The Nordic Power Market

Transcription

1 The Nordic Power Market Electricity Power Exchange across National Borders Copyright Nord Pool ASA Oslo Stockholm Helsinki Fredericia 1 April, 2004 The Nordic Power Market

2 Content Introduction The Nordic Power System Transition toward a Unified Nordic Power Market Market Reform Roles and Responsibilities of Key Companies Point-of-Connection Grid Tariff Today s Nordic Power Market The Wholesale Market The Retail Market Market Information Nord Pool Markets and Clearing Service The Spot Market - Nord Pool Spot AS The Elbas Market for Finland and Sweden Futures and Forwards Options Contracts for Difference Clearing Services for Financial Electricity Contracts Market Participants The Real-Time Market Traded and Cleared Volumes and Prices...28 The Nordic Power Market

3 Introduction This report on The Nordic Power Market is intended for introductory-level training at organisations involved in electric power markets, and as a guide for the general public. The report is part of a four-part series prepared by the Corporate Communications department of Nord Pool the Nordic Power Exchange. These reports provide an overview of the Nordic power system, the Nordic power market s infrastructure, key concepts in the restructured Nordic power market, the spot and derivatives markets, types of electricity contracts, clearing services, trading activities, and members. The report series and contents are summarised below: The Nordic Power Market A short presentation of the power system Roles and responsibilities of key companies, such as grid owners, system operators, the Nordic Power Exchange and its participants Transition from national power markets to a unified Nordic power market Wholesale and retail power markets Trading activities and prices at Nord Pool s markets and in OTC and bilateral markets Trade at the Nordic Spot Market (Nord Pool Spot AS) Discussion of the spot market auction trade concept Daily trading activity a timeline from bidding to financial settlement of traded spot contracts Establishing area prices to handle grid capacity bottlenecks Settlement and pricing of imbalances Trade at Nord Pool s Financial Market Product description of financial electricity contracts (futures, forwards, and options) Electronic trading system and trade via the helpdesk Trading procedure Financial settlement Summary of risk management, collateral, and clearing routines Market information Clearing Services Offered by Nord Pool Clearing ASA Interface between trading and clearing Roles and responsibilities of settlement banks, Clearing Members, and Nord Pool Clearing Cash flow in clearing Determination of collateral Risk management and market monitoring Structure of agreements between parties involved Copies of this report are available from Nord Pool, or they can be downloaded from Nord Pool s website: The Nordic Power Market 3

4 1. The Nordic Power System Norway, Sweden, Finland, and Denmark have co-operated for many years to provide their collective populations of about 24 million with an efficient and reliable supply of electric power, and optimal use of total system resources. This chapter presents an overview of power production in the Nordic countries. Chapter 2 describes the evolution from national markets to a competitive multi-national power market, and describes in detail the key infrastructure of the deregulated market. The following table shows the generating capacity in the four countries that make up the Nordic Power Exchange area served by Nord Pool. Generation 2003 (TWh) Country Hydro Thermal Condensing/ CHP Nuclear Renewable Total Sweden Norway Finland Denmark Total Electric power production in Norway is almost 100% hydropower. Sweden and Finland use hydropower, nuclear, and fossil-fuel-powered generation plants. Over 90% of Denmark s electricity come from conventional thermal plants and combined heating and power (CHP) facilities. The table entry for Danish renewable power sources represents wind power. The Nordic Power Market 4

5 Power production capacity in the Nordic countries Production cost Gas turbine Hydro Condensing, Oil Condensing, Coal Thermal Hydropower (mean) Combined power and heat production Nuclear power TWh Annual Nordic Consumption As a rule, hydropower production is found in the northern parts of the Nordic Power Exchange area, whereas thermal power plants are located in the south. The year-to-year variation in reservoir influx can amount to ±20 TWh. This is a significant amount of energy, compared with Denmark s annual consumption of electricity, which is less than 40 TWh. This variation in inflow substantially affects hydropower production capacity; it is the main cause of seasonal variations in spot market prices. Generally, surpluses in regions of hydropower generation are transmitted to heavily populated southern regions. Adequate power grid transmission capacity must be available to carry this north-to-south flow. In periods of adequate reservoir levels, the comparatively low cost of hydropower production causes the market to prefer this energy source over thermal generation and the market experiences low spot prices. However, national and cross-border transmission systems will be used to capacity to level out price differences between regions. In 1996: Hydropower deficit = 23 TWh Hydro Thermal Year 2001: Hydropower surplus = 18 TWh Hydro Thermal The Nordic Power Market 5

6 As illustrated for 1996, however, thermally generated electricity replaced hydropower when reservoir levels were low. In such instances, there will be a net flow of power from south to north, and the market will experience relatively high prices. In 1996, hydropower generation was about 23 TWh below the long-term average. That year, the market experienced rather high prices, sometimes over NOK 300/MWh. The annual mean System Price was NOK 254/MWh. The deficit in hydropower generation was mainly compensated for by increased Nordic thermal power generation in The condition had little impact on the flow of power between the Nordic region and other European countries tied to the Nordic grid. In 2001, due to high reservoir influx and total energy content, hydropower generation was about 18 TWh above normal half of Denmark s total consumption of electricity that year. The 2003 annual mean spot price was NOK /MWh (EUR 36.69/MWh). As these examples indicate, the Nordic market decides how to handle power generation capacity under surplus and deficit conditions via price mechanisms. An understanding of the connection between electric power prices and conditions in the hydropower system is essential for market participants. The Nordic Power Market 6

7 2. Transition toward a Unified Nordic Power Market Key factors and principles that influenced the development of today s unified and largely deregulated Nordic power market were: Market concentration in the Nordic countries did not favour strictly national markets. The large, dominant national companies should be maintained to meet challenges in the future restructured European power market; they should not be split in smaller competitive units. A common Nordic market would reduce the dominance of these large companies. The Nordic Ministers of Energy supported formation of a pan-nordic competitive power market. All parties wished to continue the Nordic power industry co-operate through the inter-nordic organisation NORDEL Market Reform The main objectives of power market reform were: To obtain a better balance between power generation capacity and power demand. To increase efficiency within the power industry. To reduce regional differences in electricity prices to end-users. The pioneering energy act in Norway went into effect 1 January The energy act introduced competition as a tool for ensuring a more efficient and reliable energy supply. The act mandated separation of grid transmission activities from competitive activities, at least in accounting. The national power company was split in 1992 into the nation-wide grid company, Statnett, and a generating company, Statkraft. Responsibility for monitoring and operation of the power grid and its cross-border links was assigned to Statnett, which was appointed transmission system operator of Norway. The tariffs in the Nordic grid are point-of-connection tariffs. The tariffs for the main grid in Norway were changed in May The tariffs for the networks of lower voltages were published a little later. All networks were opened for third-party access. The first major step in Swedish market reform was taken in 1991, with the decision to separate transmission from generation. Svenska Kraftnät, established to manage the Swedish main transmission network, started operating in The networks were gradually opened to new The Nordic Power Market 7

8 participants, and legislation providing for competition became effective 1 January Svenska Kraftnät published point-of-connection tariffs in January In Finland the main grid was owned by two grid companies, IVS, the state owned part of the grid, and TVS the industry-owned grid. Finland s new energy legislation instituted market competition beginning 1 June 1995; a point-of-connection tariff was introduced in November of the same year. The Helsinki-based electricity exchange, EL-EX, was founded in In September 1997, Finland merged the grid operations of its two companies into a single national grid company, Fingrid. Development of the Deregulated Nordic Power Market Denmark s new energy legislation became effective in Denmark instituted stepwise opening of the market; but the transition period will be shorter than required by EU directives Currently, only the largest market participants (annual consumption or generation greater than 1 GWh) operate in a deregulated market. The deregulated sector represents 35% of the Danish power market. January 2003, the market was fully open to competition, as in the other Nordic countries. A grid company responsible for western Denmark s Jutland and Funen Eltra was established 1 January A year later, Elkraft System became the transmission system operator for Zealand. In today s power system, the five Nordic Transmission System Operators (TSOs) co-operate closely on operational and market issues. On 2 January 2002, Nord Pool Spot AS was established as a separate company. The Nordic Power Market 8

9 Through a demerger, the physical-delivery spot-market activities of Nord Pool ASA have been organized in a separate company, Nord Pool Spot AS. The demerger includes both marketplace operations and trade counterparty responsibility. The Norwegian Water Resources and Energy Administration (NVE) has granted Nord Pool Spot AS a marketplace license under Norway s energy act. The license covers organizing and operating a marketplace for trade in electric power contracts for physical delivery. Nord Pool Spot AS has also been licensed to facilitate power exchange with other countries by Norway s Ministry of Petroleum and Energy. Nord Pool Spot AS is owned by the five Nordic transmission system operators (TSOs) and Nord Pool. Statnett, Svenska Kraftnät, Fingrid, and Nord Pool ASA own 20% each of Nord Pool Spot. The two Danish TSOs Eltra og Elkraft System each own 10% of the company. The business activities of the new company is largely based on services delivered by Nord Pool ASA. Such services will include calculation and monitoring of security requirements, finance, administration, information, market surveillance, IT operations and system development. Services associated with calculation and monitoring of security requirements is transferred to Nord Pool Clearing AS Roles and Responsibilities of Key Companies An innovation of restructured power markets that follow the Nordic model is the way three key elements work together: the power exchange, TSOs, and market participants. For the power system and its marketplaces to operate effectively, these three elements, along with the market s major power generators and consumers and power industry regulators, must have clearly defined roles and responsibilities. The grid owners operate monopolies. As such, their performance must be monitored by appropriate regulatory bodies, which also specify grid owner responsibilities. A grid owner s principal responsibilities are: Build, operate, and maintain the grid within its defined area. Set grid transmission tariffs. Connect customers to the grid. Collect metered hourly values for all customers or calculate hourly values based on a load profile. Submit hourly values to TSOs and power generators in the grid owner s area. Purchase energy equal to the grid s energy losses. The main responsibilities of TSOs are to handle non-predictable imbalances and unexpected events during real-time operations that cannot be relieved by trade in the market: Within the framework of the industry s regulatory bodies and in close co-operation with generators, determine rules and requirements to secure supply and supply quality. The Nordic Power Market 9

10 Provide incentives to maintain short-term power reserves. Build, operate and maintain the main grid. Work out transmission tariffs for the main grid. Manage real-time system operations. Manage a real-time market a tool to balance generation with consumption. Co-operate with TSOs of interconnected grids. Calculate imbalances for all participants in the wholesale market. Manage financial settlement of imbalances. The core responsibilities of the Power Exchange are: Provide a price reference to the power market. Operate a spot market and an organised market for financial products, such as forward, futures, and option contracts. Act as a neutral and reliable power-contract counterparty to market participants. Use the spot market s price mechanisms to alleviate grid congestion (capacity bottlenecks) through optimal use of available capacity. Report all traded power delivery and take-off schedules to the TSO for the area. TSO companies play an important role in restructured power markets. Accordingly, no market concept or solution can be allowed to interfere with TSOs obligations to maintain the reliability and quality of the power supply system. Establishment of a power exchange may not be a necessity in a particular power market. However, a power exchange greatly facilitates trade, the timely dissemination of price-sensitive information, and greater market competition and liquidity. The Regulator determines guidelines and bylaws for regulation of monopolies within the power business. Generally this will cover grid issues such as: Guidelines and by-laws for cost recovery through network tariffs. Settlement of disputes as to network tariffs. The regulatory regime is not the same in all Nordic countries. The regulator may also be involved in issues such as: Guidelines, standards, and regulations for power system operation. Guidelines, standards, and regulations for metering and calculation of power imbalances. Monitoring grid owners costs and profit. Regulating authorities responsibility for making guidelines, standards, and regulations for the power system may necessarily include oversight of market participants conduct. The Nordic Power Market 10

11 Market Participants are legal entities that operate in the wholesale and/or retail markets. They may play multiple roles, but generally fall into the categories of generators, retailers, traders, or end-users. Generators normally operate both in the wholesale markets and power exchange markets, and contribute to levelling out any price differences between the markets. They also use the spot market to balance their generation schedules to delivery commitments close to time of operation. Retailers normally serve end-users based on their own generation or power purchased in wholesale markets. End-users have various power volume requirements. Large-scale end-users may operate in the wholesale market, while retailers serve small-scale end-users. Traders: All participants act as traders in some sense, in that they trade in both physical and financial contracts to profit on price differences and volatility Point-of-Connection Grid Tariff The ideal tariff system for trade conducted on OTC and bilateral markets, or via a powerexchange-operated spot market, should be characterised by the following principles: Market participants should know the transmission costs at their locations (grid connection points) without having to enter into negotiations with grid owners or system operators. Transmission costs to a market participant should not depend on the location of a trade counterpart. Point-of-connection tariffs apply throughout today s unified Nordic power system. Market participants trade as if there were a single, interconnected power transmission grid serving all of Norway, Sweden, Finland, and Denmark. Other issues in the current grid tariff structure are discussed below. Different rates apply to feeding power into the grid (delivery) and drawing power from the grid (power take-off). These charges also depend on geographic location within the transmission grid. Main Grid Regional Grid Cumulative tariff rates throughout the four countries in the Nordic Power Exchange area, participants pay the sum of the tariffs levied, from the high-voltage national network Local Grid The Nordic Power Market 11

12 down to lower-voltage local distribution grids. The key principles in cumulative tariff rates are: Main-grid tariffs must fairly reflect the main grid s total costs. Regional-grid tariffs must fairly reflect total regional-grid costs, plus usage of the main grid. Local-grid tariffs must fairly reflect local-grid costs, plus usage of the regional grid. Tariffs vary in complexity. Main-grid tariffs are complex because they include several cost components. Local-grid tariffs can be simple, including only an annual connection fee and a volume-dependent fee. Today no border tariffs are levied for Elspot trade within the Nordic region. Power transmission is regarded as a monopolistic activity, and subject to regulation. Three factors that regulators consider in approving transmission system tariffs are: Income regulation costs recovered through transmission tariffs must be approved by an appropriate regulatory body. Efficiency regulation the regulatory authority may mandate cost cutting and increased efficiency. Incentives to avoid outages due to grid failure. The Nordic Power Market 12

13 3. Today s Nordic Power Market The Nordic power market has successfully adapted to the new competitive environment, and serves as a model for restructuring other power markets. An important component of the restructured Nordic power market is the Nordic Power Exchange the world s first multinational power exchange. OTC Markets Large industry Generators Grid owners Trade & clearing representatives Retailers Bilateral Wholesale Market Financial Contracts Physical Contracts (tailor made or standardised) Nord Pool Group Spot Market Financial Market Clearing services Large industry Generators Grid owners Trade & clearing representatives Retailers Retail Market Small scale industry Service business Households 3.1. The Wholesale Market Throughout the development period that lead to a common Nordic power market, the five transmission system operators in the Nordic countries have co-operated to facilitate trade and promote competition. In the present power market, participants have a wide choice of products and marketplaces. The Nordic Power Market 13

14 The Nordic wholesale market is characterised by: A large number of market participants and sufficient market concentration to promote competition. The presence of a power exchange that provides the market with a transparent spot price and price forecasts via forwards and futures, within a time horizon of up to four years. A non-mandatory power exchange that competes with OTC and bilateral markets for trading financially settled and physical-delivery power contracts. A choice for market participants to trade standardised contracts at the power exchange, or to trade in the bilateral market, where contracts can be tailored to the needs of the parties involved. The market share of the Nordic Power Exchange s spot market is currently approximately 32 % of total annual Nordic consumption of electricity. Total annual trade in financial contracts is estimated at 3,800 TWh (about 10 times Nordic annual consumption). The freedom to choose counterparts and products, the presence of a liquid power exchange, and the co-operative attitude of transmission system operators in facilitating trade operations, have all contributed to the high trade activity in the Nordic power market The Retail Market In the retail market, large-scale end-users (in industrial, commercial, and service businesses) normally negotiate and enter into contracts with power retailers. The Nordic power market is now a competitive one, open to all categories of electricity buyers. Denmark has opened its market in stages; the opening was completed by 2003 and is in accordance with EU directives. Small-scale end-users, such as homeowners and apartment renters can choose among retail suppliers and contract types. Examples of common contract types are: Standard contracts, where the price may be changed at short notice. One-year or two-year fixed price contracts. Spot contracts, based on the spot price plus an uplift, and without any price cap. Price cap contracts, based on the spot price, plus an uplift, but subject to a price cap. All power retailers who serve small-scale end-users are committed to making prices available to the public. Accordingly, retailers prices are listed on Internet. The Nordic Power Market 14

15 3.3. Market Information In co-operation with system operators, generators, and power industry associations, the Nordic Power Exchange gathers and distributes general and price-sensitive market information. The distribution of information is based on the following principles: The information comprises data and events that can influence prices in the power market. The information shall be aggregated to a level that does not disclose information specific to any market participant, nor any participant s positions or exposure in the markets. The information is distributed simultaneously to all participants. The greatest volume of information distributed by Nord Pool consists of daily reports following the close of trading on the Nordic Power Exchange, and weekly reports of relevant data gathered from the power industry. Nord Pool also provides timely releases of market-critical information, as events warrant. The Nordic Power Exchange views an increase in market transparency as vital. Flagging that is, notifying the general market, via the Nordic Power Exchange, of all bilateral-market (OTC) trade in standardized financial power contracts within imposed deadlines is essential. The reporting procedure of non-exchange trades in listed products cleared with Nord Pool Clearing has been in operation since 18 March The reported non-exchangecontracts are continuously published at Nord Pool s homepage giving information of the contract specifications including the time of the individual trade. Market surveillance is responsible for monitoring that the registration and confirmation of the individual contracts are carried out to fulfil the reporting requirements within a maximum time of 15 minutes after the trading time. Messages related to the information duty in the standard agreements for both the financial and physical markets are reported by participants to Nord Pool via an internet based application. Then the exchange quickly distributes such messages simultaneously to the whole market as so called Urgent Market Messages (UMM) via primarily the homepage. The basic premise for the duty to provide information is that all parties (direct members/participants & clearing clients/ customers) shall disclose all matters related to their business in the Markets, which is likely to have a substantial impact on prices. As a minimum requirement parties shall report plans for maintenance or limitations concerning more than 200 MW for the next 6-weeks and for units with more than 400 MW for the current year and three years forward. In addition any outages or errors of more than 200 MW shall be reported as soon as possible and at the latest within 60 minutes. Details about cause and expected time for restart etc. shall be given within 4 hours. The whole info clause refers to power plants, grid lines/transmission and consumption units. Daily reporting of trade at Nord Pool: Hourly spot prices and volumes of contracts to be delivered the next day. Price of day s last trade, best purchase bid, best sale offer, volumes, and open interests of products on the financial market. The Nordic Power Market 15

16 Other relevant daily or weekly information from the power business: Total generation and consumption in the Nordic countries. Transmission capacity within and out of the region Reservoir energy content throughout the Nordic hydropower system. Climatic data from key locations across the Nordic market area. Maintenance shutdown schedules for major transmission facilities and generation plants. Nord Pool s website: provides extensive market information to the general public at no charge. Nord Pool participants and subscription holders can download additional market data from a variety of Nord Pool s restricted-access files (FTP-server) via the Internet. Reports compiled by Nord Pool on Nordic Power Exchange trading are published in daily newspapers and magazines alongside reports on other commodity markets. The Nordic Power Market 16

17 4. Nord Pool Markets and Clearing Service Traded volumes have increased considerably since Nord Pool s spot and derivatives markets opened in The strong growth in trading activity results both from the market area s expansion from a national, Norwegian market to a common Nordic market, and from an increasingly mature power market. Nord Pool has been a strong initiator in this process. Nord Pool operates the following marketplaces and market services: A spot market for physical contracts (Nord Pool Spot AS) A financial derivatives market futures, forward, and option contracts Clearing services for financial electricity contracts Nord Pool Clearing ASA Compared to mean annual power generation in the Nordic area, Nordic Power Exchange trading activity is high. TWh Nord Pool's trading and clearing volumes Clearing services of non-exchange contracts Derivatives Spot Mean Annual Power Generation The Nordic Power Market 17

18 Nord Pool clears a significant proportion of Nordic OTC and bilateral market financial power contracts; these markets are not covered in this overview. However, it is estimated that the total trade in financial contracts is about 3,800 TWh. This volume corresponds to about 10 times the mean annual Nordic consumption of electricity. A total of 3,100 TWh was traded and/or cleared at Nord Pool and Nord Pool Clearing in In March 2002, Norway's Ministry of Finance granted Nord Pool ASA a license to operate as a fully regulated exchange. Nord Pool Spot AS (NPS) was granted a concession as a market place for electricity with physical delivery from its start at 2 January From July 1 st 2002 NPS ownership was extended to also the Finnish and Danish TSOs, eg. Fingrid, Eltra and Elkraft System. Since then each nation s TSO(s) as well as Nord Pool ASA owns 20% each of NPS. Nord Pool's wholly owned subsidiary, Nordic Electricity Clearing House ASA (NECH), received its license to operate as a clearinghouse in March of As of 6 January 2003 Nordic Electricity Clearing House ASA (NECH) has been renamed Nord Pool Clearing ASA. Market Surveillance The regulatory authority involved is Norway s Banking, insurance and Securities Commission (Kredittilsynet). As part of the transition to operating as a fully regulated exchange, Nord Pool decided to establish a separate market surveillance department. The main objective for market surveillance at Nord Pool is to monitor the trading activities at the spot and derivatives markets at Nord Pool and ensure that the operations are in accordance with the Exchange Act 2000, other laws and public regulations, the rulebook for physical market at Nord Pool Spot AS and the rulebook for financial electricity market at Nord Pool ASA. This chapter presents brief descriptions of Nord Pool s spot market, derivatives markets, and clearing service for OTC/bilaterally traded contracts. The real-time market for power balance adjustments, operated by Nordic Transmission System Operators (TSOs), is also presented. The real-time market, which is restricted to high-volume market participants, is included to make the description of the organised markets more complete and to provide a deeper understanding of the daily operations of the deregulated power market The Spot Market Nord Pool Spot AS (NPS) Nordic market participants trade power contracts for next-day physical delivery at the Elspot market; hence the market is referred to as a day-ahead market. Trading is based on an auction trade system. The spot concept is based on bids for purchase and sale of power contracts of one-hour duration that cover all 24 hours of the next day. Three bidding types are available, namely hourly bids, block bids, and flexible hourly bids. As soon as the noon deadline for participants to submit bids has passed, all buy and sell orders are gathered into two curves for each power-delivery hour: an aggregate demand curve and an The Nordic Power Market 18

19 aggregate supply curve. The spot price for each hour is determined by the intersection of the aggregate supply and demand curves. This spot price is also called the System Price. The spot market is also the primary Nordic marketplace for handling potential grid congestion Price (called grid bottlenecks) that is, insufficient transmission capacity in a sector of the grid. In other words, Elspot is a market place where energy and capacity is combined in to one simultaneous auction. Maximum bid price Fixed-price demand Demand (purchase) Supply (sale) Within the Norwegian power system and at the border interconnectors between Nordic countries, the spot market price mechanism is used to alleviate grid congestion by establishing different area prices. System Price Fixed-price supply Turnover MW The Nordic market is partitioned into separate bidding areas that can become separate price areas if the contractual flow between bidding areas exceeds the capacity allocated by transmission system operators (TSOs) for spot contracts. If there are no such capacity constraints, the spot system price is also the spot price throughout the entire Nordic Power Exchange Area. If contractual flow at System Price exceeds a grid capacity limit(s), two or more area prices are calculated for the affected spot market delivery hour. Once spot market prices and volumes are determined, it can be said that the Nordic Market is in planned balance according to predicted generation, loads and contractual flows. Within Sweden, Finland, and Denmark, grid congestion is managed by counter-trade, based on bids from generators and possibly large consumers. Grid congestion that occurs in real time is managed by Nordic transmission system operators, by calling on bids in the real-time market. Spot-market financial settlement is based on the net contractual volume of each participant, which up until now has been invoiced weekly. During the spring of 2004 a daily automated invoicing and settlement system will be put in place. The value of contracts traded in the settlement period represents the settlement risk for of NPS. To cover this risk, NP S requires a security deposit from each spot market participant. This deposit must based on the weekly invoicing cycle at least equal the value of the participant s net spot-market purchases during the preceding three week period (for Norway the period is four weeks due to that security calculations and settlement for spot market trades are combined with volumes in the real-time regulating market). Once the new daily invoicing and settlement system is in place the security deposit will at least have to be the participant s net purchases the last 7 days (including VAT). The Nordic Power Market 19

20 4.2. The Elbas Market for Finland and Sweden The Elbas market provides continuous power trading 24 hours a day, covering individual hours, up to one hour prior to delivery. The Elbas market is based on hourly contracts, and it supplements the Elspot and the national Nordic regulating power markets. The time span between the day's Elspot price-fixing round and the actual delivery hour of the concluded contracts can be quite long (36 hours at the most). As consumption and sales situations change, a market player may find a need for trading during these 36 hours. To meet this need, Nord Pool Finland Oy (formerly EL-EX Electricity Exchange Ltd.) opened the Elbas market on 1 March Today the member countries of the Elbas-market are Finland and Sweden. Participants can trade on both markets within the limits of cross-border transmission capacity. Expansion is under consideration to include further coverage of Nordic countries in the Elbas market area. The characteristics of Elbas products are relatively simple: For each day of the present trading day, individual, one-hour contracts for power are quoted. It is possible to trade contracts for at least 8 and at most 32 hours. Trading for the hours of the following day begins after the publication of the Elspot-results. The trading currency is euro Futures and Forwards The financial market for price hedging and risk management consists of markets for futures, forwards, options and contracts for differences. By trading power derivatives at the Nordic Power Exchange, Exchange Members can hedge purchases and sales of power with a time horizon of up to four years. Futures and forward contracts are traded continuously, much as in other commodity markets. The Nordic Power Market 20

21 Market participants authorised to trade are called exchange members. Exchange Membership is only granted to parties accepted by Nord Pool Clearing as clearing members. Nord Pool Clearing also has clearing clients for whom trade is conducted by an exchange member / clearing member approved to act as an client representative. Nord Pool is phasing in the euro as a trading and clearing currency. The transition from Norwegian kroner (NOK) to euro will be a gradual process. The first euro-contract on Nord Pool's financial market was launched on 2 January All new contracts with delivery periods starting on or after 1 January 2006 will be listed in euros. Trading in the financial market at the Nordic Power Exchange is done using an electronic trading system PowerCLICK. Most Exchange Members are connected to the trading system, and do their trading online. PowerCLICK users can connect to the Exchange using a leased line or a Virtual Private Network (VPN) internet connection. Using VPN encryption technology, a secure PowerCLICK link to the exchange can be established via the Internet. Leased line connection has been, and still is, the primary connection to the Exchange. PowerCLICK accessed over Internet is offered to all Exchange Members, and can either be used as the main connection or as a backup connection towards Nord Pool. Others communicate their bids by telephone to Nord Pool and trade via the Exchange s Financial Desk. All Exchange Members receive real-time market information throughout the daily trading period, either through Nord Pool s electronic trading system and/or real-time information distributors, as described in chapter 3.3. Financial electricity contracts traded at the Nordic Power Exchange are standardised products that are financially settled. There is no physical delivery of electric power. Settlement is conducted between Nord Pool Clearing s service and individual members. 1st year 2nd year 3rd year Days Weeks Months Seasons/Quarters Futures Forwards The Nordic Power Market 21

22 Futures contracts consist of standardised day and week contracts. Weeks are listed in a continuous cycle of 8 weeks. Forward contracts consist of month, quarter, season and year contracts. Months are listed in a continuous cycle of 6 months. Seasons (Winter 1, Summer and Winter 2) are being replaced by quarters (which follow calendar quarters). Years cascade into either seasons or quarters, and quarters cascade into months. The first quarters were listed in 2004 for settlement in the year All contracts are standardised in conformity with most Nordic OTC and bilateral market trade. Nord Pool Clearing clears all contracts traded on the Nordic Power Exchange and a substantial proportion of financial contracts traded in the Nordic OTC and bilateral power markets Options Options were introduced as tradable products at the Nordic Power Exchange in late They were launched to satisfy market demand, and represent an important element in the expanded product line of the Nordic Power Exchange. Options, combined with futures or forward positions, offer valuable strategies for managing power market risk. Options that can be traded and cleared at Nord Pool are the European-style-exercise power options. The Nordic Power Exchange s power options (Eloptions) are standardized products with clearly defined specifications and terms. The main features of options contracts traded at Nord Pool are: Options were introduced as tradable products at the Nordic Power Exchange in late They were launched to satisfy market demand, and represent an important element in the expanded product line of the Nordic Power Exchange. Options, combined with futures or forward positions, offer valuable strategies for managing power market risk. Options that can be traded and cleared at Nord Pool are the European-style power options. These are standardized products with clearly defined specifications and terms. The main features of options contracts traded at Nord Pool are: The options use standard forwards as the underlying contract. The option contracts can only be exercised at the exercise date, which is stated in the product specifications. (This is the meaning of a European-style option.) The option premium is quoted in Norwegian kroner (NOK) per MWh; premiums are payable the following clearing day. The Nordic Power Market 22

23 The energy size of an option contract is the number of MW multiplied by the number of hours in the underlying forward contract. Upon listing of a new option, initial exercise (strike) prices are set by Nord Pool, according to the price of the underlying instrument. Initially 5 strike prices are listed New strike prices are automatically generated to reflect price movements of the underlying forward instrument. Strike price intervals depend on the price of the underlying forward instrument. Options can be traded directly via Nord Pool s electronic trading system or via Nord Pool s Financial Desk. All combination strategies are conducted via the Desk Contracts for Difference Market participants that use financial market derivatives contracts to hedge spot market prices, remain exposed to the risk that the System Price will differ from the actual area price of their spot purchases or sales. To overcome this potential price differential risk, a new forward contract product Contracts for Difference (CfD) was introduced for trading on the Nordic Power Exchange in November The System Price is the reference price for forward and futures contracts traded at the Nordic Power Exchange, as well as non-exchange contracts. Nevertheless, the actual price paid for spot market physical procurement is determined by actual area prices. The spot System Price is identical to individual spot area prices only when there is no transmission grid congestion (capacity bottlenecks) between spot bidding areas. Different spot area prices are established so that price mechanisms relieve grid bottlenecks. Contracts for Difference allow market participants to create a perfect hedge of a physical contract, even when the market is split into price areas, by following a three-step process: The Nordic Power Market 23

24 Hedge the System price with trade in forward contracts for the required volume. Hedge any price differential between a particular area price and System Price by trade in Contracts for Difference for the same period and volume. Accomplish physical procurement of the contract volume in the spot market. Nord Pool Group Spot Derivatives Industry Grid owners Generators Industry Retailers Generators Representatives Retailers Representatives Market Makers Clearing Client End-users 4.6. Clearing Services for Financial Electricity Contracts In addition to clearing all contracts traded on the Nordic Power Exchange, Nord Pool Clearing ASA clears financially settled electricity contracts traded on Nordic OTC and bilateral markets. These markets have a high level of activity, and Nord Pool Clearing currently clears a substantial proportion of the standardised financial contracts traded on them. Once a non-exchange-traded contract is registered for clearing, Nord Pool Clearing assumes counterparty responsibility for clearing and settling it. To be accepted for clearing, a bilateralmarket financial electricity contract must conform to the standardised products traded via Nord Pool. Nord Pool Clearing s OTC/bilateral-market clearing service has proved itself to market participants; volume has grown considerably since the service was implemented in The main incentives for moving non-exchange-traded contracts to Nord Pool Clearing for clearing are: Market participants who would otherwise have several contractual counterparties, have Nord Pool as sole counterparty. The Nordic Power Market 24

25 Nord Pool nets (offsets) the clearing member s portfolio of positions for the purposes of calculating margin calls. This usually lowers the amount of collateral that must be posted. Nord Pool Clearing reduces clearing members counterparty risk by assuming that risk vis-àvis the actual parties to the non-exchange trade. The clearing system, Clearing Desk Application (CDA) automates registration and clearing of power contracts traded in bilateral (OTC) market. The CDA is an internet based application available for brokers, clearing members and client representatives. It is used to register, approve and allocate exchange trades and non-exchange trades Market Participants More than 350 participants from Norway, Sweden, Finland, and Denmark, as well as some from other European countries and the USA, trade through Nord Pool. Participants are power producers, retailers, grid owners, brokers, market makers, traders, and industrial companies. All Exchange Members trade on equal terms on Nord Pool s financial market. Nord Pool Clearing has three member categories: Clearing Members Clearing Representatives Clearing Clients Clearing Members has been approved by Nord Pool Clearing to have its contracts subject to Clearing with Nord Pool Clearing. Client Representatives serve Clearing Clients and manage operational trade activities on behalf of Clearing Clients. Nord Pool Clearing Trade Posting security Client Representative Clearing Settlement Posting security Client Representatives were introduced Clearing Client to facilitate Nordic Power Exchange trade for small-scale participants, who Clearing Client would not invest in the equipment and staff needed to operate a complete Clearing Client trading unit. Settlement and posting collateral are direct obligations between Nord Pool Clearing and each Clearing Client. However, monitoring of Clearing Clients security is also a responsibility of Client Representatives. The Nordic Power Market 25

26 All participants trading directly in the financial market are Exchange Members. Exchange Members have entered into an Exchange Membership Agreement with Nord Pool for Principal trading and/or Client Trading, and trade on their own account and at their own risk. In order to carry out Exchange Trading at Nord Pool, an Exchange Member must be a Clearing Member meeting the requirements for Clearing with Nord Pool Clearing. Market makers are Exchange Members who by a legal agreement with the power exchange are committed to quote binding buying and selling Orders in Listed Product Series agreed upon. The main types of participants in the spot market are Direct participants, Trade and Clearing Representatives and Clearing Customers: A direct participant trades on behalf of himself. A trade and clearing representative trades on behalf of his customers, who are referred to as clearing customers. Trade and clearing representatives thus serve customers who do not want to invest in equipment and skilled human resources to manage the daily trade activities and risk management. Each participant signs a participant agreement with Nord Pool obligating him to observe Nord Pool s rules and regulations. Participants must settle their account obligations directly with Nord Pool, and post security as required. The Nordic Power Market 26

27 5. The Real-Time Market The real-time market has two main objectives: To serve as a tool for system operators to balance generation to load at any time during real-time operations. To provide a price for participants power imbalances. Bids in priority order for each hour Spot price Downward regulation Upward regulation Bids in the real-time market are submitted to a transmission system operator (TSO) after the spot market has closed. Bids may be posted or changed close to the operational time, in accordance with agreed rules. Real-time market bids are for upward regulation (increased generation or reduced consumption) and downward regulation (decreased generation or increased consumption). Both demand-side and supply-side bids are posted, stating prices and volumes. Real-time markets are organised by TSOs; market participants must be able to commit significant power volumes on short notice. TSOs list bids for each hour in priority order, according to price (as shown in the first illustration). TSOs use the priority-ordered lists for each hour to balance the power system, as needed. To resolve a grid power deficit, upward regulation is applied: the real-time market price is set at the highest price of the units called upon from the priority listing. Similarly, in a grid power surplus situation, downward regulation is applied: the lowest price of the units called upon from the list sets the real-time price. Nordic TSOs Real-Time Markets Generators Major Consumers All Participants Imbalances The Nordic Power Market 27

28 The specific rules for determining the hourly price of power imbalances, based on the real-time market price, differs among the Nordic TSOs. Nevertheless, an imbalance always carries the risk of a financial loss, compared to balanced trade. 6. Traded and Cleared Volumes and Prices The charts in this chapter show the development of trade at the Nordic Power Exchange since it opened in 1993, and the growth of Nord Pool s clearing service for electricity contracts. Extension of the Nordic Power Exchange s market area, which began in 1996 and continued until all four neighbouring Nordic countries were included in 2000, played a large role in driving growth. Prior to 1996, volumes represent only the Norwegian market. On 1 January 1996, the Swedish and the Norwegian markets merged to form a common power market. Finland joined in 1998, followed by western Denmark in 1999, and eastern Denmark in NOK/MWh consumption water reservoirs Spotprice (MCP) GWh/10 % N + S N + S + SF N + S + SF + DK1 N + S + SF + DK1 + DK2 = The Nordic The chart above shows spot prices in NOK/MWh, reservoir energy content in percent, and total electric power consumption in GWh from 1 January 1996 and thereafter. The market areas included in the Nordic Power Exchange areas are noted at the bottom of the chart. The Nordic Power Market 28

29 Hydropower plays an important role in the Nordic power market. Below-normal influx to reservoirs in 1996 is reflected in higher System Price figures for that year. Greater-than-normal reservoir influx in 1997 and subsequent years resulted in lower spot power prices. The Spot Market TWh The doubling of Nord Pool s spot market volume in 1996 is largely due to extension of the liberalised power market in Sweden. The spot market s traded volume in 2003 was 119 TWh. Total annual Nordic consumption is about 385 TWh. Accordingly, some 31% of overall Nordic consumption was traded via the the Elspot Market in 2003, and in comparison the share of overall consumption in 2001 was slightly above 28%. The marketplace for financially settled electricity contracts at the Nordic Power Exchange trades futures, forward, and option contracts. The volume of financial contracts traded in 2003 was 545 TWh. The Financial Market TWh The financial market traded volumes have increased substantially in 200 previous years, and then fell in largely due to adverse effects from high prices and volatility in the winter of 2002/2003 The market share of all cleared contracts is about 31% The Nordic Power Market 29