nord pool - the nordic power market

The Nordic Power Market


Electricity Power Exchange across National Borders

Copyright Nord Pool ASA Oslo – Stockholm – Helsinki – Fredericia

1 April, 2004


Content

Introduction .................................................................................................................3

1. The Nordic Power System .......................................................................................4

2. Transition toward a Unified Nordic Power Market...................................................7

2.1. Market Reform ..................................................................................................................................... 7

2.2. Roles and Responsibilities of Key Companies ............................................................................................ 9

2.3. Point-of-Connection Grid Tariff ..............................................................................................................11

3. Today’s Nordic Power Market ...............................................................................13

3.1. The Wholesale Market ..........................................................................................................................13

3.2. The Retail Market ................................................................................................................................14

3.3. Market Information..............................................................................................................................15

4. Nord Pool – Markets and Clearing Service.............................................................17

4.1. The Spot Market - Nord Pool Spot AS......................................................................................................18

4.2. The Elbas Market for Finland and Sweden................................................................................................19

4.3. Futures and Forwards...........................................................................................................................20

4.4. Options..............................................................................................................................................22

4.5. Contracts for Difference........................................................................................................................23

4.6. Clearing Services for Financial Electricity Contracts...................................................................................24

4.7. Market Participants ..............................................................................................................................25

5. The Real-Time Market ...........................................................................................27

6. 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: http://www.nordpool.com


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 53 13.5 65.5 0.5 132.5

Norway 106 1 107

Finland 9.5 48.5 22 80

Denmark 38 5.5 43.5

Total 168.5 100 87.5 6 363

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.


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

Thermal

Hydro

Thermal

Year 2001: Hydropower surplus = 18 TWh

Hydro

Combined power and heat production

Gas turbine

100 200 400 TWh

Condensing, Coal

Hydropower (mean) Nuclear power

300

Annual Nordic Consumption

Production cost

Power production capacity in the Nordic countries

Condensing, OilHydro

Thermal


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 1996. 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 290.61/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.


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.

2.1. 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 1991. 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 1992. 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 1992. The networks were gradually opened to new


participants, and legislation providing for competition became effective 1 January 1996.

Svenska Kraftnät published point-of-connection tariffs in January 1995.

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 1996.

In September 1997, Finland

merged the grid operations

of its two companies into a

single national grid

company, Fingrid.

Denmark’s new energy

legislation became effective

in 1996. 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 1998. 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.

1991 1996

1998 1999

Development of the Deregulated Nordic Power Market


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.

2.2. 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.


• 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.


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.

2.3. Point-of-Connection Grid Tariff

The ideal tariff system for trade conducted on OTC and bilateral markets, or via a power-

exchange-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.

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

Main Grid

Regional Grid

Local Grid


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.


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.

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.

Nord Pool Group

• Spot Market

• Financial Market • Clearing services

Retail Market

Small scale industry Service business

Households

OTC Markets

Bilateral Wholesale Market • Financial Contracts • Physical Contracts (tailor made or standardised)

Large industry

Generators Grid owners

Trade & clearingrepresentatives

Retailers

Large industry

Generators Grid owners

Trade & clearingrepresentatives

Retailers


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.

3.2. 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.


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 2002. 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.


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: www.nordpool.com 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.


4. Nord Pool Markets and Clearing Service

Traded volumes have increased considerably since Nord Pool’s spot and derivatives markets

opened in 1993. 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.

Nord Pool's trading and clearing volumes

0200400600800

1000120014001600180020002200240026002800300032003400

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

TWh

Clearing services of non-exchange contracts

Derivatives

Spot

Mean Annual Power Generation


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 2002.

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 2002. From July 1st 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 2002. 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.

4.1. 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


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

(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.

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.

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).

Price

Maximum bidprice

System Price

Fixed-price supply

Turnover

MW

Supply (sale)

Demand (purchase)

Fixed-price demand


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 1999. 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.

4.3. 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.


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 2003. 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


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

2006. 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.

4.4. Options

Options were introduced as tradable products at the Nordic Power Exchange in late 1999. 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 1999. 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 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.

4.5. 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 2000.

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:


Nord Pool Group

Spot Derivatives

Generators

Retailers Representatives

Industry Grid owners

Representatives

Industry Retailers

Market Makers

Clearing Client

End-users

Generators

• 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.

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 bilateral-

market 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 1997. 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.


• 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-à-

vis 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.

4.7. 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.

Client Representatives were introduced

to facilitate Nordic Power Exchange

trade for small-scale participants, who

would not invest in the equipment and

staff needed to operate a complete

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.

Nord Pool Clearing

Trade Posting security

Client Representative

Clearing Client

Clearing Client

Clearing Client

Clearing Settlement

Posting security


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.


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 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

Bids in priority order for each hour

Upward regulation

Downward regulation

Spot price


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 2000.

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.

0

100

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900

1 000

01.0

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0

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160NOK/MWh

GWh/10%

N + S N + S + SF N + S + SF + DK1 N + S + SF + DK1 + DK2 = The Nordic

consumptionwater reservoirsSpotprice (MCP)

0

100

200

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1 000

01.0

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0

20

40

60

80

100

120

140

160NOK/MWh

GWh/10%

N + S N + S + SF N + S + SF + DK1 N + S + SF + DK1 + DK2 = The Nordic

consumptionwater reservoirsSpotprice (MCP)


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 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 traded volumes

have increased substantially in

previous years, and then fell in 2003

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 Spot Market

0

20

40

60

80

100

120

140

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

TWh

The Financial Market

0

200

400

600

800

1000

1200

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

TWh


In 2003, a traded volume of

1,219 TWh from the OTC/bilateral

market was reported to Nord Pool

Clearing for clearing. The volume

cleared from the bilateral financial

market refers to bilateral trade in

standardized products; i.e. equal to

trade listed on the Exchange.

Roughly 80% of financial electricity

contracts traded in Nordic OTC and

bilateral markets are cleared via Nord

Pool Clearing. The remaining 20% are

settled directly between the two contractual parties. Nord Pool began clearing OTC/bilateral-

market contracts in 1997.

Clearing of bilateral contracts

0

500

1000

1500

2000

2500

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

TWh

nord pool - the nordic power market

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