electricity and Gas Impact In line with the BPM5 (and BPM6) Germany records Forwards with physical delivery of electricity in the Goods Account. Compared with Trade in Goods recorded by IMTS the amounts increased rapidly over the last years. (about 50% with partner country UK) 28. November 2012 Page 11 Deutsche Bundesbank in Mio €Trade in ElectricityTrade according to IMTS receiptsexpendituresexportsimports 2009 37,10538,786 803,312664,615 2010 64,17163,219 951,959797,097 2011 77,93276,588 1,060,036901,952

12. Problems Increasing adjustments between BOP „Goods“ and IMTS  in the Quality Report of Eurostat this is considered as a sign of poor quality. Analytical problems for users. Asymmetries with other countries who may not record these flows. 28. November 2012 Page 12 Deutsche Bundesbank Question to the delegates: Germany is interested how these transactions from trade in electricity are treated in other MS.