Nord Pool – Europe’s leading power market

5. April 2017

Reykjavik, Iceland

N o r Haakon Reiersen Leknes Senior Consultant, Consulting Email: [email protected]

N o r N o r N o r The future is Electric

Nord Pool Consulting 5 N o r N o r N o r N o r Europe’s future electrical energy supply infrastructure

Nord Pool Consulting 10 The HV/DC interconnectors

. NorNed . Skagerak . Kontek . . SwePol . Konti-Skan . ’ . NorBalt In the pipeline: . North Connect . NSL . NordLink . LitPol

Nord Pool Consulting 11 N o r Nord Pool’s first two decades of growth

Nord Pool Consulting 13 Europe’s leading power market

Nord Pool offices Nordic/Baltic and UK – day-ahead and intraday

FINLAND Intraday with access to Nordic volumes RUSSIA

Serviced markets YTD

NEMO status approved

LATVIA

DENMARK

BELARUS IRELAND UK

NETHER- LANDS UKRAINE

LUXEMBOURG CZECH REPUBLIC SLOVAKIA MOLDOVA

AUSTRIA HUNGARY SWITZERLAND ROMANIA SLOVENIA CROATIA BOSNIA & SERBIA HERZEGOVINA BULGARIA ANDORRA MONTE- KOSOVO ITALY NEGRO MACEDONIA

ALBANIA TURKEY PORTUGAL SPAIN GREECE

Nord Pool Consulting 14

*) In the UK, Nord Pool operates under the N2EX brand Nord Pool’s mandate

 To provide a liquid and secure wholesale market for physical power  To provide accurate and timely information regarding the wholesale power market, ensuring transparency  To provide equal access to market for everyone  To be counterpart for all trades; guaranteeing settlement and delivery

Nord Pool Consulting 15 Stakeholders

 Owned by Nordic and Baltic transmission system operators (TSO) – Norway – 28.2% – Estonia – 2%  Regulated by Norwegian Water Resources and Energy Directorate (NVE) Svenska Kraftnät – Sweden – 28.2% – Lithuania – 2%

Energinet – – 18.8% AST – – 2%

Fingrid – – 18.8%

Nord Pool Consulting 16 Electricity wholesale market regulation

Rules related to Nord Pool and its members Rules related to the wholesale market Cross Norwegian Ministry of

Oil and Energy

- border border trading license

NVE and other NRAs

Nord Pool AS

REMIT

Market place license place Market Network Codes CACM Codes Network

Trading Rules Regulation Transparency

Market Conduct Rules

Wholesale market participant (Nord Pool member)

Nord Pool Consulting 17 Total traded volume in 2016

European intraday: 5 TWh UK day-ahead: 109 TWh Nordic Baltic day-ahead: 391 TWh

Nord Pool Consulting 18 We continue to see steady growth

Nord Pool Consulting 19 The Nord Pool model

10 years Day-ahead Intraday Intrahour 1,5 months

Time Financial market Financial market Hedging of prices

Reference price Day Ahead market (AKA Elspot) (system price) The DAM is a daily auction that closes at Elspot 12:00 every day. System price and area prices are calculated delivery Physical for delivery each hour the following day.

Elbas Intraday market (AKA Elbas) The ID is a continuous (24/7) market and closes shortly before each delivery hour.

Remaining transmission capacity after the Balancing publication DAM prices is allocated to ID. market

Balancing markets Intra-hour market for maintaining the power balance Imb. settl.

Imbalance settlement Post-hour settlement of deliveries between Physical Financial market participants Financial settlement Physical delivery delivery settlement

Nasdaq Nord Pool AS TSOs

Nord Pool Consulting 20 Trading at Nord Pool markets

Nord Pool Consulting 21

Source: Nord Pool Day Ahead market and price formation

Nord Pool Consulting 22 The Day-Ahead Market (Elspot)

 Daily auction for physical deliveries the following day

 The Day-Ahead market is open every day throughout the year

FINLAND  Available transmission capacities, SWEDEN supply and demand are used to NORWAY determine the price for electricity and ESTONIA flows between price areas for each hour LATVIA

 The auction calculate area prices for DENMARK LITHUANIA

physical deliveries, system price as a BELARUS IRELAND reference price for most standardized UK

NETHER- POLAND financial contacts LANDS GERMANY UKRAINE BELGIUM

LUXEMBOURG CZECH REPUBLIC  Liquidity is key: a market with a lot of SLOVAKIA power traded leads to depth in the FRANCE HUNGARY market and reliable index prices SWITZERLAND ROMANIA SLOVENIA CROATIA BOSNIA & SERBIA HERZEGOVINA BULGARIA ANDORRA MONTE- KOSOVO ITALY Nord Pool ConsultingNEGRO 23 MACEDONIA

ALBANIA PORTUGAL SPAIN Day Ahead price formation in practice

Factors affecting the Factors affecting the supply for electricity: demand for electricity: • Fixed costs of • Retail volumes and production delivery obligations: S D • Variable costs of - Weather production U PRICE E - Open deliveries, etc. P M • Industrial consumers: • Plant startup and VOLUME shutdown costs P A - Fixed costs • CO2 allowance prices L FLOW N - Variable costs • Weather - Startup and shutdown Y D costs • Hydro situation - Flexibility of processes

TRANSMISSION CAPACITY

Available Transmission Capacity (ATC): • Existing interconnectors • Unavailability of interconnectors (faults, etc.) Nord Pool Consulting 24 Day-Ahead price formation in theory

 Day-Ahead prices are calculated using an optimization algorithm called Euphemia Max EUR/MWh 3000

 Optimization happens through maximising overall social welfare

 Calculation methodology ensures that, based on the placed sell and Average buy bids, least-cost generation electricity price units are activated first*

 Last activated bid sets the price for all production needed to meet demand TWh Average electricity consumption

Min EUR/MWh - 500

Nord Pool Consulting 25 *) The traditional ‘merit order’ of short-run marginal costs of generation is not fully applicable to intermittent generation as it cannot be dispatched to meet peak demand. Due to zero marginal cost of intermittent generation such as wind and solar, they always become first in the ‘merit order’: they produce when they produce. Economic approach

Area between the buy and sell curves represent the total economic surplus of buyers and sellers for each hour. In addition, transmission network limitations (bottlenecks) can create bottleneck income.

Price Consumer surplus = difference between the EUR/MWh demand offer price and market price Supply

Market price Demand Producer surplus = difference between the supply offer price and market price 1 MWh Volume MWh

Optimising the seller and buyer surplus (while taking into account potential limitations in both orders and the transmission infrastructure) results in the maximum overall economic welfare.

Nord Pool Consulting 26 Transmission capacities and implicit auction

 The TSOs allocate transmission capacity (ATC) between each bidding area: – Trading capacities for the next day are published on Nord Pool's website at 10:00 CET – All trading capacity between the Nordic and Baltic bidding areas is dedicated to Nord Pool for implicit auction  Implicit auction, performed through market coupling, simultaneously determines prices, sell and purchase volumes and flows between bidding areas: – All trading capacity is available to all market participants on equal terms – There are no explicit capacity auctions on these connections

Source: Statnett website 5th March 2016. Click map for updated ATC.

Nord Pool Consulting 27 Bottleneck income (Congestion rent) Example including two bidding areas and is followed by three examples

Oversupply area A Undersupply area B

P = P + Δ Price P B A Price P A B

Demand * P Amount paid by Demand * P A A consumers B B

Production * P Income received Production * P A A by producers B B

Subtracting the income received by producers from the amount paid by consumers results in bottleneck income: flow (MWh) * Δ (€/MWh)

Bottleneck income belongs to the interconnector owner. Since 2012, bottleneck income from an interconnector have been equally divided between the respective TSOs.

Bottleneck income = Price difference * Flow

Nord Pool Consulting 28 Example 1: Isolated areas, ie Iceland and UK

Area with oversupply Area with undersupply

]

]

Price [EUR/MWh Price Price [EUR/MWh Price

100 EUR/MWh 50 EUR/MWh

100 MW Volume 100 MW Volume [MWh] [MWh]

Nord Pool Consulting 29 Example 2: Exchange between areas, ie Norway and the

Surplus area has the possibility to export to the deficit area

]

] MWh MWh 100 MW

100 MW

Price [EUR/ Price Price [EUR/ Price

100 EUR/MWh Common price for the two areas 50 = 75 EUR/MWh EUR/MWh

Volume [MWh] Volume [MWh] Flow

Nord Pool Consulting 30 Example 3: Exchange between areas – limited transmission capacity

Surplus area Deficit area

Price Price Demand Original supply Final supply Original Final Supply demand demand (60) Original area price (55) Final area price (50) (50) System System price price (45) Final area price (40) Original area price

Volume Volume Increasing exports from the surplus Increasing imports to the deficit area area moves the demand curve to moves the supply curve to the right. the right. Price increases Price decreases.

Flow

Nord Pool Consulting 31 Market coupling across Europe

Nord Pool Consulting 32 Day-Ahead prices are determined simultaneously across Europe

FINLAND SWEDEN The Price Coupling of Regions (PRC) initiative now RUSSIA enables the coupling of Day Ahead electricity markets in 23 countries representing over 90% of European NORWAY power consumption. ESTONIA

LATVIA

DENMARK LITHUANIA

BELARUS IRELAND UK

NETHER- POLAND LANDS GERMANY UKRAINE BELGIUM

LUXEMBOURG CZECH REPUBLIC SLOVAKIA MOLDOVA Part of PCR initiative today AUSTRIA FRANCE HUNGARY 4 MMC SWITZERLAND ROMANIA SLOVENIA Independent CROATIA BOSNIA & SERBIA HERZEGOVINA BULGARIA ANDORRA MONTE- KOSOVO ITALY NEGRO MACEDONIA

ALBANIA TURKEY PORTUGAL SPAIN GREECE

Nord Pool Consulting 33 Euphemia

 EUPHEMIA: EU + Pan-European Hybrid Integration Algorithm  It maximizes the welfare of the solution: – Most competitive price will arise – Overall welfare increases – Efficient capacity allocation  Utilized by six power exchanges (PX) each operating several bidding areas: – All bidding areas are matched at the same time – Each bidding area can obtain a different price. Price must respect maximum and minimum market price boundaries

Nord Pool Consulting 34

Source: EUPHEMIA description and functioning, January 2016 Nord Pool Intraday Market

Nord Pool Consulting 35 How the DA and ID markets works

“The day-ahead and intraday supplement each other, with the intraday market acting as a balancing market to the day-ahead”

Nord Pool Consulting 36 Nord Pool Intraday Market

 The first international intraday market

 Continuous (24/7) market for buying and selling electricity close up to gate closure: FINLAND – Allows for adjustment of all buy- and SWEDEN sell orders done in the Day-Ahead market (DAM) NORWAY – Possible to optimize trades done in the ESTONIA

DAM or make better use of LATVIA production/consumption that was not DENMARK LITHUANIA accepted in DAM BELARUS IRELAND  Trading resembles that of stock UK

NETHER- POLAND trading: LANDS GERMANY UKRAINE – What you see is what you get BELGIUM LUXEMBOURG CZECH REPUBLIC – First come, first served SLOVAKIA

AUSTRIA – Best priced orders first FRANCE HUNGARY SWITZERLAND ROMANIA SLOVENIA CROATIA BOSNIA & SERBIA HERZEGOVINA BULGARIA ANDORRA MONTE- KOSOVO ITALY Nord Pool ConsultingNEGRO 37 MACEDONIA

ALBANIA PORTUGAL SPAIN Allocated Transmission Capacity Intraday

 Available transmission capacity (ATC) after DAM is allocated to the intraday market.

 Intraday trading can take place across FINLAND borders if there is enough ATC SWEDEN

 All cross border trading is implicit both NORWAY in the Intraday market and DAM ESTONIA  Nord Pool is counterpart to all trades LATVIA and handles all cross border DENMARK LITHUANIA

BELARUS nomination for all trades. Traders onlyIRELAND have to nominate trades to their local UK NETHER- POLAND LANDS TSO GERMANY UKRAINE BELGIUM

LUXEMBOURG CZECH REPUBLIC  No congestion rent to TSOs, because SLOVAKIA intraday trading can both reduce and AUSTRIA FRANCE HUNGARY increase loss on interconnects SWITZERLAND ROMANIA SLOVENIA CROATIA BOSNIA & SERBIA HERZEGOVINA BULGARIA ANDORRA MONTE- KOSOVO ITALY Nord Pool ConsultingNEGRO 38 MACEDONIA

ALBANIA PORTUGAL SPAIN Why extreme prices Intraday?

www.nordpoolgroup.com/academy Nord Pool Intraday 2015 trading volumes

 2015: 5 TWh another record year

 3/4 of trades are cross border

 1/3 of trades done the last hour

 150 members in 14 countries

Nord Pool Consulting 40

Source: Nord Pool XBID – Cross Border Intraday

TSOs and PXs participating for developing and implementing the XBID Solution

FINLAND PXs participating; TSO observer SWEDEN RUSSIA PXs participating, adherence to  EU target model for a joint project ongoing Common European NORWAY Cross-Border Intraday ESTONIA Market LATVIA

DENMARK LITHUANIA  4 Power exchanges and BELARUS 17 TSOs IRELAND UK

NETHER- POLAND LANDS  Go live target date: GERMANY UKRAINE 2018 BELGIUM LUXEMBOURG CZECH REPUBLIC SLOVAKIA MOLDOVA  Equal treatment AUSTRIA FRANCE HUNGARY SWITZERLAND ROMANIA  Shared Order Book SLOVENIA CROATIA BOSNIA & SERBIA HERZEGOVINA BULGARIA ANDORRA MONTE- KOSOVO ITALY NEGRO MACEDONIA

ALBANIA TURKEY PORTUGAL SPAIN GREECE Nord Pool Consulting 41 41 How will XBID affect the Nordic market participants? Shared orderbook Improved liquidity

Nord Pool Consulting 42 Nord Pool Consulting are ambassadors for modern power markets across the world

Nord Pool Consulting offer services to Governments, Power Exchanges, Regulators, TSOs and other stakeholders on:

 Market design BILDE

 Rulebook development

 Market regulation

 Power market systems

 Capacity building

 Analysis and reports

 Competence building

 Nord Pool Academy

 www.nordpoolgroup.com/academy

Nord Pool Consulting 43 Haakon Reiersen Leknes Senior Consultant, Nord Pool Consulting Email: [email protected]

nordpoolgroup.com/ academy

N o r N o r