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. Todays 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 markets 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:

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 Pools 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 Pools 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 Pools
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 Denmarks
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 Denmarks 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, Oil
Hydro
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 Denmarks 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 todays 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 Kraftnt, 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 Kraftnt 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. Finlands 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.

Denmarks 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 Denmarks Jutland and Funen Eltra was
established 1 January 1998. A year later, Elkraft System became the transmission system
operator for Zealand.

In todays 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 Norways 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
Norways Ministry of Petroleum and Energy.

Nord Pool Spot AS is owned by the five Nordic transmission system operators (TSOs) and Nord
Pool. Statnett, Svenska Kraftnt, 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
markets 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 owners
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 owners area.
Purchase energy equal to the grids 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 industrys 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 markets 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 todays 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 grids 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. Todays 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 worlds 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 & clearing
representatives

Retailers

Large industry

Generators Grid
owners

Trade & clearing
representatives

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 Exchanges 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 participants 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 Pools 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 days 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 Pools 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 Pools 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 Pools spot and derivatives markets
opened in 1993. The strong growth in trading activity results both from the market areas
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
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
2400
2600
2800
3000
3200
3400
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 1
st
2002 NPS ownership was
extended to also the Finnish and Danish TSOs, eg. Fingrid, Eltra and Elkraft System. Since then
each nations 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 Norways 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 Pools 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 participants 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 participants net purchases the last 7 days (including VAT).
Price
Maximum bid
price
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 Exchanges Financial
Desk. All Exchange Members receive real-time market information throughout the daily trading
period, either through Nord Pools 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 Clearings 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 Exchanges 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 Pools electronic trading system or via Nord Pools
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 Clearings 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 members 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--
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 Pools 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
Pools 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 Pools clearing service for electricity contracts.
Extension of the Nordic Power Exchanges 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
200
300
400
500
600
700
800
900
1 000
0
1
.
0
1
.
1
9
9
6
0
1
.
0
4
.
1
9
9
6
0
1
.
0
7
.
1
9
9
6
0
1
.
1
0
.
1
9
9
6
0
1
.
0
1
.
1
9
9
7
0
1
.
0
4
.
1
9
9
7
0
1
.
0
7
.
1
9
9
7
0
1
.
1
0
.
1
9
9
7
0
1
.
0
1
.
1
9
9
8
0
1
.
0
4
.
1
9
9
8
0
1
.
0
7
.
1
9
9
8
0
1
.
1
0
.
1
9
9
8
0
1
.
0
1
.
1
9
9
9
0
1
.
0
4
.
1
9
9
9
0
1
.
0
7
.
1
9
9
9
0
1
.
1
0
.
1
9
9
9
0
1
.
0
1
.
2
0
0
0
0
1
.
0
4
.
2
0
0
0
0
1
.
0
7
.
2
0
0
0
0
1
.
1
0
.
2
0
0
0
0
1
.
0
1
.
2
0
0
1
0
1
.
0
4
.
2
0
0
1
0
1
.
0
7
.
2
0
0
1
0
1
.
1
0
.
2
0
0
1
0
1
.
0
1
.
2
0
0
2
0
1
.
0
4
.
2
0
0
2
0
1
.
0
7
.
2
0
0
2
0
1
.
1
0
.
2
0
0
2
0
1
.
0
1
.
2
0
0
3
0
1
.
0
4
.
2
0
0
3
0
1
.
0
7
.
2
0
0
3
0
1
.
1
0
.
2
0
0
3
0
1
.
0
1
.
2
0
0
4
0
1
.
0
4
.
2
0
0
4
0
1
.
0
7
.
2
0
0
4
0
1
.
1
0
.
2
0
0
4
0
1
.
0
1
.
2
0
0
5
0
20
40
60
80
100
120
140
160
NOK/MWh
GWh/10
%
N + S N + S + SF N + S + SF + DK1 N + S + SF + DK1 + DK2 = The Nordic
consumption
water reservoirs
Spotprice (MCP)
0
100
200
300
400
500
600
700
800
900
1 000
0
1
.
0
1
.
1
9
9
6
0
1
.
0
4
.
1
9
9
6
0
1
.
0
7
.
1
9
9
6
0
1
.
1
0
.
1
9
9
6
0
1
.
0
1
.
1
9
9
7
0
1
.
0
4
.
1
9
9
7
0
1
.
0
7
.
1
9
9
7
0
1
.
1
0
.
1
9
9
7
0
1
.
0
1
.
1
9
9
8
0
1
.
0
4
.
1
9
9
8
0
1
.
0
7
.
1
9
9
8
0
1
.
1
0
.
1
9
9
8
0
1
.
0
1
.
1
9
9
9
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1
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0
4
.
1
9
9
9
0
1
.
0
7
.
1
9
9
9
0
1
.
1
0
.
1
9
9
9
0
1
.
0
1
.
2
0
0
0
0
1
.
0
4
.
2
0
0
0
0
1
.
0
7
.
2
0
0
0
0
1
.
1
0
.
2
0
0
0
0
1
.
0
1
.
2
0
0
1
0
1
.
0
4
.
2
0
0
1
0
1
.
0
7
.
2
0
0
1
0
1
.
1
0
.
2
0
0
1
0
1
.
0
1
.
2
0
0
2
0
1
.
0
4
.
2
0
0
2
0
1
.
0
7
.
2
0
0
2
0
1
.
1
0
.
2
0
0
2
0
1
.
0
1
.
2
0
0
3
0
1
.
0
4
.
2
0
0
3
0
1
.
0
7
.
2
0
0
3
0
1
.
1
0
.
2
0
0
3
0
1
.
0
1
.
2
0
0
4
0
1
.
0
4
.
2
0
0
4
0
1
.
0
7
.
2
0
0
4
0
1
.
1
0
.
2
0
0
4
0
1
.
0
1
.
2
0
0
5
0
20
40
60
80
100
120
140
160
NOK/MWh
GWh/10
%
N + S N + S + SF N + S + SF + DK1 N + S + SF + DK1 + DK2 = The Nordic
consumption
water reservoirs
Spotprice (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 Pools spot market volume in 1996 is largely due to extension of the
liberalised power market in Sweden. The spot markets 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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