Electricity Market Day. Nord Pool and the Nordic Power Market. Torger Lien President & CEO, Nord Pool ASA

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2 Electricity Market Day Nord Pool and the Nordic Power Market Torger Lien President & CEO, Nord Pool ASA

3 The market fails to do what the sentral planners want Quotation from a US electricity market professor at Harvard

4 The deregulated power market consept is just an instrument, not the objective Electricity is no ordinary good Energy policy have been and will be on the top of the political agenda, with good reason The objective is secure safe and stable supply of electricity at reasonable prices As Nord Pool see it the market is functioning and Nord Pool has an important role to make the market work after its intentions But there are challenges

5 Challenges Nord Pool has long warned against excessive market concentration We are close to the limit of what the market can tolerate Challenge with larger degree of area pricing Transmission links must be strengthened The Nordic region needs more power generation

6 International fuel costs

7 Power production capacity in the Nordic countries Gas turbine Production cost Condensing, oil P2 P1 Hydro Thermal Pumped storage power Hydropower (mean) Combined heat and power production Nuclear power Condensing, coal TWh Annual Nordic consumption

8 Price determination - principles Production cost Gas turbines Average price Condensing, oil Hydro (average) CHP industry Condensing, coal Combined heat and power Nuclear TWh Annual Nordic consumption

9 Price determination - principles Production cost Gas turbines Average price Condensing, oil Condensing, coal CHP industry Hydro (low) Combined heat and power Nuclear TWh Annual Nordic consumption

10 Price determination - principles Production cost Gas turbines Average price Condensing, oil Hydro (high) CHP industry Condensing, coal Combined heat and power Nuclear TWh Annual Nordic consumption

11 Electricity prices September 05 EEX peak 62 /MWh 30 /MWh CO 2 10 /MWh Kul 20 /MWh Fuel Olie 60 /MWh DK1 peak 57 /MWh EEX base 48 /MWh DK1 base 45 /MWh NP base 29 /MWh

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13 Regional spread Physical market DK 12% Financial market Other 13% FI 21% DK 5% NO 27% FI 5% 167 TWh 590 TWh NO 53% SE 24% SE 40% Market share (in %) by country in 2004.

14 A strong regulatory framework Post Enron development: ISD, ISD II, Mifid, MAD, CAD, IFRS, IAS Commodity markets, not the prime target The nature of the Nordic electricity market is substantially different from the international stock, bond and interest markets For example the new accounting rules are not well adapted to a hydro based electricity market

15 Will the rules attract liquidity?

16 Who are the players in the commodity market (power) Generators Distributors Large industrial consumers Investment firms (traders) Hedge funds Other financial institutions

17 Direct trade the most natural alternative Anybody is free to purchase or sell their electricity product to anyone It s a deal between the buyer and seller No need to report any contract details to anybody This is a key principle in a free country Any exchange or organised market place has to offer added value

18 What s the added value? The best execution price Security (risk reduction) Simplicity (administration) Ease of transaction Transparency Liquidity Reliability

19 What helps liquidity in this regulatory context More and equal info. to everybody Level playing field, no manipulation or abuse Serious and financially solid players Securing equal treatment In general the new legal requirements improve these elements

20 Why the resistance? Complexity Cost Hampers present privileged position Strong resistance against publishing reservoir data (94-95) What s the real and what s the hidden agenda

21 Nord Pool is open and transparent Nord Pool s idea is based on openness and transparency, equal information to everybody and strong disclosure requirements Nord Pool has some of the strictest rules in the world for information management compared with other commodity exchanges Well balanced this is to the better of the market

22 Marginal price = Market price Marginal price setting is not unique to Nord Pool The alternative is to introduce price regulation

23 Nord Pool New bidding area - KONTEK KONTEK introduce market coupling, Germany-Nordic The main purpose is to secure that the power flow across the border is responding to price signals from the two markets So fare the power flow between Eastern Denmark and the KONTEK bidding area is always right i.e. the power always flows towards the high price area. So far relatively low liquidity on KONTEK

24 Kyoto protokoll ETS and EUA quota system

25 EUA Prices EUR/ tco EUADEC-05 Prices: CFI-DEC

26 Carbon dioxide price is not fully expressed in the power market 100% Elastic consumption Load variation and price structure Fuel exchange Hydropower Bottlenecks 0% No thermal power No trade

27 Production cost avg. coal fired power generation Marginal carboncost: 13,7 øre/kwh øre/kwh Karbonkostnad Brenselskostnad OPEX Uke

28 Cost effect the European model 100 % 80 % 60 % 40 % Nordel 20 % Germany Definition: Avg. price increase/margi nal cost increase of carbon coal gen. 0 % EUR/tonne Today s fuel prices The cost effect in Germany is higher than in the Nordic region Today s carbon dixoide price yield about 45% effect in the Nordic region

29 Actual power and carbon forward prices, EUR/tonne February 05 March 05 April 05 May 05 June 05 July 05 August 05 Carbon 2007 Germany 2007 Nordel EUR/MWh Strong correlation beetween forward and carbon prices Even stronger correlation between Nord Pool and EEX power prices

30 Finnish thermal production Helprice-2004 Helprice-2005 GWh EUR/MWh Uke

31 EUA/ETS sustainability Higher power prices to household consumers Globally competitive base industry will suffer EUA price formation fundamental or speculative Will the concept reduce CO2 emissions globally is the test period. What will be the conditions for period, and what will happen after 2012 For how long will European politiciens be the frontiers on the account of European base industry flagging out or will the rest of the world follow their brave initiative?

32 For more information: