1. Copyright Houmoller Consulting © Jan. 3, 2013 Anders Plejdrup Houmøller 1 Introduction  In Appendix 1, you’ll find slides giving examples of how the closing/settlement prices for financial contracts can change during the contracts’ trading period.  In appendix 2, you’ll find a list of the terms and acronyms used in this presentation.  Concerning the documents referred to in this presentation: At houmollerconsulting.dk, you can download the documents from the sub-page Facts and findings.  This PowerPoint presentation is animated It’s recommended to run the animation when viewing the presentation.  On most computers, you can start the animation by pressing F5. Now the presentation moves one step forward, when you press Page Down. It moves one step backward, when you press Page Up.

2. Copyright Houmoller Consulting © Jan. 3, 2013 Anders Plejdrup Houmøller 2 Forward prices and spot prices – 1  This PowerPoint presentation compares the spot prices and the prices of the financial forward contracts The comparison is made for the German Phelix spot price, the Nordic System price and the spot prices for the price zones of Southern Sweden (SE4), Western Denmark (DK1) and Eastern Denmark (DK2).  In this presentation, for Southern Sweden, Western Denmark and Eastern Denmark, the ”forward price” is the price of the System Price contract plus the price of the CfD contract: (Forward price) = (System Price) + (CfD price).

3. Copyright Houmoller Consulting © Conclusion from the analysis: price hedging is expensive for consumers  As can be seen: compared with the spot prices, the forward prices have a strong tendency to overshoot Hence, in the choice between spot and forward, on the average you get the highest prices by choosing forward. Consequently, on the average, price hedging is expensive for consumers (and profitable for producers).  For both Germany and Western Denmark, the tendency for the quarterly forward prices to overshoot the spot prices is statistically significant With only 28 observations in each of the samples, its remarkable its possible to prove statistical significance for some price zones. 3 *) For both Germany and Western Denmark, the significance level is higher than 0.995% *) The concept ”price hedging” is explained in appendix 2

4. Copyright Houmoller Consulting © Correlation between forward prices and spot prices  Note that high liquidity for a forward contract does not imply strong correlation between the contract’s prices and the corresponding spot prices.  Probably, the Nordic System Price contracts are Europe’s most liquid financial electricity contracts At the same time, the prices of the System Price contracts have low correlation to the spot prices. Jan. 3, 2013 Anders Plejdrup Houmøller 4

5. Copyright Houmoller Consulting © Jan. 3, 20135 Forward prices and spot prices – 2  For each of the slides no. 7-11:  For each quarter, “the quarter’s forward price” is the average of the daily closing/settlement prices during the reference period The reference period is the trading days during the last quarter, where the contract was traded (save the last ten trading days).  Example for the Nordic System Price contract for Q3-2012 (ENOQ3-12): The “forward price” is the average of the daily closing prices during the period from 2 April to 15 June 2012 As can be seen from slide no. 18, this gives a forward price of 29.84 EUR/MWh. Anders Plejdrup Houmøller

6. Copyright Houmoller Consulting © Jan. 3, 20136 Forward prices and spot prices – 3  For each of the slides no. 7-9 and slide no. 11:  For each of the 28 quarters from Q1-2006 to Q4-2012, the quarter’s average spot prices is compared with the quarter’s forward price.  For each slide, this gives 28 points indicating how well the forward’s price forecasted the spot price.  The mean of the numerical difference |spot–forward| illustrates the average distance between the forward curve and the spot curve.  The mean of the difference (spot–forward) shows how far the spot curve on the average lies below the forward curve.  For slide no. 10: the price zone SE4 was launched 1 November 2011. Therefore, the analysis covers only the four quarters of 2012. Anders Plejdrup Houmøller

7. Copyright Houmoller Consulting © Germany: forward prices and spot prices The 28 quarters from Q1-2006 to Q4-2012 20 30 40 50 60 70 80 90 EUR/MWh 2006200720082009201020112012 Correlation(spot,forward) = 0.52 Average of (spot - forward) = -6.0 EUR/MWh Average of |spot – forward| = 9.8 EUR/MWh The quarter’s forward price The quarter’s average spot price 7 Source: EEX

8. Copyright Houmoller Consulting © Western Denmark: forward prices and spot prices 2006200720082009201020112012 The 28 quarters from Q1-2006 to Q4-2012 The quarter’s forward price The quarter’s average spot price Correlation(spot,forward) = 0.52 Average of (spot - forward) = -6.8 EUR/MWh Average of |spot – forward| = 8.8 EUR/MWh 20 30 40 50 60 70 80 EUR/MWh 8 Sources: Nasdaq OMX and Nord Pool Spot

9. Copyright Houmoller Consulting © Eastern Denmark: forward prices and spot prices 2006200720082009201020112012 20 30 40 50 60 70 80 EUR/MWh The 28 quarters from Q1-2006 to Q4-2012 The quarter’s forward price The quarter’s average spot price Average of (spot - forward) = -5.6 EUR/MWh Average of |spot – forward| = 11.0 EUR/MWh Correlation(spot,forward) = 0.35 9 Sources: Nasdaq OMX and Nord Pool Spot

10. Copyright Houmoller Consulting © Southern Sweden: forward prices and spot prices 20 30 40 50 60 EUR/MWh The 4 quarters from Q1-2012 to Q4-2012 2012 Q1Q2Q3Q4 The quarter’s forward price The quarter’s average spot price Average of (spot - forward) = -10.4 EUR/MWh 10 Sources: Nasdaq OMX and Nord Pool Spot

11. Copyright Houmoller Consulting © System Price: forward prices and spot prices 2006200720082009201020112012 10 20 30 40 50 60 70 EUR/MWh The 28 quarters from Q1-2006 to Q4-2012 The quarter’s forward price The quarter’s average spot price Correlation(spot,forward) = 0.49 Average of (spot - forward) = -3.5 EUR/MWh Average of |spot – forward| = 9.5 EUR/MWh 11 Sources: Nasdaq OMX and Nord Pool Spot

12. Copyright Houmoller Consulting © Jan. 3, 201312 Appendix 1 Closing/settlement prices Variation during the last nine months of the financial contract’s trading period Anders Plejdrup Houmøller

13. Copyright Houmoller Consulting © 13 Closing/Settlement Prices  Please refer to appendix 2: at the end of each trading day, both Nasdaq OMX and EEX set a closing/settlement price for each of their financial contacts.  As examples of how the closing/settlement prices vary:  The slides no. 14-18 show the daily closing/settlement prices for five forwards.  For each forward, the daily closing/settlement price is shown during the last nine months, where the forward was traded.  The four Nordic forwards hedged against the Q3-2012 spot price for respectively Western Denmark (DK1). Eastern Denmark (DK2). Southern Sweden (SE4). The Nordic System Price.  The German forward hedged against the German Q4-2012 spot price.  “Reference period” is the trading days during the last quarter, where the contract was traded (save the last 10 trading days).

14. Copyright Houmoller Consulting © Germany: Q4-2012 0 10 20 30 40 50 60 EUR/MWh Forward prices and the quarter’s average spot price Trading days in 2012 Settlement price per day for Phelix Baseload Quarter 4/12 14 Source: EEX The average German spot price for Q4-2012 turned out to be 41.38 EUR/MWh Reference period’s average forward price: 50.15 EUR/MWh JanFebMarAprMayJunJulAugSept Reference period

15. Copyright Houmoller Consulting © Western Denmark (DK1): Q3-2012 0 10 20 30 40 50 EUR/MWh 15 Sources: Nasdaq OMX and Nord Pool Spot Forward prices and the quarter’s average spot price Trading days in 2011-2012 Closing price per day for ENOQ3-12 + SYARHQ3-12 The average DK1 spot price for Q3-2012 turned out to be 33.95 EUR/MWh Reference period’s average forward price: 39.55 EUR/MWh OctNovDecJanFebMarAprMayJun Reference period

16. Copyright Houmoller Consulting © Eastern Denmark (DK2): Q3-2012 0 10 20 30 40 50 EUR/MWh 16 Sources: Nasdaq OMX and Nord Pool Spot Forward prices and the quarter’s average spot price Trading days in 2011-2012 Closing price per day for ENOQ3-12 + SYCHPQ3-12 Reference period’s average forward price: 39.79 EUR/MWh The average DK2 spot price for Q3-2012 turned out to be 35.39 EUR/MWh OctNovDecJanFebMarAprMayJun Reference period

17. Copyright Houmoller Consulting © Southern Sweden (SE4): Q3-2012 0 10 20 30 40 50 EUR/MWh 17 Sources: Nasdaq OMX and Nord Pool Spot Forward prices and the quarter’s average spot price Trading days in 2011-2012 Closing price per day for ENOQ3-12 + SYMALQ3-12 Reference period’s average forward price: 35.82 EUR/MWh The average SE4 spot price for Q3-2012 turned out to be 25.68 EUR/MWh OctNovDecJanFebMarAprMayJun Reference period

18. Copyright Houmoller Consulting © System Price: Q3-2012 0 5 10 15 20 25 30 35 40 45 EUR/MWh 18 Sources: Nasdaq OMX and Nord Pool Spot Forward prices and the quarter’s average spot price Trading days in 2011-2012 OctNovDecJanFebMarAprMayJun Closing price per day for ENOQ3-12 Reference period The average System Price for Q3-2012 turned out to be 20.84 EUR/MWh Reference period’s average forward price: 29.84 EUR/MWh

19. Copyright Houmoller Consulting © Jan. 3, 201319 Appendix 2 Terminology and acronyms Anders Plejdrup Houmøller

20. Copyright Houmoller Consulting © Terminology and acronyms – 1 As used in this presentation  CfD Contract for Difference. A financial contract, which hedges against the risk there is a difference between the System Price and the spot price of a given Nordic price zone. Example: the underlying reference for the CfD for DK1 is this difference (DK1 spot price) - (System Price).  Closing price At Nasdaq OMX, for each financial contract, a closing price is set at the end of every trading day. In effect, at the end of the trading day, the closing price is the financial market’s forecast of the future spot price. Nasdaq OMX’ closing price is analogous with EEX’ settlement price. Example: 27.45 EUR/MWh was the closing price 15 June 2012 for the contract hedging against the System Price during Q3- 2012 (ENOQ3-12). 20Jan. 3, 2013 Anders Plejdrup Houmøller

21. Copyright Houmoller Consulting © 21Jan. 3, 2013 Anders Plejdrup Houmøller Terminology and acronyms – 2 As used in this presentation  Correlation Given two data sets, the correlation function measures the degree to which the two data sets move in lockstep. Please refer to the next-to-last slide.  DK1 and DK2 The price zones of Western and Eastern Denmark as indicated at the picture.  Eastern Denmark See DK2.  EEX European Energy Exchange. Please refer to the web site eex.de.  ENOQ3-12 See ticker symbol.  Financial contract Short-term for financial forward contract.

22. Copyright Houmoller Consulting © Terminology and acronyms – 3 As used in this presentation  Financial forward contract In this document, this is a contract, which can be used to hedge against a spot price. Please refer to the chapters 11-13 of the PDF document “The Liberalized Electricity Market”.  Forward contract Short-term for financial forward contract.  Forward price The settlement/closing price of a forward contract.  German spot price See Phelix spot price.  Nasdaq OMX An exchange, where the players can trade Nordic financial contracts (and other contracts). Please refer to the web site nasdaqomx.com/commodities.  Nordic and Nordic area In this document, this refers to the four countries Denmark, Finland, Norway and Sweden.  Nordic System Price See System Price. 22 Anders Plejdrup Houmøller Jan. 3, 2013

23. Copyright Houmoller Consulting © Terminology and acronyms – 4 As used in this presentation  Phelix Baseload 4/12 The EEX forward, which hedged against the German spot price during Q4-2012.  Phelix spot price The spot price for Germany published by the spot exchange EPEX Spot.  Price hedging As a consumer or producer of electricity in Northern Europe: if you choose to trade at the spot price, you’ll first learn your price for the next day’s consumption/production of electricity after 12 o’clock Central European Time. However, by using a financial contract, you can fix your electricity price at an earlier point in time. This early fixing of the price is called “price hedging”.  Price zone A geographical area, within which the players can trade electrical energy day-ahead without considering grid bottlenecks. 23Jan. 3, 2013 Anders Plejdrup Houmøller

24. Copyright Houmoller Consulting © Terminology and acronyms – 5 As used in this presentation  SE4 The price zone of Southern Sweden as indicated at the picture at slide no. 21.  Settlement price At EEX, for each financial contract, a settlement price is set at the end of every trading day. In effect, at the end of the trading day, the settlement price is the financial market’s forecast of the future spot price. EEX’s settlement price is analogous with Nasdaq OMX’s closing price.  Southern Sweden See SE4.  Spot price Please refer to appendix 2 in the PowerPoint presentation “Market coupling and spot price calculation” (or the PDF document with the same name). 24Jan. 3, 2013 Anders Plejdrup Houmøller

25. Copyright Houmoller Consulting © Terminology and acronyms – 6 As used in this presentation  SYARHQ3-12 See ticker symbol.  SYCHPQ3-12 ticker symbol of the CfD, which hedged against the difference between the DK2 spot price and the System Price during Q3-2012. CPH indicates CoPenHagen.  SYMALQ3-12 ticker symbol of the CfD, which hedged against the difference between the SE4 spot price and the System Price during Q3-2012. MAL indicates MALmø (the biggest town in SE4).  System Price A virtual price. It’s the theoretical, common spot price we would have in the Nordic area, if there were no grid bottlenecks in the area covered by the four countries. For an overview over the historical numerical values of the System Price, please see the PowerPoint presentation “System Price 1992-2012” (or the PDF document with the same name). 25Jan. 3, 2013 Anders Plejdrup Houmøller

26. Copyright Houmoller Consulting © Terminology and acronyms – 7 As used in this presentation  Ticker symbol The name of a financial contract. Example 1: the ticker symbol of the contract, which hedged against the System Price during Q3-2012 was ENOQ3-12 ENO indicates Electricity NOrdic Q3-12 indicates the third quarter of 2012. Example 2: the ticker symbol of the CfD, which hedged against the difference between the DK1 spot price and the System Price during Q3-2012 was SYARHQ3-12 SY indicates SYstem Price ARH indicates AARHus (the biggest town in Western Denmark). Q3-12 indicates the third quarter of 2012.  Western Denmark See DK1. 26Jan. 3, 2013 Anders Plejdrup Houmøller

27. Copyright Houmoller Consulting © 27 The correlation function  The correlation function measures the correlation between two variables.  If the two variables move in lockstep, the value of the correlation function is 1. A value of 0 means there is no correlation at all. a b In this example Correlation(a,b) = 1 as a and b move in lockstep

28. Copyright Houmoller Consulting © Thank you for your attention! 28 Anders Plejdrup Houmøller Houmoller Consulting ApS Tel. +45 28 11 23 00 anders@houmollerconsulting.dk Web houmollerconsulting.dk