1. Copyright Houmoller Consulting © Jan. 3, 2013 Anders Plejdrup Houmøller 1 Introduction In Appendix 1, youll find slides giving examples of how the closing/settlement prices for financial contracts can change during the contracts trading period. In appendix 2, youll find a list of the terms and acronyms used in this presentation. Concerning the documents referred to in this presentation: At houmollerconsulting.dk, you can download the documents from the sub-page Facts and findings. This PowerPoint presentation is animated Its recommended to run the animation when viewing the presentation. On most computers, you can start the animation by pressing F5. Now the presentation moves one step forward, when you press Page Down. It moves one step backward, when you press Page Up.

2. Copyright Houmoller Consulting © Jan. 3, 2013 Anders Plejdrup Houmøller 2 Forward prices and spot prices – 1 This PowerPoint presentation compares the spot prices and the prices of the financial forward contracts The comparison is made for the German Phelix spot price, the Nordic System price and the spot prices for the price zones of Southern Sweden (SE4), Western Denmark (DK1) and Eastern Denmark (DK2). In this presentation, for Southern Sweden, Western Denmark and Eastern Denmark, the forward price is the price of the System Price contract plus the price of the CfD contract: (Forward price) = (System Price) + (CfD price).

3. Copyright Houmoller Consulting © Conclusion from the analysis: price hedging is expensive for consumers As can be seen: compared with the spot prices, the forward prices have a strong tendency to overshoot Hence, in the choice between spot and forward, on the average you get the highest prices by choosing forward. Consequently, on the average, price hedging is expensive for consumers (and profitable for producers). The concept price hedging is explained in appendix 2. Jan. 3, 20133 Anders Plejdrup Houmøller

4. Copyright Houmoller Consulting © Correlation between forward prices and spot prices Note that high liquidity for a forward contract does not imply strong correlation between the contracts prices and the corresponding spot prices. Probably, the Nordic System Price contracts are Europes most liquid financial electricity contracts At the same time, the prices of the System Price contracts have low correlation to the spot prices. Jan. 3, 2013 Anders Plejdrup Houmøller 4

5. Copyright Houmoller Consulting © Jan. 3, 20135 Forward prices and spot prices – 2 For each of the slides no. 8-11: For each year, the years forward price is the average of the daily closing/settlement prices during the reference period The reference period is the trading days during the last quarter, where the contract was traded. Example for the Nordic System Price contract for 2012 (ENOYR-12): The forward price is the average of the daily closing prices during the period from 3 October to 28 December 2011 As can be seen from slide no. 18, this gives a forward price of 42.24 EUR/MWh. Anders Plejdrup Houmøller

6. Copyright Houmoller Consulting © Jan. 3, 20136 Forward prices and spot prices – 3 For each of the slides no. 9-11 (Nordic prices): For each of the years 2002-2012, the years average spot price is compared with the years forward price. For each slide, this gives 11 points indicating how well the forwards price forecasted the spot price. For the slide no. 8 (German prices): The same method. However, for Germany its the 10 years 2003-2012. The mean of the numerical difference |spot–forward| illustrates the average distance between the forward curve and the spot curve. The mean of the difference (spot–forward) shows how far the spot curve on the average lies below the forward curve. Anders Plejdrup Houmøller

7. Copyright Houmoller Consulting © The price zone of Southern Sweden (SE4) The year 2012 The price zone SE4 was launched 1 November 2011 For the year 2012, the average SE4 spot price turned out to be 34.21 EUR/MWh. The forward price was 52.10 EUR/MWh Hence, the difference (spot - forward) was -17.89 EUR/MWh For 2012, among the five forward contracts investigated in this analysis, this is the record difference. Jan. 3, 2013 Anders Plejdrup Houmøller 7

8. Copyright Houmoller Consulting © Germany: forward prices and spot prices 03040506070809101112 The 10 years 2003-2012 The years forward price The years average spot price Correlation(spot,forward) = 0.53 Average of (spot - forward) = -3.2 EUR/MWh Average of |spot – forward| = 8.8 EUR/MWh 20 25 30 35 40 45 50 55 60 65 EUR/MWh Source: EEX 8

9. Copyright Houmoller Consulting © Western Denmark: forward prices and spot prices The 11 years 2002-2012 0203040506070809101112 20 25 30 35 40 45 50 55 60 EUR/MWh The years forward price The years average spot price Correlation(spot,forward) = 0.64 Average of (spot - forward) = -3.2 EUR/MWh Average of |spot – forward| = 6.5 EUR/MWh Sources: Nasdaq OMX and Nord Pool Spot 9

10. Copyright Houmoller Consulting © Eastern Denmark: forward prices and spot prices The 11 years 2002-2012 EUR/MWh 20 25 30 35 40 45 50 55 60 0203040506070809101112 The years forward price The years average spot price Correlation(spot,forward) = 0.59 Average of (spot - forward) = -2.4 EUR/MWh Average of |spot – forward| = 8.1 EUR/MWh Sources: Nasdaq OMX and Nord Pool Spot 10

11. Copyright Houmoller Consulting © Nordic System Price: forward prices and spot prices The 11 years 2002-2012 EUR/MWh 20 25 30 35 40 45 50 55 60 0203040506070809101112 The years forward price The years average spot price Correlation(spot,forward) = 0.37 Average of (spot - forward) = -1.3 EUR/MWh Average of |spot – forward| = 8.6 EUR/MWh Sources: Nasdaq OMX and Nord Pool Spot 11

12. Copyright Houmoller Consulting © Jan. 3, 201312 Appendix 1 Closing/settlement prices Variation during the last year of the financial contracts trading period Anders Plejdrup Houmøller

13. Copyright Houmoller Consulting © 13 Closing/Settlement Prices Please refer to appendix 2: at the end of each trading day, both Nasdaq OMX and EEX set a closing/settlement price for each of their financial contacts. As examples of how the closing/settlement prices vary: The slides no. 14-18 show the daily closing/settlement prices for five forwards. For each forward, the daily closing/settlement price is shown during the last year, where the forward was traded. The five forwards hedged against the 2012 spot price for respectively Germany. Western Denmark (DK1). Eastern Denmark (DK2). Southern Sweden (SE4). The Nordic System Price. Reference period is the trading days during the last quarter, where the contract was traded.

14. Copyright Houmoller Consulting © Germany – the year 2012 0 10 20 30 40 50 60 EUR/MWh Forward prices and the years average spot price Trading days in 2011 DecJan Settlement price per day in 2011 for Cal-12 Reference period Reference periods average forward price: 54.16 EUR/MWh The average German spot price for 2012 turned out to be 42.60 EUR/MWh Source: EEX 14

15. Copyright Houmoller Consulting © Western Denmark (DK1) – the year 2012 0 10 20 30 40 50 60 EUR/MWh Sources: Nasdaq OMX and Nord Pool Spot Trading days in 2011 DecJan Reference period Forward prices and the years average spot price The average DK1 spot price for 2012 turned out to be 36.33 EUR/MWh Closing price per day in 2011 for ENOYR-12 + SYARHYR-12 Reference periods average forward price: 48.67 EUR/MWh 15

16. Copyright Houmoller Consulting © Eastern Denmark (DK2) – the year 2012 0 10 20 30 40 50 60 EUR/MWh Sources: Nasdaq OMX and Nord Pool Spot Forward prices and the years average spot price Trading days in 2011 DecJan Reference period Closing price per day in 2011 for ENOYR-12 + SYCHPYR-12 Reference periods average forward price: 52.07 EUR/MWh The average DK2 spot price for 2012 turned out to be 37.56 EUR/MWh 16

17. Copyright Houmoller Consulting © Southern Sweden (SE4) – the year 2012 0 10 20 30 40 50 60 EUR/MWh Sources: Nasdaq OMX and Nord Pool Spot Forward prices and the years average spot price Trading days in 2011 DecJan Closing price per day in 2011 for ENOYR-12 + SYMALYR-12 The average SE4 spot price for 2012 turned out to be 34.21 EUR/MWh Reference period Reference periods average forward price: 52.10 EUR/MWh 17

18. Copyright Houmoller Consulting © Nordic System Price – the year 2012 0 10 20 30 40 50 EUR/MWh Sources: Nasdaq OMX and Nord Pool Spot Forward prices and the years average spot price Trading days in 2011 DecJan Reference period Closing price per day in 2011 for ENOYR-12 The average System Price for 2012 turned out to be 31.20 EUR/MWh Reference periods average forward price: 42.24 EUR/MWh 18

19. Copyright Houmoller Consulting © Jan. 3, 201319 Appendix 2 Terminology and acronyms Anders Plejdrup Houmøller

20. Copyright Houmoller Consulting © Terminology and acronyms – 1 As used in this presentation Cal-12 the ticker symbol of the EEX financial contract, which hedged against the German spot price during the year 2012. CfD Contract for Difference. A financial contract, which hedges against the risk there is a difference between the System Price and the spot price of a given Nordic price zone. Example: the underlying reference for the CfD for DK1 is this difference (DK1 spot price) - (System Price). Closing price At Nasdaq OMX, for each financial contract, a closing price is set at the end of every trading day. In effect, at the end of the trading day, the closing price is the financial markets forecast of the future spot price. Nasdaq OMX closing price is analogous with EEX settlement price. Example: 42.90 EUR/MWh was the closing price 21 November 2011 for the contract hedging against the System Price during the year 2012 (ENOYR-12). 20

21. Copyright Houmoller Consulting © 21Jan. 3, 2013 Anders Plejdrup Houmøller Terminology and acronyms – 2 As used in this presentation Correlation Given two data sets, the correlation function measures the degree to which the two data sets move in lockstep. Please refer to the next-to-last slide. DK1 and DK2 The price zones of Western and Eastern Denmark as indicated at the picture. Eastern Denmark See DK2. EEX European Energy Exchange. Please refer to the web site eex.de. ENOYR-12 See ticker symbol. Financial contract Short-term for financial forward contract.

22. Copyright Houmoller Consulting © Terminology and acronyms – 3 As used in this presentation Financial forward contract In this document, this is a contract, which can be used to hedge against a spot price. Please refer to the chapters 11-13 of the PDF document The Liberalized Electricity Market. Forward contract Short-term for financial forward contract. Forward price The settlement/closing price of a forward contract. German spot price See Phelix spot price. Nasdaq OMX An exchange, where the players can trade Nordic financial contracts (and other contracts). Please refer to the web site nasdaqomx.com/commodities. Nordic and Nordic area In this document, this refers to the four countries Denmark, Finland, Norway and Sweden. Nordic System Price See System Price. 22 Anders Plejdrup Houmøller Jan. 3, 2013

23. Copyright Houmoller Consulting © Terminology and acronyms – 4 As used in this presentation Phelix spot price The spot price for Germany published by the spot exchange EPEX Spot. Price hedging As a consumer or producer of electricity in Northern Europe: if you choose to trade at the spot price, youll first learn your price for the next days consumption/production of electricity after 12 oclock Central European Time. However, by using a financial contract, you can fix your electricity price at an earlier point in time. This early fixing of the price is called price hedging. Price zone A geographical area, within which the players can trade electrical energy day-ahead without considering grid bottlenecks. 23Jan. 3, 2013 Anders Plejdrup Houmøller

24. Copyright Houmoller Consulting © Terminology and acronyms – 5 As used in this presentation SE4 The price zone of Southern Sweden as indicated at the picture at slide no. 21. Settlement price At EEX, for each financial contract, a settlement price is set at the end of every trading day. In effect, at the end of the trading day, the settlement price is the financial markets forecast of the future spot price. EEXs settlement price is analogous with Nasdaq OMXs closing price. Southern Sweden See SE4. Spot price Please refer to appendix 2 in the PowerPoint presentation Market coupling and spot price calculation (or the PDF document with the same name). 24Jan. 3, 2013 Anders Plejdrup Houmøller

25. Copyright Houmoller Consulting © Terminology and acronyms – 6 As used in this presentation SYARHYR-12 See ticker symbol. SYCHPYR-12 ticker symbol of the CfD, which hedged against the difference between the DK2 spot price and the System Price during 2012. CPH indicates CoPenHagen. SYMALYR-12 ticker symbol of the CfD, which hedged against the difference between the SE4 spot price and the System Price during 2012. MAL indicates MALmø (the biggest town in SE4). System Price A virtual price. Its the theoretical, common spot price we would have in the Nordic area, if there were no grid bottlenecks in the area covered by the four countries. For an overview over the historical numerical values of the System Price, please see the PowerPoint presentation System Price 1992-2012 (or the PDF document with the same name). 25Jan. 3, 2013 Anders Plejdrup Houmøller

26. Copyright Houmoller Consulting © Terminology and acronyms – 7 As used in this presentation Ticker symbol The name of a financial contract. Example 1: the ticker symbol of the contract, which hedged against the System Price during the year 2012 was ENOYR-12 ENO indicates Electricity NOrdic YR-12 indicates the year 2012. Example 2: the ticker symbol of the CfD, which hedged against the difference between the DK1 spot price and the System Price during 2012 was SYARHYR-12 SY indicates SYstem Price ARH indicates AARHus (the biggest town in Western Denmark). YR-12 indicates the year 2012. Western Denmark See DK1. 26Jan. 3, 2013 Anders Plejdrup Houmøller

27. Copyright Houmoller Consulting © 27 The correlation function The correlation function measures the correlation between two variables. If the two variables move in lockstep, the value of the correlation function is 1. A value of 0 means there is no correlation at all. a b In this example Correlation(a,b) = 1 as a and b move in lockstep

28. Copyright Houmoller Consulting © Thank you for your attention! 28 Anders Plejdrup Houmøller Houmoller Consulting ApS Tel. +45 28 11 23 00 anders@houmollerconsulting.dk Web houmollerconsulting.dk