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 E-mail: rn@npspot.com Tel: +46 (0)8 555 166 06

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 

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 1999-2000? 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!

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!

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?

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

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

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

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

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

"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 13-24 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 19-24 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.

Trading on the Elbas market

Bid = Buy Ask =Sell

The menus of the trading system “Back office”

The bid – ex. single hourly bids A bid consists of - the delivery hour - the volume - the price PH(hh)(yy)(mm)(dd) 7.6.2002 10:00-11:00 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)

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

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 €

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)

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

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

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

Extra slides

(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 email) Debiting: +1 banking day Crediting: +3 banking days

Source: www.nordpool.com

Nord Pool Group markets turnover in TWh 2000-2007 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. 2000-2005, 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.

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)

Elspot monthly prices 2006-2007 in EUR/MWh

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 %

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

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

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