1. Is the Icelandic market ready for new challenges?
Conference 11 February in Reykjavik: Power exchange for electricity Opportunities or constraints?
Is the Icelandic market ready for new challenges?
Rickard Nilsson
Project Manager
Nord Pool Spot AS
Tel: +46 (0)

2. Agenda
Reflections on market design, regulations, opportunities and challenges with establishing spot trading
In reality how different are Icelandic fundamentals from elsewhere when spot market places were started?
Some trading and market design issues "open for debate” that are important to get feed-back on from potential market parties and also other stakeholders
Brief facts and features in Elbas, the system intended for the "Isbas" Market for spot trading 

3. Were framework conditions and rules perfect elsewhere when spot markets were launched?
Norway-Sweden 1996? Examples:
Limited cross-border capacity for market due to historical bilateral priority contracts lasting until about 1999
Only hourly bids in spot although Swedish needs for blocks
Many retailers and end-consumers had pre-deregulation supply contracts that lasted several years thereafter, thus free choice and competition was not really there from start
Switch of supplier was costly in Sweden because until ”profile ontracts” were introduced in 1999 customers has to buy metering device to switch supplier
No common adjustment (intra-day) market and only weak co-ordination of RPM, i.e. real-time (TSO) balancing market
Nor-Swe-Finland 1998 plus Denmark ? Examples:
Tariffs imposed Swe-Fin and Swe-Den in the first few years
Almost no market access to capacity Norway-Jutland since pre-deregulation bilateral contracts not abandoned from start, also limited capacity Swe-Fin and Swe-Den in the beginning and for similar reasons
No common intra-day trading and still weak co-ordination of RPM on Nordic basis, which however came about very clearly in autumn of 2002
Only large scale consumers (ex. >10 GWh) in Denmark had access to market and could shift supplier in first few years with the spot market in Denmark
Basically all the constraints above have since long been eliminated, but the point is that the market could function and develop even with those imperfections!
In other words, even with imperfect conditions a promising development can be achieved as long as most parties, including stakeholders with powers to set rules, strive for improvements and seek opportunities with open and transparent trade!

4. Positives in Icelandic market Some general ”early observations from a foreigner who has seen and been part of a few spot market start-ups before”
Strong focus on power system fundamentals, combined with recognition of economic realities and opportunities
Balance Responsible Agreement in place between TSO and ”suppliers” that enables trading, and can be developed further
Some inherent flexibility in production and consumption
Significant growth of (industrial) demand ”likely” and ample opportunity to increase hydro and geothermal power production
Finally, a ”negative” that can be a positive – namely that it seems like quicker and more transparent signals of surplus and scarsity situations in the power system is needed, and that is precisely what an organized spot market can facilitate!

5. Design questions for the ”Isbas” Market Examples:
Opening hours for trading
Closing time for contracts
Settlement cycle
Clearing requirements
Market place functions – who and what
Currency for trading
Minimum trading lot (volume)
Minimum price step in bid/ask quotation
Needed content in Rulebook
Liquidity facilitation
Use of ”market makers”
Other issues?

6. Outlook - immediate future
A Power exchange for spot trading can be
Ready for launch in September 2008
Operated by Landsnet or a contractor of their choice
Technically supported by Nord Pool Spot (trading system, etc.)
Based on continuous trading as in NPS’ Elbas Market
Trading Area of the Icelandic market
The Icelandic market will be a separate/independent trading area
Reasons for proposal
Market players in Iceland have little experience in exchange trading
The Icelandic market is fairly small and a limited number of actors exist, at least initially
Continuous trading preferable in the beginning, because it is not as vulnerable towards lack of liquidity as auctions
Trading today in Iceland is based on bilateral contracts
Further developments, i.e. day-ahead spot auction and long-term (financial) contracts may be developed later, if it suits the market

7. Elbas market at Nord Pool Spot today
Adjustment market after Elspot
Trading intra-day and after Elspot is closed (confirmed) also day-ahead
Market areas:Finland, Sweden, East and West Denmark and Germany (KONTEK)
Continuous trading
Open around the clock all days of a year
Hourly contracts can be traded until one hour before delivery hour
Trading is anonymous
Trading currency is Euro
Settlement and clearing is combined with the Elspot Market at NPS
Common Rulebook with Elspot (separate details in appendices/agreements)
Automated control of grid capacity
Communication in public network with SSL-encryption
Market makers 24 hours per day
Number of customers: 55

8. Not dependent on one volume, price or counterpart
Why do companies trade on the Elbas market? Many arguments can also be valid in Iceland
An effective and economical way to manage electricity procurement and sales near the time of delivery
To sell production, cover consumption or trade single hours today & tomorrow
Handling of unexpected changes in electricity production, procurement or consumption in your electricity balance
React to unexpected changes in the market price and need for power
-> You can hedge the price you have to pay for imbalances
-> You can reduce the volume exposed for imbalances
-> You can increase the efficiency of daily management of your electricity portfolio
Not dependent on one volume, price or counterpart
Increases transparency of day-ahead and intraday prices
Trading made easy and fast:
Web based trading system
The market is ALWAYS open
Market making 24 hours per day
Automated and simple functionalities
Automatic clearing, netting of collaterals, and one settlement account for Elbas*
Note: *At NPS the Elbas settlement/collaterals is combined with day-ahead Elspot Market

9. Nord Pool Group Markets
Physical market – Elspot – Nord Pool Spot AS
trading in energy – day ahead (hourly contracts)
Swe, Fin, Den, Nor and VE-T area in Ger*
Adjustment market – Elbas – Nord Pool Spot AS
trading in energy – intra day (hourly contracts)
Financial market – Nord Pool ASA
financial power contracts** up to 5 calendar years ahead
EUA (CO2-allowances ) and CER
Clearing of financial contracts, incl. OTC – Nord Pool Clearing ASA
Notes:
* Plan is to in June 2008 establish ”Market Coupling” with EEX spot between Den and Ger
**Until 2007 Nordic contracts based on Elspot (System) Prices as underlying, but from early 2008 also contracts based on Dutch (APX) and German (EEX) spot prices

10. until 1 hour before delivery
The Elbas timeline
14:00
in SE, FI and DK2
Next days delivery hours opened at:
Delivery
hour
ELBAS
C o n t i n u o u s t r a d i n g
until 1 hour before delivery
ELSPOT
TSO:s real time
market
At 14:00 in SE, FI & DK2 the hour series for the next day are opened (the hours 01-24)
At 08:00 in GER and at 17:00 in DK1

11. "ISBAS" An idea for ”Isbas” timeline & structure Landsnet’s
Note: The point is merely to illustrate how it could function
Opening hours
for trading
09:00
15:00
C o n t i n u o u s t r a d i n g
until 2 hours before delivery
Delivery
hour
"ISBAS"
Landsnet’s
real time market
Hour 13 (time 12-13)
is nearest hour possible to trade when market opens
At 09:00 the market opens for trading hours today plus hours 1-24 tomorrow. Thus for 36 separate hourly contracts.
At 10:00 trade for hour 13 is closed and at 10:05 the Isbas system sends a report with final net trade per Balance Responsible for hour 13 to Landsnet. Every hour shift the procedure is repeated until 15:00 when a final net trade report is sent for hour 18, and for hours plus hours 1-12 tomorrow.
Settlement for “today’s hours” then occurs tomorrow if daily settlement cycle is applied or the 1st bank day the following week if weekly settlement.

12. Trading on the Elbas market

13. Bid = Buy
Ask =Sell

14. The menus of the trading system
“Back office”

15. The bid – ex. single hourly bids
A bid consists of - the delivery hour - the volume - the price
PH(hh)(yy)(mm)(dd)
:00-11:00 a.m.
The priority of the bid: 1. The price 2. The time when the bid was registered in the trading system
A bid is binding until: - a trade, change of the bid or an cancellation of the bid - in other words a bid may be annulled or changed until the bid has resulted in a trade
Trading currency is Euro
The minimum volume is 1 MWh
The minimum price difference is 0,1 € (=tick size)

16. Anonymity Common information: price volume order time of trade
information on cancellation of trade
Individual party information is not public information!

17. The consequences of a trade
Buy 10 MWh
PH12
21,2 €
Sell 6 MWh
PH12
21,2 €
All trades go automatically to clearing at Nord Pool Spot AS
Delivery
NPF informs the TSO once per hour (a few minutes after change of hour) the Elbas trades netposition for every hour open for trade
Money transactions
Invoicing every bankday
Collateral Call
7 days net bought (netted with the Elspot collateral call)
Trade 6 MWh
PH12
21,2 €

18. Scheduling report to the TSOs
Hourly net trades per participant in the TSOs area
The report is sent once an hour
The report includes the hourly values for today and after noon also the values for tomorrow
Participant must also send their hourly Elbas trade schedules to the TSO
Notes:
- Naturally the conditions that would be set by Landsnet may be different in Iceland
– likewise may apply for the economic settlement cycle (for ex. daily or weekly) and needs for collateral (security)

19. System requirements for end user
Minimum requirements for hardware, system software and
data communications lines:
- Web browser: Microsoft Internet Explorer 5.0 or later
or Netscape 6.0 or later, Opera
- Computer: Processor minimum Pentium II
128 MB RAM,
recommended 256 MB
- Data communications
link to ISP service: Recommended 2 Mbit/s
- Operating system Windows 2000/NT/XP or Unix

20. The trading system automatically updates crossborder capacities
Direction
Capacity to Elbas
Capacity after Elbas trade 1
Capacity after Elbas trade 2
FI-SE
2300
2310
SE-FI
1100
1090
DK2-SE
2000
1990
1994
SE-DK2 10 6
10 MWh
Participant C
Sell (4 MW) FG
SVK
Buy (10 MW)
Participant A
Participant D
Buy (4 MW)
Participant B
Sell (10 MW)
6 MWh
Capacities are updated automatically by the trading system
Automated Market Splitting divides areas dynamically when bottlenecks occur
Energinet.dk

21. Daily average prices (EUR) Elbas and Elspot Area price FIN (1 – 5/2006)

22. Extra slides

23. (Invoice/Credit Note per email)
Settlement on Nord Pool Spot’s physical markets
Daily settlement
The settlement system relies on electronic bank communications and funds transfers
-> All participants are obliged to have a pledged account in one of Nord Pool Spot AS settlement banks
Delivery of Elbas trades: -1 day
Delivery of Elspot trades: +1 day
Settlement day
(Invoice/Credit Note per )
Debiting:
+1 banking day
Crediting:
+3 banking days

24. Source: www.nordpool.com

25. Nord Pool Group markets
turnover in TWh
68,9
2.369
1.299
1.060
292
2007
prel.
61,4
2.410
1.394
765
251
2006
31,9
3.232
2.089
1.019
124
2002 28
2.770
1,748
910
112
2001
2000
2003
2004
2005
359
545
590
786
Financial 25
30,9
42,2
45,2
Elspot % -
Share of
Nordic**
consumption
1.636
1.883
1.964
2.278
Total
1.180
1.219
1.207
1.316
Clearing (bil. fin.) 97
119
167
176
Elspot*
Note:
*Elspot incl. Elbas of between 0.5 –0.9 TWh/yr , 1.1 TWh 2006 and 1.6 TWh 2007.
**Percentage of consumption in the Nordic part of the exchange area (not excl. exp).
Only considered DK-East (Zealand) consumption from Oct 2000 when that area was opened for Elspot.
As a comparison the Elspot volume of 40.6 TWh in 1996 ”only” represented 16% of the consumption in the then Swedish/Norwegian market area and the same year the financial exchange trade was 43 TWh.

26. Note: In 2007 there was a common Elspot price in the Nordic region 28
Note: In 2007 there was a common Elspot price in the Nordic region 28.1% of the time
compared with 33.3% all year 2006 (Jan-Jun 2007 it was common above 45% of time)

27. Elspot monthly prices 2006-2007 in EUR/MWh

28. Elspot volumes in GWh/week 2005-2007
Share of consumption
(prel.)
Dec-07
2007
Norway
58,9 %
57,0 %
Sweden
93,2 %
89,7 %
Finland
44,1 %
45,8 %
DK-West
84,4 %
84,3 %
DK-East
80,5 %
82,0 %
Total
70,4 %
68,9 %

29. Roles of the Power Exchange, Market Participants and System Operator
Grid
Capacities
Management of:
The Spot Market
(The Financial Market)
Real Time Operation
Ancillary Services
The Real Time Market
Imbalance settlement
Spot Trading
Schedules
and Flows
Bids Spot Market
(Trades in Financial)
Trade
Results
Participants:
Generation Schedules
Consumption forecasts
Trading Schedules (Spot+Bilateral)
Bids in Real Time Market
Generators
Distributors
Grid Owners
Traders
Brokers
Large scale Industry

30. Regulated markets Financial market at Nord Pool:
Exchange Act / Securities Trading Act (Norway)
Licences as commodity derivatives exhange and clearing house
Rulebooks for Nord Pool ASA and
Nord Pool Clearing ASA
Physical market at Nord Pool Spot:
Energy Act (Norway)
Licence as market place (Norway)
Rulebook Nord Pool Spot AS

31. Power Exchanges in Europe Shown current EuroPEX members
Volume in TWh 2007 (2006)
Spot
auction
Financial on PX and bil. clearing
Nord Pool
291 (250)
2369 (2220)
EEX (Ger)
117
(88)
1150
(1044)
APX (Ned)
21 (19)
- (-)
Powernext (Fra) (vol. 2006)
(30)
(83)
Nord Pool ASA & Spot
OMEL
APX
EEX
Gielda Energii
Powernext
Borzen
EXAA
GME
Belpex
OMIP
OPCOM
OTE
Endex