By Nina Chestney and Susanna Twidale
AARHUS, Denmark (Reuters) - Far from the sprawling financial hubs of London or Frankfurt, high-tech traders in the Danish university city of Aarhus are driving rapid change in European power markets, easing the shift to renewables with technology that also carries some risks.
The red-brick buildings, pavement cafes and streets full of cyclists in the coastal city on the Jutland peninsula belie the sophisticated computer-driven trade in electricity and gas across Europe taking place inside some 10 firms based here.
But the wind turbines filling fields nearby flag the origins of a future-focused business. Leading global wind turbine manufacturers Vestas and Siemens Gamesa have roots in Denmark, which now covers around 30 percent of its energy needs with renewables.
The rapid diversification brought by renewables, coupled with growing competition and digitalisation in traditional European power and gas, has lowered margins, shortened contracts and brought an explosion of data for traders to consider.
Algorithms can examine live data about the output of wind turbines or solar panels, changeable weather patterns, demand and fuel price data much faster, more accurately and at a lower cost than a human trader.
A Dane called Henrik Lind spotted an opportunity in Aarhus, where Vestas is based, and set up Danske Commodities in 2004. It and other firms established since - some by former Danske Commodities employees - now use algorithms and artificial intelligence to reap rewards from real-time fluctuations in supply and demand.
"A knowledge industry has been created here of power, gas, renewables, Big Data, artificial intelligence - a combination of the traditional markets and the Silicon Valley tech," said Jesper Johanson, chief executive and co-founder of InCommodities, one of four Aarhus-based firms Reuters spoke to.
Energy companies and banks have their own trading desks experimenting with automation and utility companies are also dipping their toes into the business, but some say that with customers to satisfy, the stakes are much higher if they get it wrong.
In an ideal world, the technology helps energy producers to sell their output at the best price, utilities to keep their costs and supplies steady and bankers and brokers to make money with trades that smooth over sharp changes in supply or demand.
Balancing those interests and ensuring transparency and predictability is a challenge, however, and market experts expect regulation to evolve as it has for financial markets as power trading develops.
DATA IS GOLD
Specialist firms are already growing fast as the shift away from fossil fuels introduces a raft of new variables.
"I consider InCommodities just as much an IT company as a commodity trader," said Johanson, one of four founders of a two-year-old company which now employs 35 people trading short-term power and gas in ten different European markets. All four founders have previously worked at Danske Commodities.
InCommodities' earnings before tax jumped 529% last year to 7.9 million euros ($8.9 million) and it plans to expand into UK gas next year, emissions markets and, potentially, liquefied natural gas in future.
Danske Commodities was bought by Norwegian oil and gas major Equinor last year: its 50 dedicated energy traders are now doing more than 3,750 trades a day; 24 hours a day; 7 days a week and across 38 power markets.
InCommodities and Danske Commodities both trade on their own account and the latter also buys and sells on behalf of clients, which may be power companies or renewable energy producers.
Danske Commodities' earnings before interest and tax rose by 28 percent last year to 72 million euros.
"We treat data as gold. We believe in automation. AI and algorithms are important to be able to leverage the trend of digitalization and develop a competitive edge in these power markets," said Andreas Schwartz Knudsen, the company's head of commercial business development.
Leading European power exchange EPEX SPOT said automatic trading began on its platform in 2012 and by last year accounted for around a third of record intraday and day-ahead volumes of 567 terawatt hours (TWh).
Six senior company officials from Danish-based companies involved in the trade interviewed by Reuters all saw European power trading becoming so complex that only computer modelling, coupled with human traders, could tackle it.
Investment in automation technology can cost from 100,000 euros to several millions but the most successful has a payback of between one and two years, according to Philippe Vie, group leader of energy, utilities and chemicals at business consultancy Capgemini.
Even so, some people are cautious.
Swedish power company Vattenfall's CEO Magnus Hall said the company did trade automatically, but "under great surveillance".
"If it goes wrong it can go severely wrong," he said by telephone. "Some others do it more frequently but we think there is a need for more safety and security work."
Market players in Aarhus see themselves as a force for good in a market much more unpredictable than it was in the pre-1990s era of state monopolies dealing with fossil-fuel based regional supply and relatively steady demand.
"The transition towards a higher share of renewable production increases market volatility," said Sebastian Lund, managing partner of Aarhus-based Nordic Energy House, founded by four former Danske Commodities employees and focused on British and Irish intraday power markets.
"Traders provide market liquidity and play a vital role in establishing dynamic and fair market prices," he said.
The increasing electrification of power to homes and businesses and the prospect of millions of electric vehicles supplied via a web of renewables and traditional suppliers gives a picture of the complexity ahead.
Algorithmic trading is at a relatively early stage compared with financial markets, but as it develops, it will become harder for the traders overseeing it to gauge the factors behind market moves.
Potential risks have already caught the attention of the body overseeing European energy market transparency regulation, the Agency for the Cooperation of Energy Regulators.
"The two main examined risks are its potential use as a tool for the manipulation of the market and the possibility that algorithms themselves can in certain circumstances be susceptible to manipulation," it said.
Existing legislation already applied, it said, while adding: "Provisions from the financial legislation and experience from financial market authorities could prove useful."
The rewards for successful power trading are growing.
Volumes in Europe's main wholesale markets were broadly stable at 9,270 terrawatt hours (TWh) last year, but a rise in prices pushed its notional value up 25% to a 7-year high of 459 billion euros, research firm Prospex said. Total European gas trading value rose 35% last year to exceed one trillion euros for the first time.
"As technology and trading gets more sophisticated, the imperfections and the profits shrink,....but the companies playing the market the best, with the most sophisticated technology, are claiming larger profit share," said Antti Belt, managing director and partner at Boston Consulting Group.
Germany has the continent's most liquid power market and very short term trades are increasing, while German power producers and grid operators are concerned about the possibility of outages as the country shifts to renewables.
In-country and cross-border capacity is an issue, and with a population exceeding 83 million, Germany has around 14 times as many people to worry about than its northern neighbour Denmark.
There, so far, the experience has been good.
"Denmark ... is now widely recognised as a global leader in integrating variable renewable energy while at the same time maintaining a highly reliable and secure electrical power grid," the International Energy Agency said.
At Danske Commodities, the average age of the 300 employees is 33 and 73% have a master's degree or higher - some even in cosmology and nanophysics. A talent pool for it and other firms lies on the doorstep.
($1 = 0.8915 euros)
(Reporting by Nina Chestney and Susanna Twidale in LONDON; additional reporting by Vera Eckert in FRANKFURT, Lefteris Karagiannopoulos in OSLO and Stine Jacobsen in COPENHAGEN; editing by Philippa Fletcher)