Nord Pool
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| Nord Pool group | |
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| Type | Physical and financial commodity exchange |
| Location | Oslo, Norway |
| Owner | Statnett (20%) Svenska Kraftnät (20%) Fingrid (20%) Energinet.dk (20%) Nord Pool ASA (20%) |
| Key people | Jan Olof Magnusson (Chairman) |
| Currency | NOK, SEK, DAK, EUR |
| Commodities | Electric power |
| Website | www.nordpool.com and www.nordpoolspot.com |
Nord Pool (the Nordic Power Exchange) is the single power market for Norway, Denmark, Sweden and Finland. It was the world's first multinational exchange for trading electric power.[1] As of 2008, Nord Pool is the largest power derivatives exchange and the second largest exchange in European Union emission allowances (EUAs) and global certified emission reductions (CERs) trading.[2]
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[edit] History
In 1991 the Norwegian parliament decides to deregulate the market for power trading. In 1993 Statnett Marked AS (now Nord Pool ASA) was established as an independent company. Nord Pool was established in 1996, and was then owned by the two national grid companies, Statnett in Norway (50%) and Svenska Kraftnät in Sweden (50%).
On 21 December 2007, Nord Pool agreed to sell its two subsidiaries—Nord Pool Clearing, which deals with clearing transactions, and Nord Pool Consulting—to the Nordic exchange operator OMX.[3]
[edit] Organisation
The Nord Pool group comprises Nord Pool ASA and Nord Pool Spot AS. Nord Pool ASA comprises the wholly owned subsidiaries, Nord Pool Clearing ASA and Nord Pool Consulting AS. The national grid companies Svenska Kraftnät and Statnett holds 50 per cent each in Nord Pool ASA.[1]
Nord Pool Spot AS and its subsidiaries Nord Pool Finland Oy and Nord Pool Spot AB are owned by the national grid companies Fingrid, Energinet, Statnett, Svenska Kraftnät and Nord Pool ASA by twenty per cent each.[1] The Nord Pool group has offices in Lysaker (Oslo), Fredericia, Stockholm, Helsinki, Berlin and Amsterdam.
[edit] Members
The Nord Pool group has more than 420 members in total, including exchange members, clearing clients, members and representatives in 20 countries. The customer base for Nord Pool ASA now includes 400 members. Nord Pool Spot AS has a customer base of 319 in Elspot and 55 in Elbas.
The membership includes energy producers, energyintensive industries, large consumers, distributors, funds, investment companies, banks, brokers, utility companies and financial institutions.
[edit] Services
[edit] The physical market - Nord Pool Spot AS
The physical market is the basis for all electricity trading in the Nordic market. The spot price set here forms the basis for the financial market. Nord Pool Spot organises the market place which comprises the Elspot and Elbas products. Elspot is the common Nordic market for trading physical electricity contracts with next-day supply. Elbas is a physical balance adjustment market for Sweden, Finland and Denmark. Both the Elspot and Elbas market also include the KONTEK area in Germany.
[edit] The financial market – Nord Pool ASA
Nord Pool ASA provides a market place where the exchange members can trade derivative contracts in the financial market. Financial electricity contracts are used to guarantee prices and manage risk when trading power. Nord Pool offers contracts of up to six years' duration, with contracts for days, weeks, months, quarters and years. Nord Pool also trades EUAs).
[edit] The Nordic power market
The benefit of the Nordic power market derives from the opportunity it provides for Finland, Sweden, Denmark and Norway to assist each other when additional electricity supplies are required. If one country is unable to satisfy demand from its own output, it can import the necessary power from a neighbour. The common Nordic market primarily involves electricity generation from such resources as water, nuclear energy and coal. Since the generating modes differ and are distributed differently in the various countries, the need for additional power will vary from country to country and at different times. This makes it possible to share Nordic electricity resources. A common Nordic resource pool for electricity helps to optimise the use of available power and reduce local deficits. That allows the various countries to reap socio-economic gains. Electricity prices would be higher if all the Nordic nations had to build enough generating capacity to be individually self- supporting.
[edit] Features of the physical market
The physical market price on Nord Pool is set in the same way as on other commodity exchanges – through a market pricing. The big difference compared with other markets is that electricity is a commodity which must be generated and consumed simultaneously. This makes very special demands on output planning. The physical market’s primary function is to establish a balance between supply of and demand for electricity on the following day. This job is extremely important because power shortages carry very substantial socio-economic costs. A well-functioning power market ensures that electricity gets generated wherever the cost of generation is lowest at any time of the day. Increases in demand will be balanced against more expensive modes of generation. That also gives the market an indication of what it would take to establish new generating capacity.
In socio-economic terms, this provides a clear indication of the cost society would have to bear to incorporate new output in the system. Where commercial considerations are concerned, generators will receive a good indication of where the break-even point lies for developing new generating capacity. Nord Pool’s physical market ensures that power supply and demand are balanced right up to one hour before the time of consumption.
[edit] Features of the financial market
Risks associated with changes in physical market prices can be managed through the financial (forward) market for electricity. A buyer or seller of power can reduce the risk of future price changes by selling or buying the cost of future electricity to/from other players with the ability and willingness to accept this price risk. Players can thereby change their risk exposure as required, and are able to hedge the price of future output or consumption. Using the marketplace allows players to secure the greatest possible transparency around pricing, and reduce the risk of incorrect price formation in the future. The alternative is to do this bilaterally with limited information about the overall position.
[edit] Transparency on Nord Pool
As long as Nord Pool performs the functions described above, generators, distributors and consumers in the Nordic region will derive great benefits from the market. But that depends on the trust held by players and society in general in price formation by the market – in other words, that this process is open and transparent. It is important to distinguish here between openness in trades and over the names of players. All available information about offers/bids, volumes and prices is openly published from trading on Nord Pool. But the names of members making offers/bids remain confidential because, as in most other commodity markets, players operate under full anonymity in order to keep their positions confidential. However, Nord Pool’s market surveillance department is always fully informed about which players are involved in any deal, so that investigations can be pursued and sanctions applied when necessary.
[edit] What influences Nordic power prices
The Nordic system price is set in Nord Pool’s physical market for the following day, hour by hour. This is based on registered offers/bids from generators and distributors respectively. The price is determined by Nord Pool’s trading system, which matches offers/bids with Nordic transmission capacity. The electricity price is basically the same across the whole region, but with certain regional differences which reflect transmission bottlenecks. Prices paid by consumers can vary from country to country, however, primarily because of different tax levels and competition in the Nordic consumer market. Variations in the wholesale (spot price) for each country also play a minor role. In the financial market, the same buyers and sellers conclude forward contracts for power. This is because they want to hedge against price changes, which also provides a measure of predictability for consumers.
[edit] Weather and temperature conditions
Precipitation: Hydropower accounts for half the Nordic electricity market. So the level of precipitation is significant for pricing on the power exchange. Plentiful rain and snow mean more water to drive the turbines, which in turn boosts supply. An increase in precipitation alone will normally reduce electricity prices.
Temperature conditions: Electricity provides about 30 per cent of space heating in Nordic homes. Temperatures therefore influence daily demand for power. Colder weather boosts demand, which can lead in turn to price rises.
[edit] Electricity transmission
Transmission capacity:Capacity shortages in the transmission network could increase prices if demand in one area exceeds supply. Lack of capacity means that power cannot be acquired from regions with a surplus.
Exchanges with non-Nordic countries: The Nordic market is also tied to the Russian, German and Polish power markets. Supply and demand in these countries will therefore also influence Nordic prices. Price differentials between day and night are much greater in Germany than in the Nordic region. Market players in Europe can buy cheap German power and transmit as much of it to the Nordic region as the grid will carry. They can then buy relatively cheap daytime electricity in the Nordic region and transmit it south, again to the limits of grid capacity. This exploits the ability of the Nordic power market to regulate output because it is based on hydropower. Electricity flows out of the Norwegian region for most of the hours in wet years, and the other way in dry years.
[edit] Economic factors
Generating capacity: Expanding generating capacity will increase the supply of electricity, which could reduce prices. However, current forecasts indicate that new power would cost NOK 0.25-0.30 per KWh. With future market prices expected to lie below this level, generators are accordingly unlikely to develop additional capacity. But new generating facilities would probably hold down prices, given that variable generating costs are lower than the spot price.
Level of economic activity: The Nordic power market is influenced by fluctuations in other raw material and currency markets, primarily in Europe but to a certain extent on a world basis. General economic fluctuations such as booms and recessions also impact electricity consumption and thereby trading in power.
Currency movements: Most raw materials are priced in US dollars. A lower exchange rate for the dollar cuts the cost of coal, for instance, and would offers better terms for coal-fired German electricity. That could boost exports from the German power market to the Nordic region, and help to reduce prices there – assuming that Nordic prices were high.
[edit] Prices for input factors in power generation
Energy sources such as coal, oil and nuclear energy account for a large part of overall electricity consumption in Denmark, Sweden and Finland. The cost of these raw materials is accordingly very significant for price determination.
Coal prices: When coal becomes more expensive, the cost of generating electricity from this fuel rises. Unlike wind and water power, where the “raw material” is free, coal-fired power stations in the Nordic region and the rest of Europe must buy their fuel. Should prices reach a level which makes burning coal to generate electricity uneconomic, the level of activity at such power stations will decline. That in turn reduces supply and boosts prices on the power exchange.
Gas prices: Most European electricity is generated from coal or nuclear energy, but gas also accounts for a proportion. As with coal-fired capacity, these power stations depend on buying gas for fuel. Lower gas prices would improve the terms for such output, which could increase electricity supply and cut prices.
Prices for carbon allowances (EUAs) and carbon credits (CER’s): Trading in carbon dioxide emission allowances was introduced by EU in 2005. in 2007 carbon credits were introduced by the UN. These carbon allowances and credits are traded as a commodity on Nord Pool. Power stations with carbon emissions must buy EUAs or CERs to cover a possible shortage of such allowances. If the price of EUAs or CERs is high, it becomes more expensive to generate electricity from fuels such as coal and gas and the cost could rise. The price could increase by the amount of the EUAs and CERs, because these are input factors. The power market functions in such a way that the cheapest electricity is generated first, with more expensive generating modes phased in as consumption rises. In practice, this means that the wholesale market price is set by the most expensive generating mode. Since there are periods in the Nordic market when this is coal, the power price will also include the cost of EUAs or CERs.
[edit] Nuclear energy
A number of large nuclear power stations in the Nordic region account for almost 30 per cent of output. Outages or generating cut-backs for nuclear power will reduce supply and could thereby increase prices.
[edit] Power consumption over time
If Nordic electricity consumption rises substantially more than the expansion in generating capacity, demand may exceed supply. That can be balanced by an increase in power prices.
