NORD POOL Market Integration: Nordic Countries APEx 2003 Conference, Catagena de Indias – Colombia, October 14 & Torger Lien, President & CEO Nord Pool ASA

Copyright  Nord Pool ASA 2002 Regional challenges n4 Countries n4 Governments with changing policy n4 Legislations n4 Regulators and FSA’s n5 TSO’s n5 Grid’s with reasonably good connections AND ONE MARKET

Copyright  Nord Pool ASA Norway, Sweden Nord Pool 1993 Norway StatnettMarked Development of the Exchange Area for Elspot 1 October 2000 Norway, Sweden Finland and Denmark Nord Pool 1 July 1999 Norway, Sweden Finland, West Denmark Nord Pool 15 June 1998 Norway, Sweden, Finland Now all the Nordic countries are part of Elspot and hourly border trade towards the continent works more efficient than before! 1. Brief info about the Nord Pool Group

Copyright  Nord Pool ASA 2002 Nord Pool’s Participants February 2003 (Legal Entities) Total: 321 Norway 157 Finland 39 Sweden 80 UK 10 Germany 4 The Netherlands 3 Denmark 22 USA 2 Switzerland 1 France 1 Italy 1 Belgium 1

Copyright  Nord Pool ASA 2002 Yearly volumes: 1998: 56,7 TWh 1999: 75,2 TWh 2000: 96,2 TWh 2001: 111,2 TWh 2002: 123,6 TWh Jan-Sep 03: 85,8 TWh (Jan-Sep 02: 85,4 TWh) Elspot turnover per month Note: In addition trading volumes in the Elbas Market has since the start in March 1999 been between 0,5 and 0,8 TWh/year.

Copyright  Nord Pool ASA 2002 System Operators’ (TSOs) vs. the Nord Pool Group’s roles in the Nordic Power Market Regulating service Balancing between production and consumption real-time Balance settlement of BRCs afterwards on measured and reported values The Spot Market Physical delivery Planned balance Hourly contracts Elspot (and Elbas) Run by Nord Pool Spot AS Clearing services run by Nord Pool Clearing ASA The Financial Market Price hedging (for physical Spot) Risk Management Financial contracts Elspot prices underlying products Daily--yearly contracts, Options Run by Nord Pool ASA Within the hour The next day Next day up to four years ahead The Nordic Power Exchange - Nord Pool System Operator (TSO) Trading and Clearing – physical and financial

Copyright  Nord Pool ASA 2002 What is Elspot? nNordic Market place for purchases/sales of electric power - gives overall planned balance day-ahead nShort-term physical contracts lDuration of one hour l12-36 hours ahead (next day’s 24 hrs.) lTrading 365 days a year lThree bid types: hourly, blocks, and flexible hourly bids nBidding with portfolios in purchase/sales curves nAuction trading (once per day) nPrice set at equilibrium point (buy=sell) each hour nHandling of bottlenecks between Elspot Areas using the so called Price Area Model (Market Splitting) Demand Supply 2. Main principles in Elspot

Balance requirement : Participants must achieve balance between energy supply and energy demand within each bidding area (including contracts) towards TSO Participants must be approved as Balance Responsible Company by the national TSO in the area(s) they intend to trade in. (In some countries this can be handled via a third-party agreement with a BRC). Participants place bids in Areas where they are approved (”BRC”) and have production, consumption or contracts Bidding Areas in the Elspot Market SE FI E DK1 DK2 NO1 NO2 Note: In Norway the number of Areas vary over time and currently there are four areas

Price calculation - no bottlenecks Elspot Areas Area prices = System Price 2. Checking transmission limits MW PurchaseSale PsPs Trade 1. Calculation of system price Price One price SE FI E DK1 NO1 NO2 DK2 3. Handling of congestion in Elspot

Copyright  Nord Pool ASA Calculation of different Elspot area prices (iterative process) Flow at System Price above capacity, thus different prices Physical power flow 1. System price calculation PurchaseSell Ps 2. Checking transmission limits Elspot Areas SE FI E DK1 NO1 NO2 DK2 Price calculation - with bottlenecks

Copyright  Nord Pool ASA 2002 Calculation of area prices when bottlenecks occur DS Sweden price D Swe +expS Swe D Nor S Nor +imp nSolution like above: Flow is ”geared down” to max. transmission capacity (C) by the price-mechanism. Export (Swe) and import (Nor) will be equal to available capacity (C). nResult: Norway price > System price > Sweden price Participants are always credited/debited according to the Area Prices. System Price Example: System Price calculation results in a flow from Sweden to Norway above capacity (C). Norway price System PricePrice Area SwedenPrice Area Norway CC

Copyright  Nord Pool ASA 2002 Elspot prices for Oslo, Stockholm and System

Copyright  Nord Pool ASA 2002 Year No. of hrs % , , , , , ,1

Copyright  Nord Pool ASA 2002 Elspot’s Price Area Model - ”Market Splitting” nAllocates transmission capacity based on the energy bids, thus Elspot is a simultaneous energy and capacity auction nResults in energy flows according to price signals (flow from low  high price) nOpens up national and international trading for all types of companies nBilateral contracts between parties in different countries can easily be agreed upon and then reflected in Elspot bids (buy/sell) per bidding area nReduces market power because the model connects areas/countries and importantly it is done in a non-discriminatory fashion 4. Possibilities and limits for usage in other countries and regions

Copyright  Nord Pool ASA 2002 Isolated markets Bilateral agreements Long-term auctions Daily auctions Nord Pool Model (Market splitting) Integrated market Various ways of handling cross-border Power trading and congestion

Copyright  Nord Pool ASA 2002 Nord Pool OMEL UKPX, APX EEX Gielda Energii Powernext Borzen Electricity Exchanges in Europe EX Alpen Adria ”GME” Facts related to Nord Pool Group: NP is shareholder in EEX (>17%) NP delivered spot auction system (SAPRI) to EEX and Powernext EEX has established a financial market (Futures), which like NP uses their spot auction price as underlying reference

Copyright  Nord Pool ASA 2002

European integration ? nMarket areas to be connected nReal competition on supply and demand nHarmonised legislation and regulatory framework nEqual knowledge to price sensitive information nHarmonisation between regulators and / or common regulator nSincere political willingness to implement a common market

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