NORD POOL ASA ANNUAL REPORT 2008

Transcription

1 NORD POOL ASA ANNUAL REPORT 2008

2 CONTENTS Introduction Highlights The new offer... 2 Organisation and ownership... 3 The world s leading power exchange Key figures... 4 CEO s report... 6 Products and services Export of power markets European expansion The future carbon market Business reports Financial market Clearing Consulting A reliable and secure market Corporate governance Annual accounts Directors report Profit and loss account Balance sheet Cash flow analysis Accounting principles Notes to the accounts Auditor s report... 47

3 NORD POOL ASA / ANNUAL REPORT Highlights January Launched German derivative contracts Nord Pool ASA, Europe s leading international commodity exchange for power and carbon, launched derivative contracts for the international power markets. 27 February Sale of EEX shares Nord Pool ASA entered into an agreement with Eurex to sell the per cent stake held by the company in the Leipzig-based European Energy Exchange AG (EEX) for EUR 46 million, or EUR 6.60 per share. 1 2 July Introduced a GCM model Nord Pool Clearing ASA launched a general clearing member (GCM) model, increasing flexibility and accessibility for members and liquidity in Nord Pool s financial markets. The new member category will be the counterparty to the clearinghouse for both proprietary and client trading. 28 August Granted licence for US trading Nord Pool ASA was granted permission by the US Commodity Futures Trading Commission (CFTC) to allow US companies to trade and clear Nordic and international power derivatives and carbon products. The licence gives Nord Pool the opportunity to set up CLICK Trade XT TM (PowerCLICK) terminals in the USA. 17 October Launched NPN 365 power price index Nord Pool ASA launched a forward price index for Nordic power under the name NPN 365. This represents the price of power for a period lasting 365 days, based on Nord Pool ASA s derivative contracts. 21 October NASDAQ OMX completed acquisition of Nord Pool s assets The NASDAQ OMX Group, Inc announced the completion of its acquisition of Nord Pool s clearing, international derivatives and consultancy business areas. 27 November NASDAQ OMX Commodities and Nord Pool Spot were chosen to deliver market and clearing services for the UK wholesale power market NASDAQ OMX Commodities and Nord Pool Spot were chosen by the Futures & Options Association in the UK to establish a spot and cash-settled derivative power market with a full range of clearing services.

4 + NORD POOL ASA / ANNUAL REPORT 2008 The new offer from Nord Pool ASA and NASDAQ OMX Commodities In October 2008, NASDAQ OMX acquired Nord Pool s international power derivatives, the carbon products, the clearing business and the consultancy services provided for commodity markets globally. 2 Combined offering Nord Pool ASA and NASDAQ OMX Commodities offer their members access to trading and clearing of Nordic, Dutch and German power derivatives as well as carbon products To whom? Basic customers such as power utilities, industry, manufacturing and oil companies Financial customers such as banks, brokers, hedge funds and other financial institutions When? Seeking alternative investment possibilities Hedging power contracts Selling/buying carbon products Seeking to reduce capital employed, counterparty risk and administration How do Nord Pool ASA and NASDAQ OMX Commodities improve the customer s business? More efficient transactions for customers through a single entry point an existing membership will give a member access to new asset classes and commodity instruments Through the clearing service, members can reduce capital employed, counterparty risk and administration Business area responsibilities NASDAQ OMX Commodities ownership of international power derivatives and carbon products clearing of all Nord Pool s and NASDAQ OMX Commodities exchange traded products clearing of standardised OTC-traded products consultancy services in the power sector globally market data services for the power and carbon markets What advantages do Nord Pool ASA and NASDAQ OMX Commodities offer compared with others? Plan to offer a single membership with access to trading and clearing in multiple asset classes Current NASDAQ OMX offering includes commodities, equities, index and fixed income Offer access to the most liquid market for Nordic power derivatives 55.5 per cent of cleared Nordic power volumes are traded on Nord Pool ASA Almost all Nordic power volumes are cleared through Nord Pool Clearing ASA Offer access to the world s most transparent and mature power market in the world The European Union has characterised Nord Pool as Europe s best-functioning power market Offer expertise and knowledge acquired from being at the forefront of the power market for 15 years Nord Pool ASA exchange trading of Nordic power derivatives exchange trading of international power derivatives (German and Dutch) and carbon products (EUAs and CERs) on behalf of NASDAQ OMX Commodities AS holds the exchange licence and runs the exchange operation market surveillance In 2009, the combined commodity offering will comprise trading and clearing of power derivatives in four European power markets Nordic, German, Dutch and British (launch of UK power market in 2009) trading carbon products European Union emission allowances (EUAs) and global certified emission reductions (CERs)

5 NORD POOL ASA / ANNUAL REPORT Organisation and ownership NASDAQ OMX COMMODITIES AS Ownership of international power derivatives and carbon products STATNETT 50% 30% Ministry of Petroleum and Energy, Norway 3 NORD POOL CONSULTING AS 50% 30% SVENSKA KRAFTNÄT NORD POOL CLEARING ASA The clearing house for Nordic and international power derivatives and carbon products exchangeand OTC-traded FINGRID ENERGINET.DK 20% 20% Norwegian Water Resources and Energy Directorate Financial Supervisory Authority of Norway NORD POOL ASA The exchange for Nordic power derivatives, and for international power derivatives and carbon products on behalf of NASDAQ OMX Commodities NORD POOL SPOT AS The spot market for Nordic day-ahead power (Elspot) and continuous trading (Elbas)

6 + NORD POOL ASA / ANNUAL REPORT 2008 The world s leading power Derivative Exchange For more than 15 years Nord Pool has created the world s most successful power exchange. It ranks today as the biggest in volume terms, the most liquid, and the one with the largest number of members. 4 Key figures Nord Pool Spot AS (the underlying physical market for Nord Pool s financial market) Turnover Elspot Change % Volume (TWh) Value (EUR million) Market share in Nordic region (%) Turnover Elbas Change % volume (TWh) Key figures Nord Pool ASA and Nord Pool Clearing ASA (part of Nord Pool Clearing ASA Commodities) Turnover power trading (including international contracts) Change % Volume (TWh) Value (EUR million) Number of transactions Turnover power trading and clearing of OTC trades Change % Volume (TWh) Value (EUR million) Number of transactions Turnover carbon trading (EUA/CER) Change % Volume (1 000 tonnes) ( 2) Value (EUR million) Number of transactions (5) Turnover carbon trading and clearing of OTC trades (EUA/CER) Change % Volume (1 000 tonnes) Value (EUR million) Number of transactions

7 119.3 BN VALUE CLEARED CONTRACTS (EUR) 5 Exchange trading (TWh) NP EEX PWX 80% 15% 5%

8 + NORD POOL ASA / ANNUAL REPORT 2008 CEO s report Focus on the Nordic region Nord Pool ASA experienced yet another year with record volumes and results in The figures clearly show that the Nordic power market remains the foundation of the business. Nord Pool s NASDAQ OMX Commodities partner will concentrate primarily on expanding internationally. That means the most important job at Nord Pool after the acquisition is to ensure that the Nordic power market is developed through new products and increased distribution, and to maintain the focus on market surveillance. 6 As the new chief executive of the exchange, responsible for operating the financial market and for market surveillance, I want to ensure that the development of the Nordic power market continues. Nord Pool ranks today as the largest, most liquid and most transparent power exchange. However, improvements will always be possible in order to offer market participants better products and to enhance liquidity even further. Collaboration with NASDAQ OMX Commodities will be one of several factors contributing to this. Continuing as before It is important to emphasise that Nord Pool will still be listing all the products, including those offered by NASDAQ OMX Commodities. All trading will still be conducted over the Nord Pool platform. Responsibility for all trading activity and market surveillance is unaffected by the NASDAQ OMX acquisition and remains at Nord Pool. Where product development for each market is concerned, responsibility rests with the company owing the product. In other words, product development and market-related work for Nordic power remains with Nord Pool, while NASDAQ OMX Commodities will handle carbon and international products. However, product development will be pursued in close collaboration be tween the companies to provide the best offerings to members. Increase distribution Nord Pool faces a number of tasks in While its goals coincide to a great extent with those of NASDAQ OMX Commodities, the company needs to take account of special considerations in the Nordic region. On the distribution side, Nord Pool wants to expand opportunities for small participants.through the new general clearing member (GCM) model, the new membership category known as nonclearing member (NCM) will have a GCM as its counterparty in the transactions. Hopefully, this will help to increase the number of exchange members and liquidity even further. It will accordingly be important to secure Nordic banks as GCMs, and for NAS- DAQ OMX Commodities to obtain a corresponding arrangement internationally. Product development The collaboration with NASDAQ OMX Commodities in the Nordic market will focus on developing netting opportunities for clearing between different geographical markets and between different products such as power and carbon. Nord Pool will also look at products which exploit price differentials between various markets, such as the German-Nordic power spread. International marketing of opportunities in the Nordic power market will also be strengthened. With the CFTC licence, which allows terminals to be established in the USA, and the collaboration with NASDAQ OMX Commodities, Nord Pool is experiencing increased interest among American players in becoming members of the world s most liquid power market. Dedicated sales resources have accordingly been allocated to this work. The exchange is playing an important role in establishing the UK power market. Trading in financial contracts will take place on the Nord Pool exchange, using its exchange licence. The UK market corresponds to that in the Nordic region and will provide a further investment opportunity for financial participants. This will help to enhance the liquidity of Nord Pool s existing products. Better systems Both the exchange and the clearing business are due to implement upgraded information technology systems in April. Substantial work has been devoted in-house to developing these solutions. Members have been notified of preparations for the upgrade through a number of market announcements. Although the technology boost will provide members with better tools for trading and clearing, its primary benefit is to improve Nord Pool s internal IT systems. That will allow the company to devote more time to customer care and to product development in the future. Some work remains to be done in-house on integrating former Nord Pool entities with NASDAQ OMX Commodities. Since NASDAQ OMX supplies both trading and clearing applications, this work will clearly also have consequences for all members. However, Nord Pool s goal is that this integration work will be pursued with the minimum impact on customers. A future common IT platform will primarily yield benefits through improved access to development resources and technology. This is intended to make a broad range of products available on the exchange.

9 NORD POOL ASA / ANNUAL REPORT TWh traded on the exchange (incl international contracts)

10 Nord Pool ASA and NASDAQ OMX Commodities plan to offer a single membership with access to trading and clearing in multiple asset classes. This will give more efficient transactions for customers through a single entry point an existing membership will give a member access to new asset classes and commodity instruments. The world s most liquid power market Four different power markets Nord Pool ASA and NASDAQ OMX Commodities offer trading and clearing services for the financial market. The financial trading is almost 6.5 times the Nordic consumption corresponding to almost TWh in By 2009, it will be possible to trade Nordic, German, Dutch and UK power on the world s leading and most liquid power exchange.

11 nord pool asa + nasdaq omx commodities = THE world s leading power exchange

12 + NORD POOL ASA / ANNUAL REPORT 2008 Products and services Nord Pool ASA and NASDAQ OMX Commodities aim to increase the exchange s attractiveness by offering new trading opportunities in the largest European power markets. The financial market Clearing services Consulting services 10 Products in the financial market are a combined offering from Nord Pool ASA and NASDAQ OMX Commodities. Trade in four different power markets Manage worldwide carbon exposure Manage risk State-of-the-art power expertise By 2009, members will be able to trade Nordic, German, Dutch and British power on the world s leading and most liquid power exchange. The contracts have a trading horizon of up to six years, covering daily, weekly, monthly, quarterly and annual periods. Europe s first and one of the largest marketplaces for European Union emission allowances (EUAs) and global certified emission reductions (CERs). The CER specifications meet EU requirements. Planned netting between EUAs and CERs from mid Nord Pool Clearing ASA enters into financial power, EUA and CER contracts as a contractual counterparty. The clearing house assumes liability for covering the future settlement of these contracts, which reduces the risk for both buyer and seller. Nord Pool Clearing provides clearing of all contracts traded on the exchange and standard ised contracts traded in the OTC market. Nord Pool Consulting AS provides specialist services in the fields of consulting, operation and development of international deregulated power markets. The company has been involved in power market projects in more than 65 countries worldwide. Flexible membership structure Efficient electronic trading systems and voice execution Clearing of exchange- and OTC-traded contracts Reduced margin call by offering netting between markets Trayport an additional trading solution Regulated exchange and clearing house One margin call for all markets Straight-through processing to settlement Guaranteed financial settlement Efficient handling of both exchange- and OTC-traded contracts through an electronic clearing application Easy-access web interface for clearing reports, including traded contracts, net positions, margin calls and settlements

13 NORD POOL ASA / ANNUAL REPORT The combined Nord Pool ASA and NASDAQ OMX Commodities product offering will deliver improved services to the market participants. TIME 0 1 HOUR 24 HOURS 1 YEAR 6 YEARS 11 BALANCING MARKET ADJUSTMENT MARKET PHYSICAL ELECTRICITY MARKET CARBON MARKET FINANCIAL POWER MARKET Reference price PHYSICAL DELIVERY CASH-SETTLED Elspot physical electricity market Day-ahead auction market supply and demand cross (system price). Mechanism for handling of constraints. Handled by Nord Pool Spot AS. Elbas adjustment market Continuous hourly intraday market. Handled by Nord Pool Spot AS. Balancing market Realtime market operated by the transmission system operators (TSOs). Financial power market Cash-settled futures, forwards, options and contracts for differences (CfDs). Contracts with a trading horizon of up to six years, which cover daily, weekly, monthly, quarterly and annual periods. Handled by Nord Pool ASA. Clearing Exchange and OTC contracts. Handled by Nord Pool Clearing ASA. Carbon market EUA spot contract (day-ahead), EUA and CER physical forward contracts for and CER/EUA swaps and strips for Handled by Nord Pool ASA.

14 Anthony Belchambers, chief executive of the FOA: The depth of experience and resources and the quality of the offering by NASDAQ OMX Commodities and Nord Pool Spot was sufficient to secure the unanimous support of the market participant project board. Developing power markets Nord Pool has been involved in developing power market projects in more than 65 countries. NASDAQ OMX is the world s leading technology provider to the exchange industry. Combining their expertise, experience and technology, they are now creating the UK power exchange N2EX. Large potential The UK power market is almost as large as the Nordic around 400 TWh in annual consumption. N2EX will provide trading, clearing and notification services for spot, auction, prompt and derivative markets.

15 15 YEARS OF POWER market EXPERIENCE + a world leader in exchange technology = EXPORT OF POWER MARKETS

16 + NORD POOL ASA / ANNUAL REPORT 2008 European expansion Nord Pool has contributed to developing power market projects in more than 65 countries since NASDAQ OMX is the world leader in exchange technology. As proof that this forms a powerful combination, Britain s Futures and Options Association (FOA) chose a consortium of Nord Pool Spot and NASDAQ OMX Commodities to establish the new UK power market. 14 The two partners will provide a complete solution for the UK, including trading, clearing and notification services for spot, auction, prompt and derivatives markets. It will comprise a cashsettled power derivative market, allowing complete netting across contracts with the same delivery periods, as well as netting offset against existing Nordic and international power contracts. Anthony Belchambers, chief executive of the FOA, comments: There s a paramount need to enhance liquidity in the UK power market, and this was what prompted us to issue a request for proposals (RFP) from market infrastructure providers. While the responses were all comprehensive and of a very high standard, the practitioner project market advisory board felt that the one from NASDAQ OMX Commodities and Nord Pool Spot was best placed to deliver on the requirements set out in the RFP. Work has now started in earnest with a view to achieving a go-live date in the autumn. Erik Sæther, chief executive of Nord Pool Spot, which is responsible for the physical market, says: We re very grateful for the opportunity the FOA has given us. Establishing a successful UK market has our highest priority in We have proven that, to build a well functioning derivatives market, you first need to create a liquid and robust physical spot market. Geir Reigstad, head of NASDAQ OMX Commodities and responsible for the derivatives market with trading and clearing facilities of all physical and financial contracts, adds: The UK will be one of the biggest developed economies to use ideas behind the Nordic model, which has been developed and tested for over 15 years in Norway, Sweden, Denmark and Finland. This model has also been used in Germany and France. The market regime and the legal framework forged in the Nordic region will be tailored to the unique nature of the British market to provide confidence and transparency. Mr Sæther adds: The success of the model can best be seen from its results, with almost 70 per cent of physical power consumption in the Nordic area traded over Nord Pool Spot. In the traded financial markets, Nord Pool has a market share of 56 per cent of the total cleared market. Both he and Mr Reigstad believe that the success of the Nordic market rests on the principles set out below. These can hopefully be tailored to the UK power market in order to fulfil the needs of participants for a well-functioning physical and financial market. Implicit auction Power price and capacity are managed in a single operation. When the calculation system has determined the equilibrium for all sales and purchase bids over the next 24 hours, it has also handled Erik Sæther CEO of Nord Pool Spot Anthony Belchambers CEO of the FOA Geir Reigstad Head of NASDAQ OMX Commodities

17 NORD POOL ASA / ANNUAL REPORT The success of the model is best seen in the results, with almost 70 per cent of physical power consumption in the Nordic area traded over Nord Pool Spot. In the traded financial markets, Nord Pool has a 56 per cent share of the total cleared market. possible constraints in the transmission network. This secures highly efficient price and capacity calculations. Rules and regulation The trading and clearing rulebooks for the physical and financial markets have been developed over 15 years of operation on the basis of directions from the regulatory agencies and in close cooperation with market participants. The legal framework enjoys broad acceptance and is incorporated into business practices. Information regime Within the legal framework, requirements for market participants are based on a fundamental principle: all of them must provide information to the power exchange immediately if they believe that it could influence price calculations. The power exchange then publishes this information through its channels to all market participants simultaneously. Market experience and technology Nord Pool has been involved with power markets since 1993, and is considered to be the world leader in developing such exchanges. NASDAQ OMX supplies exchange technology to more than 60 financial marketplaces in over 50 countries. Flexible membership structure Participants can choose between different types of membership in accordance with their needs, ranging from a direct membership both on the exchange and towards the clearing house to being clients of a general clearing member. 15 NORD POOL MARKETS NORD POOL FUTURE MARKET NORD POOL/ NASDAQ OMX Commodities APXUK APX ENDEX TGE BELPEX EEX OTE PWX GME EXAA BORZEN SOUTH POOL OPCOM OMEL OMIP

18 Nord Pool ASA and NASDAQ OMX Commodities know how to create liquid marketplaces. With state- ofthe-art knowledge about well functioning markets, the companies see several improvement areas for global carbon trading. Improving carbon markets More auctioning frequent reporting reducing trading barriers better information to the market. Seeing beyond Kyoto Carbon markets must offer the same transparency, fairness and efficiency as other commodity markets. This is dependant on political willingness and must not be hindered by lack of decision-making.

19 Carbon pioneers + The world s largest exchange company = Paving the way for global carbon trading

20 + NORD POOL ASA / ANNUAL REPORT 2008 The future carbon market As world-class leaders in derivatives and commodity trading, Nord Pool ASA and NASDAQ OMX Commodities are paving the way to a well-functioning carbon market. 18 According to industry analyst Celent, the carbon exchange market grew from less than EUR 9 billion in 2005 to about EUR 25 billion in Annual transaction value could reach EUR 40 billion by 2012 and climb to over EUR 100 billion by 2020, depending on the future regulatory framework. Most of the activity in this market is centred in Europe, with the financial sector and electricity generators as the main participants. Setting an emission cap and allowing firms to trade their emission allowances, an approach called cap-and-trade, provides the best of both worlds: flexibility to find the emission reductions with the lowest cost, while providing incentives to reach emission targets. Cap-and-trade has been shown to provide at least 40 per cent cost savings compared with a command-and-control regime. However, some challenges need to be addressed. Areas where improvements need to be made to the carbon market include: reducing market fragmentation avoiding over-allocation of quotas eliminating different product standards reducing barriers to entry improving market surveillance improving information and transparency creating certainty over inclusion of new sectors and the future of the Kyoto framework Based on global carbon market irregularities and their experience of the EU s emission trading scheme (ETS) market, Nord Pool and NASDAQ OMX Commodities have identified some principles critical to the functioning of local and global carbon trading. A large number of buyers and sellers provide reliable pricing and create liquidity Standardised (homogeneous) products link markets globally Low barriers to trading: reducing credit risk and transaction costs allow more players to enter the market Perfect information on prices, volumes, emissions and regulations reduces risk A predictable long-term framework provides a stable investment environment Wide sector coverage Borrowing and banking of allowances Increased use of auctioning and linking to carbon credits and other trading schemes Improving carbon markets The two companies believe that market functionality will be improved in the future by auctioning quotas and frequent emission reporting. This will increase liquidity, reducing trading barriers and providing better information to the market. On the basis of their experience in developing the Nordic power market, the world s most successful, they would suggest a NORD POOL CARBON TURNOVER (CONTRACTS/MONTH) FM CER FM EUA OTC CER OTC EUA

21 NORD POOL ASA / ANNUAL REPORT The greatest value NASDAQ OMX Commodities can deliver is a transparent marketplace and risk management solutions which provide a level playing field for all members. centralisation of policy-making, registration and regulatory institutions. Linking between schemes will also enlarge the pool of liquidity, allowing participants to identify emission reductions with the lowest cost, providing a better price mechanism, and encouraging other world regions to join a globally-linked system. Critical factors will be global exchanges, standardised global guidelines for market design, centralised registries, information dissemination and an open-ended stable framework. 19 Work should be directed towards a vision of a global downstream allowance and credit system in which all activity equally reflects the price of emissions, and in which equal treatment removes the need for special protection. Seeing beyond Kyoto The greatest value NASDAQ OMX Commodities can deliver is a transparent marketplace and risk management solutions which provide a level playing field for all members. As this market evolves, however, the company believes a carbon trading platform must offer the transparency, fairness and efficiency which are the hallmarks of fair and orderly markets. Ultimately, the future of the carbon market lies in the hands of the politicians. With increasing political awareness relating to environment issues worldwide, however, the politics may move to supporting cap-and-trade for emissions over the next few years. Geir Reigstad Head of NASDAQ OMX Commodities

22 + NORD POOL ASA / ANNUAL REPORT 2008 business report Financial market Integration and partnership with NASDAQ OMX represent a milestone in Nord Pool s history, and are expected to bring greater efficiency, new products and more liquidity to the exchange. 20 Introduction Participants demonstrated their commitment during 2008 to a transparent and efficient electronically traded Nordic power market. For the first time, more volume was traded on the financial exchange than through OTC brokers, giving the exchange 55.5 per cent of the total cleared volume of Nordic power. The reasons for this development are believed to be efficiency, transparency and trust in market price formation, while extreme price volatility also contributed to an actively traded market. Development The exchange-traded volume rose from to TWh (excluding international contracts), an increase of 32.7 per cent from 2007 to 2008, with the number of transactions rising from to , up 46 per cent. A trend towards declining market concentration for Nordic power has been seen over the past few years. No member accounted for more than eight per cent of the total exchange-traded volume in Similarly, the number of members accounting for 80 per cent of total turnover increased to 31 in The exchange-traded volume in the carbon market was 32 million tonnes in 2008, unchanged from the year before. Sixteen new exchange members joined this market in A total of 101 companies now trade EUAs and CERs over Nord Pool. Strategy Integration and partnership with NASDAQ OMX represent a milestone in the exchange s history, and are expected to bring greater efficiency, new products and more liquidity to the exchange. Given its ambition of being a leading global power and carbon exchange combined with state-of-the-art technology, the company has a solid basis for building the business to the benefit of its owners and members. For the first time, more volume was traded on the financial exchange than through OTC brokers, giving the exchange 55.5 per cent of the total cleared volume of Nordic power. POWER VOLUMES (EUR MILLION) Financial market

23 NORD POOL ASA / ANNUAL REPORT business report CLEARING Integrating Nord Pool Clearing s expertise in commodity derivatives with NASDAQ OMX s knowledge of share-based derivatives will form the basis for a very competitive global clearing house. Introduction Nord Pool Clearing ASA enters into contracts as the counterparty in order to reduce the financial counterparty risk for the parties. The contracts for clearing consist of: financially settled power contracts in the Nordic market carbon contracts (EUAs and CERs) financially settled power contracts in the German and Dutch markets UK market in 2009 Nord Pool Clearing had 391 counterparties/members from 22 countries at 31 December Development Substantial price fluctuations and high volatility in power contracts were experienced during Volatility increased throughout the year, while prices peaked in the late summer. Combined with the uncertainty in world financial markets and the tightened credit risk, this prompted an increase in margin requirements for all contracts. The total volume cleared by Nord Pool Clearing came to TWh in 2008, a rise of 8.8 per cent from TWh the year before. The volume registered for clearing from Nord Pool s financial market came to TWh, up by 35.6 per cent from TWh in The total carbon volume cleared by Nord Pool Clearing in 2008 was million tonnes, an increase of 28 per cent from Strategy The rationale for NASDAQ OMX s acquisition of Nord Pool Clearing rests on financial, technological and distribution-related assessments. Obvious benefits are seen from integrating the clearing business in a larger structure and securing access to NASDAQ OMX s distribution network and technology. At the same time, integrating Nord Pool Clearing s expertise in commodity derivatives with NASDAQ OMX s knowledge of share-based derivatives will form the basis for a very competitive global clearing house. 21 Substantial price fluctuations and high volatility in power contracts were experienced during POWER VOLUMES (EUR MILLION) Clearing volume (OTC)

24 + NORD POOL ASA / ANNUAL REPORT 2008 business report Consulting Nord Pool Consulting delivers a market concept, including consultancy and system services, which build on leading-edge knowledge and experience combined with proven software tools. 22 Introduction Nord Pool Consulting AS offers a wide range of services, from feasibility studies, infrastructure and market design for deregulation of power markets to the specification, delivery and support of dayahead market trading systems. It also offers market simulations and capacity building. Major projects of Nord Pool Consulting during 2008 included: Regional market design and trading system delivery for Opcom, the Romanian power exchange. Trading system delivery and production setup for the Southern African Power Pool, SAPP. Trading system support for Powernext, the French power exchange. Trading system support for the Indian Energy Exchange, IEX. Market analysis and training in the INPIC2 project for the Indian power market, in cooperation with SWECO, for the Norwegian embassy in New Delhi. Regional market development for the Greater Mekong Subregion in cooperation with France s RTE for the Asian Development Bank. Consultancy services for: TEIAS, the Turkish transmission system operator the Central and Eastern European Power Exchange (CEEPEX), on assignment from the Austrian and Hungarian regulators a project assigned by the World Bank for the opening of the wholesale market of south-eastern Europe (SEE) Training seminars were held for customers from China, India and Lithuania, among others. Development Operating profit was NOK 3.8 million, up from NOK 1.7 million in Total operating revenues increased from NOK 20.7 million to NOK 29.4 million, while operating costs were up from NOK 19 million to NOK 25.5 million. Strategy Nord Pool Consulting merged its software and system architecture products with its consultancy activities in Its combined services, which build on leading-edge knowledge founded on experience from the Nordic region combined with proven software tools, attract great interest and demand is growing for integrated solutions based on this wide range. Nord Pool Consulting delivers a market concept, including consultancy and system services. The focus for Nord Pool Consulting in 2009 is to ensure the quality of all its ongoing projects and to support the regional market launch of both SAPP and Opcom supported by software from Nord Pool Consulting. With its new and combined services, Nord Pool Consulting looks forward to supporting further development for current customers, and to engaging with new clients worldwide in their development of electricity markets. Based on the combined services offered to customers, 2008 was the best year ever for Nord Pool Consulting. The market responded well to its service offering. The company delivers a market concept which combines consultancy with system services.

25 NORD POOL ASA / ANNUAL REPORT Nord Pool s corporate governance Understanding of the role played by Nord Pool finds expression through its vision of building a secure market. A well-functioning market presupposes and depends on trust. This trust must be held by all participants affected by the business. Nord Pool s corporate governance principles accordingly address all the factors which can influence trust in the market. The Nord Pool exchange offers financial power contracts, EUAs and CERs. Price formation for the products traded is very important for key elements in European society. The political debate in Europe over the environment, emission allowances and future energy supplies represents a direct extension of the power exchange s operations. Trading on Nord Pool sends immediate and clear signals about conditions under discussion in society. Nord Pool s corporate governance must therefore be based on a clear understanding of its social role. This is reflected in the corporate governance principles, which aim to ensure that: the company facilitates transparent price formation the exchange provides an efficient marketplace the regulatory authorities are confident that the company fulfils the roles assigned by its exchange licence employees comply with the company s ethical guidelines control bodies in the organisation are adequate for ensuring that all elements of the business are subject at all times to systematic risk analysis the participants want Nord Pool ASA as their preferred marketplace Building trust The object of the code of practice issued by the Norwegian Corporate Governance Board (NCGB) is confined to ensuring that listed companies provide a clarification of the division of roles between shareholders, the board of directors and the executive management which goes beyond legal requirements. As far as the code issued by the NCGB is concerned, Nord Pool is subject to additional regulations and legal requirements through its exchange licence. The NCGB code is intended for listed companies with numerous shareholders, so that many of its 15 main points are not relevant for Nord Pool ASA, where two owners hold equal shares in the company. With regard to building further trust in the market through its corporate governance, Nord Pool has several bodies which handle risk management and member compliance with the rulebook. Among legislation and statutory regulations which supplement the recommendations in the NCGB code, Chapter 3 of the Norwegian Exchange Act and regulation 1057/1997 from the Financial Supervisory Authority of Norway on clarifying control responsibility, documentation and confirmation of internal control (replaced with effect from 1 January 2009 by regulation 1080/2008 on risk manage ment and internal control) are particularly important. Control committee Pursuant to section 3-3 of the former Norwegian Exchange Act of 17 November 2000 and section 13-1 (5) of the Norwegian Act on Securities Trading, Nord Pool ASA had a control committee in This body issues an annual report on its work to the general meeting and to the Financial Supervisory Authority. However, section 38 of the current Exchange Act no longer requires Nord 23

26 + NORD POOL ASA / ANNUAL REPORT 2008 With regard to building further trust in the market through its corporate governance, Nord Pool has several bodies which handle risk management and member compliance with the rulebook. 24 Pool to have a control committee, and its abolition will therefore be proposed to the annual general meeting of Nord Pool in Pursuant to section 13-1 (5) of the Act on Securities Trading, the control committee for Nord Pool Clearing ASA will be retained. Risk committee To comply with the requirements of section 11 of the Exchange Act and regulation 1057/1997 (replaced with effect from 1 January 2009 by regulation 1080/2008 on risk management and internal control) from the Financial Supervisory Authority, Nord Pool has also established an in-house risk committee and internal audit function which systematically and continuously analyses the risks which might threaten the company s strategic and operational goals. Its membership is drawn not only from Nord Pool ASA but also from NASDAQ OMX Commodities AS and Nord Pool Clearing ASA. Collaboration within the committee accordingly embraces all the key parts of the exchange trading and clearing business in order to ensure that the systematic approach to risk has a sufficiently broad scope. The committee reports directly in a separate annual report and indirectly through the line management to the chief executive of Nord Pool ASA. Disciplinary committee Nord Pool ASA has also established a disciplinary committee to advise the board in the event of breaches of Nord Pool ASA s rules. Its duties are directly related to the vision of building a secure market, since they form part of the work done to ensure that members retain their trust in the market. Appointed by the board, the committee works on cases identified by Nord Pool ASA s market surveillance department. In addition, Nord Pool ASA has developed a set of ethical guidelines for market behaviour as part of the rules for both trading and clearing. All employees are also subject to a special set of ethical guide lines, which pay particular attention to their duty of confidentiality, conflicts of interest and opportunities to own financial instruments pursuant to sections of the Exchange Act. Continuous efforts are being devoted to the further development of corporate governance at Nord Pool ASA.

27 NORD POOL ASA / ANNUAL REPORT Directors report Solid progress and results for 2008 A new volume record was set on the exchange in 2008, with a turnover of TWh (excluding international contracts). That corresponded to 55.5 per cent of the market for cleared volumes in the Nordic region. Nord Pool ASA completed two successful sales transactions in It sold the shares in EEX in June with a gain of NOK 328 million, while the sale of the clearing and consultancy business and the international products to NASDAQ OMX Group, Inc in October yielded a gain of NOK million. The sale to NASDAQ OMX yielded a gain of NOK million for Nord Pool ASA. The sale of shares in EEX gave a gain of NOK 328 million. At TWh (excluding international contracts), turnover for the exchange was up by 32.7 per cent from TWh in The total Nordic volumes traded and cleared came to TWh, an increase of seven per cent from TWh in Power market Turnover for Nordic contracts traded on the exchange in 2008 came to TWh, compared with TWh the year before. This is the highest traded volume in the history of the exchange, and the board is satisfied with the development of traded volumes in recent years. Nord Pool s ambition is still to be the leading power exchange in Europe. That calls for a comprehensive range of products which satisfy trading and clearing in a number of markets. This ambition will require a comprehensive and constructive collaboration with NASDAQ OMX Commodities AS as the owner of part of the seven products traded by Nord Pool ASA. The board s view is that this collaboration functioned well in 2008, and will secure the continued development of the Nordic power market. Nord Pool ASA was awarded a licence by the US Commodity Futures Trading Commission which gives American companies direct access to trade and clear the exchange-traded products. International power market International power contracts for Germany and the Netherlands were launched in January A total of 30.2 TWh of German contracts were traded on the exchange, and 41.7 TWh were cleared. No Dutch power contracts were traded. Carbon market Turnover of EUAs and CERs on the exchange totalled 31.9 million tonnes of carbon dioxide compared with 32.3 million in The total volume traded and cleared through Nord Pool increased from 95.1 million tonnes in 2007 to million tonnes in The latter figure is apportioned between 69.6 million tonnes of EUAs and 52.1 million tonnes of CERs. This turnover had a total value of EUR million as against EUR million in CLEARING TURNOVER OTC TWh

28 + NORD POOL ASA / ANNUAL REPORT Odd Håkon Hoelsæter Elisabeth Westberg Bo Lennart Krantz Christina König Erik Thrane Clearing Nord Pool Clearing ASA was sold to NASDAQ OMX Group, Inc in October The total volume of Nordic and international power contracts cleared by the company in 2008, including volumes from Nord Pool ASA, came to TWh compared with TWh the year before. That represents an increase of seven per cent. A new member category called the general clearing member (GCM) was introduced by Nord Pool Clearing in July This represents a further extension of its offering to the major financial participants in the markets. Nord Pool Clearing ASA had 391 legal counterparties at 31 December, a net decline of nine from the beginning of the year. This contraction primarily reflects the winding up of the FishEx exchange, with the consequent cancellation of Nord Pool Clearing s contract for clearing fish derivatives. The turbulence in the financial markets has also meant that a few participants no longer desire an exposure to the power market. NASDAQ OMX The sale of ownership rights to the international power contracts, the carbon contracts, and the clearing and consultancy businesses to NASDAQ OMX Group, Inc was completed on 21 October This transaction laid the basis for an exciting development of markets and products in cooperation with one of the world s leading exchange trading groups. Implementation of the transfer was accomplished through a non-cash contribution by Nord Pool ASA to a newly established company called Nord Pool International AS, which has changed its name to NASDAQ OMX Commodities AS. The contribution in kind comprised shares in the Nord Pool Clearing ASA and Nord Pool Consulting AS subsidiaries as well as that part of Nord Pool ASA s business related to trading with international power contracts, trading with European Union emission allowances and global certified emission reductions, and the associated human resources and business assets. The board carried out detailed valuations of each part of the transaction, particularly in light of the developments in the financial markets at the time of the transaction. The board was very concerned to ensure that the valuation made at the time of the completion of the transaction reflected the actual asset value at the transfer date, regardless of whether the pricing of the transaction as a whole was carried out at a time when other financial conditions prevailed. Market surveillance Market surveillance is a common function for Nord Pool Spot AS and Nord Pool ASA, which continuously monitors trades and price formation in both physical and financial markets. This department investigates possible breaches of the market conduct rules and recommends possible sanctions to the board for decision. It also has an advisory function related to Nord Pool s own rules.

29 NORD POOL ASA / ANNUAL REPORT Mikael Odenberg Knut Rabbe Eva Granly Fredriksen Bente Hagem The market surveillance department has coordinated submissions on behalf of Nord Pool ASA and Nord Pool Spot AS concerning the assessment of the regulation of market manipulation and transparency at a European level. These submissions relate to the preparation of advice by the Committee of European Securities Regulators (CESR) and the European Regulators Group for Electricity and Gas (ERGEG) to the European Commission for the third energy package. On the instructions of the board, the department has further formalised its consideration of cases and tightened up its practice related to the provision of information and reporting by market participants. The board will continue its efforts to ensure a transparent market which inspires confidence. Financial position The profit for 2008 is a consequence of the agreement concluded with NASDAQ OMX Group, Inc. The company s ordinary operating profit from 1 January 2008 until the accounting transfer at 31 October 2008 is encompassed by this agreement. Ordinary operating profit does not include the gains made on the sale of the shares in EEX, the disbursement of shares in Nord Pool Spot AS and the NASDAQ OMX transaction, or interest earned on these receipts. The company s operating profit was influenced by the provisions made for severance pay agreed with the former chief executive, by the transfer of capitalised pension obligations to NASDAQ OMX Commodities AS and the reversal of provision for pension costs for the year. Subsequent to the transaction, the company purchases administrative and technical services from NASDAQ OMX Commodities AS. The scope of these services is substantial, not only in the administrative sphere but also in relation to the delivery of operating solutions for the trading systems. Part of the costs related to the trading systems are volume-dependent. Nevertheless, the result of the company depend on traded volumes. The board is paying attention to maintaining the quality of service deliveries at every stage and also to keeping the development of costs under control. The board regards the company s equity as satisfactory in relation to its total exposure and risk. Pursuant to section 3-3a of the Norwegian Accounting Act, the board confirms that the going concern assumption is realistic. The accounts presented have been prepared on that basis. The group s financial position is satisfactory. No events of significance for the 2008 annual accounts had occurred up to the date they were presented. The group at 31 December comprised the parent company, Nord Pool ASA, and the wholly owned Nord Pool AB subsidiary. Nord Pool AB s earnings are confined to intragroup sales to Nord Pool ASA. The group s head office is located at Lysaker outside Oslo, and it has permanent operational premises in Stockholm and Helsinki.

30 + NORD POOL ASA / ANNUAL REPORT Accounts for 2008 The consolidated profit and loss account includes items for the divested subsidiaries Nord Pool Clearing ASA and Nord Pool Consulting AS as well as carbon and international power contracts up to 31 October. As a result, the group s results for 2008 are not directly comparable with the figures for the year before. Consolidated operating revenue for 2008 totalled NOK million, including NOK million in gain on sales of operations. Operating profit came to NOK million. The consolidated profit of NOK million before tax includes NOK 328 million in gain on the sale of the shares in EEX, NOK million in gain from the NASDAQ OMX transaction and NOK 47 million from the distribution of the shares in Nord Pool Spot AS. The two sales transactions resulted in extraordinary levels of financial income, and financial income for 2008 therefore amounted to NOK 441 million. The board is satisfied with the results achieved in Allocation of net profit A dividend of NOK million is proposed from Nord Pool ASA s net profit for The parent company s liquidity is satisfactory. At 31 December 2008, its working capital totalled NOK million as against NOK 15 million a year earlier. The total balance sheet at 31 December was NOK million, compared with NOK 583 million at the end of Company equity at 31 December totalled NOK million as against NOK 405 million in Unrestricted equity in Nord Pool ASA at 31 December totalled NOK million, compared with NOK million the year before. Organisation and working environment The Nord Pool group had 18 employees at 31 December, including 16 in Norway, one in Sweden and one in Finland. Sixteen people were employed by Nord Pool ASA and two by Nord Pool AB. One employee was on leave of absence at 31 December. As a result of the NASDAQ OMX transaction, the number of employees in the group was reduced by 62 from the end of Leave of absence owing to illness in Nord Pool ASA during 2008 was 2.01 per cent, compared with 1.62 per cent the year before. No lost-time injuries or accidents were suffered during Nord Pool ASA s operations do not impact the external environment. Gender breakdown Six of the 18 employees were women and 12 were men, or 30 and 70 per cent respectively. Nord Pool s board of directors has eight members, including two employees of Nord Pool ASA. The gender distribution is four women POWER VOLUMES (TWh) CLEARING VOLUME (OTC) FINANCIAL MARKET ELSPOT MARKET