(C) NordPool1 The Nordic Power Market Zonal Pricing Jan Vidar Thoresen Managing Director Nord Pool Consulting AS

(C) NordPool2 Content The development of a regional power market The spot market Zonal pricing Experiences

(C) NordPool3 Development of a regional power market (1) - The Nordic power system Combine power and heat production Gas turbine TWh Condensing, Coal Condensing, Oil Hydro power (mean) Nuclear power 300 Consumption Production cost Hydro Thermal

(C) NordPool4 Development of a regional power market (2) Development : Stepwise development in the period Harmonisation of procedures limited to a minimum required to operate a common power market The balancing mechanism a responsibility of the TSOs and stepwise harmonised. No border transmission tariff. One PX - five national TSOs

(C) NordPool5 Nord Pool  Spot Market  Financial Market: Futures, Forwards, Options (standardised)  Clearing services Retail Market Small-scale industry Commercial and service businesses Households OTC Markets Bilateral Wholesale Market  Financial Contracts  Physical Contracts (tailor-made or standardised) Large-scale industries Generators & Grid owners Trading & Clearing Representatives Retailers Large-scale industries Generators & Grid owners Trading & Clearing Representatives Retailers Development of a regional power market (3)

(C) NordPool6 Development of a regional power market (4) Generation planning should be a responsibility of each generator. (Portfolio bidding and no central dispatch) A non-mandatory day-ahead spot market based on auction and self-dispatch. No curtailment of traded spot contracts. A real time markets that include central dispatch based on bids from consumers and generators. Harmonisation of procedures The balancing mechanism a responsibility of the TSOs. No border transmission tariff.

(C) NordPool7 A Day-Ahead Spot Market where the price represents the electricity energy price. A Real Time Market Where the price represents the system’s capability to balance generation and consumption in real time. The Real Time Market is normally operated by the Transmission System Operators. Two-market Concepts: Single-market Concepts: One price only that represents the margin of real time centralised dispatched contracts. Development of a regional power market (5) – Market concept

(C) NordPool8 Participants at Nord Pool and at the TSOs Nord Pool Spot MarketReal Time MarketsDerivatives Retailers Generators Industry Grid owners Representatives Clearing customers End-users Market Makers Generators End-users All Participants’ Imbalances Nordic TSOs Representatives Generators Industry Retailers Note: Demand side bidding in the real time market

(C) NordPool9 The Spot Market (1) Each of the national TSO-areas define the bid areas. Within each bid area participants can operate with one or more portfolios. Participants themselves optimise the use of own resources within in each bid area. The spot market is normally applied to balance resources to commitments to deliver. Day ahead congestion management is carried out between bid areas. The unconstrained MCP is the reference price for derivatives.

(C) NordPool10 The Spot Market (2) - Bidding Hour\Price: Bidding by fax or electronically! Participant Bid valid for: Week nr. Elspot area MonTueWedThuFriSatSun WeekCorrected Date: Time: example hour 9

(C) NordPool11 The Spot Market (3) - Market Clearing Price Mem. A, MW Mem. B, MW Mem. C, MW SUM, Purchase Price SUM, Sale Sale Purchase Price MW

(C) NordPool12 The Spot Market (4) - Present situation Market share of spot market about 40 % of total generation/consumption Continuously increase in number of participants Demand side participation Price signals into the retail market Low imbalance costs and appropriate systems for consumption forecast decrease the need for an intra day market.

(C) NordPool13 The Spot Market (5) - Handling of imbalances in real time Bids in merit order for each hour Downward Upward Spot price Price MW TSO select the cheapest unit if generation has to be increased and the most expensive unit if generation has to be decreased. The unit last called upon in each hour defines the real time price for the specific hour By the end of each hour of operation a price is determined. This price is also the price of imbalances

(C) NordPool14 The TSOs cooperate in an “Inter-Nordic Transmission System Operator Agreement”. The balancing mechanisms include in total about 3-5 % of total generation. Demand side bidding in the real time markets and markets for power reserves. Procedures for pricing of imbalances still different in the TSO areas Structure of transmission tariff harmonised. Generation and consumption carries about 50 % each of total transmission costs in the respective TSO-areas. The Spot Market (6) - The Present balancing Mechanism

(C) NordPool15 Zonal Pricing (1) - Day ahead congestion management No congestion Congestion between Norway and Sweden One price only : MCP Three prices: MCP, P L and P H P L < P H Contractual flow PLPL PHPH MCP

(C) NordPool16 The TSO compensate for transmission constraints by “re- dispatching” the market in real-time using the Balancing Market. No change of the market cross/MCP on both sides of the bottleneck. The TSO procures upward regulation in deficit area and downwards regulation in surplus area at Balancing Market prices. -Note that demand side can contribute by increasing/decreasing load! Cost incurred by the TSO is passed on to the Grid owners and/or consumers as a Transmission Tariff Zonal Pricing (2) - Counter trade in real time

(C) NordPool17 Zonal Pricing (3) - Present situation No congestion and therefore only one price in the total market in about 50 % of the time. In the remaining 50% of the time there are congestion between two or more TSO-areas. Market concentration may not be appropriate in some situation with congestion. Due to day ahead congestion management there is a net income in settlement of spot contracts in all situations with congestion. The net income is distributed to TSOs based on a formula agreed on.

(C) NordPool18 Single-market concepts: Central dispatch of traded contracts Complex price determination Trade close to time of operation Price determination claimed to be ”Not understandable” Low demand side participation Not appropriate for participants to respond on prices Experiences (1) – Market concept characteristica

(C) NordPool19 Two-market concepts: De-centralised dispatch of spot contracts Centralised dispatch in Real Time Market Simple and understandable price determination both in spot market and real time market Trade close to time of operation Appropriate concept for participants to respond on price signals Experiences (2) – Market concept characteristica

(C) NordPool20 Two-market concept High activity in bilateral trade One spot exchange with high liquidity Strong support to the spot exchange by regulator, political level and TSOs The spot price have developed to be The Reference Price The spot exchange is an important infrastructure company Low imbalance costs Full retail competition Experiences (3) – The Nordic Market

(C) NordPool21 Generally high competition in the zones Reliable reference prices – necessary for developing a derivative market Easy to understand the price setting Demand side participation Netting of imbalances in each zone The system operator defines the capacities Simplified trading system Experiences (4) – Zonal pricing

(C) NordPool22 Thank you very much for your attention