Market Structures and Institutions Brasilia, Brazil 21 - 23 September 2003 Mature Meshed Market The Nordic Market Expe

1. CIGRE WORKSHOP Study Committee C5 Market Structures and Institutions Brasilia, Brazil 21 - 23 September 2003 Mature Meshed Market The Nordic Market Experience Ole Gjerde Department Manager, Grid Operation Statnett, Norway

2. Contents of presentation • Background – the Nordic electricity system • The Nordic model • A competitive market – basic requirements • From theory to practice – Why is the Nordic market a success? • Conclusions

3. Driving Forces behind Liberalization • Political willingness and consensus on liberalization • Legal framework put in place and adjusted to ensure competition • Regulator established in all countries • Independent Transmission System Operator (TSO) created in all countries to facilitate market development

4. Rapid electricity market opening in the 1990´s. • NORWAY • Energy Act, Jan 1991 • Full market opening 1992 • Power Exchange 1993 • Nord Pool Norway-Sweden 1996 • FINLAND • Electricity Market Act, June/Nov 1995 • Full market opening 1998 • Part of Nord Pool area 1998 • SWEDEN • Electricity Market Act, Jan 1996 • Full market opening 1999 • Nord Pool Sweden-Norway 1996 • DENMARK • Electricity Act, 1998 • Energy act amandment, June 1999 • Full market opening Jan 2003 • Nord Pool West Denmark 1999, East Denmark 2000 Liberalization in the Nordic Electricity Market

5. Current Nordic Electricity Situation 5 0 • Capacity 90 650 MW • Consumption 397 TWh • Peak load 70 000 MW • Inhabitants 24 mill. • Area 1 154 961 km2 • Generation mix • Hydro (55%) • Nuclear (22%) • Thermal (21%) • Renewable (2%) • National legislation, regulatory bodies and TSOs • The Nordic electricity market is transformed from four national/five systems into one electricity market • Common electricity exchange and reference prices • Grid interconnections and trade between countries and to continental Europe 12 20 1 2 00 0 15 5 00 1 5 60 0 3 60 00 5 5 0 32 2 0 0 300 0 R U S E S T 1 0 0 0 6 5 0 L V 1 3 5 0 D K 1 7 0 0 L T 1200 1200 R U S B Y 6 0 0 8 0 0 6 0 0 4 5 0 6 0 0 P L N L EEX APX PPX D

6. Supply Nordic Regulatory Model Monopoly Competition Independent Transmission System Operator Generation Distribution Network

7. Market Players - Nordic Model Uranium Plutonium MOX Natural gas Coal Oil “Inter- connectors” “Inter- SYS. OP. Water Other Fuels Fuel al Generation Energy Act TRANSMISSION NORD POOL Transmission Regulator Independent System Operator Market Operator Regu- lations Distributjon & retail Large consumers Retailers DISTRIBUTION

8. Governing Bodies, Example Statnett Ministry of Petroleum and Energy Complaints Energy Authority Owner The Board Regulator Licences Statnett SF Users Council Supervision Customers/Users Representatives Complaints

9. Spot market sets energy price Point tariff pays network costs – No transmission channels Decentralized generation scheduling, no central dispatch Regulating power market for real time balancing of generation and demand Congestion management by market splitting (Structural bottlenecks) and counter trade (Temporary bottlenecks) Ancillary services by contract and markets Full retail choice of supplier Financial contracts for price hedging Nordic Electricity Market Structure - Key Elements

10. OTC Markets Bilateral Wholesale Market  Financial Contracts  Physical Contracts (tailor-made or standardized) Nord Pool ASA  Spot Market  Financial Market: Futures, Forwards, Options (standardized) Retail Market Small-scale industry Commercial and service businesses Households Large-scale industries Generators &Grid owners Trade & clearing representatives Retailers Large-scale industries Generators & Grid owners Trade & clearing representatives Retailers The Nordic Power Market

11. The NORDIC Model PRODUCERS OTHER PLAYERS CONSUMERS PRODUCERS OTHER PLAYERS CONSUMERS BILATERIAL ELECTRICITY TRADE ELECTRICITY EXCHANGE Regulating power Balancing power Financial market ELSPOT ELBAS 36 - 12 h 33 - 1 h 3 year - 56 h After the fact Operating hour

12. The roles of...Nord Pool , market players, and system operators Power Exchange System Operator Grid Capacities • Organisation and • Operation • Financial markets • Elspot • Elbas Operational reliability Ancillary Services Regulating Power Market Balance control and settlement Spot trading Bids to Elspot and Elbasmarkets Requesting up- and downward regulation Market players Generation Schedules Bids to the Regulating Power Market Generators Distributors Grid Owners Traders Brokers Large-scale Industries

13. Nordic physical market (day ahead) Volume in MWh 6 000 Purchase System price 124.53 5 000 Sale 4 000 3 000 2 000 1 000 0 0 20 40 60 80 100 120 140 160 180 200 Price in NOK Setting the system price • Constraints- Defined by TSO- Exchange informed • Market opens- Participant information sent • Bids- Participant place bids via internet (or EDIEL, fax) • System price • Aggregated demand curve • Aggregated supply curve • Intersection defines system price

14. The Regulating Power Market - The Nordic Balance Market

15. A common Nordic Regulating Power Market established 1 September 2002 So far the following results have been achieved: Efficient balance control Lower total control costs for the TSOs Improved operational reliability due to simplified routines and improved overview Equalisation of the Regulating Power Price in Nordel Increased interest in placing bids on the Regulating Power Market Harmonisation of balance settlement between the countries In practice, the TSOs work as one company in this respect CommonRegulating Power Market - Results

16. Elkraft System Svenska Kraftnät Statnett Eltra Fingrid Inter-Nordic Transmission System Operation Agreement Forming of a Nordic Electricity Market Requirements: Co-operation between all five Nordic TSOs on issues required to form one common market. Co-operation regulated in: “The Inter-Nordic Transmission System Operation Agreement”

17. Competition encouraged where possible (electric power a commodity) Natural monopolies (network) separated from competitive operations The network is the physical market place, all eligible customers must have open access to the network A transparent transmission tariff structure (G and L) where charges are non transaction based and independent of choice of trade counter part Inter TSO-compensation payment for cross border transit flows A competitive electricity market- basic requirements (1)

18. Congestion management for physical power flow A system to manage imbalances A system to manage energy losses in the grid Market rules that do not interfere with system operator’s responsibility regarding power quality and reliability Network monopolies regulated by the authorities Trading on the Power Exchange is not mandatory A neutral TSO A competitive electricity market- basic requirements (2)

19. An independent TSO is the backbone of an open market The grid is the physical marketplace

20. NOK/MWh 400 350 300 Norways last political decided price 1991 1996 250 1994 200 2001 1997 1993 1998 1995 150 1999 2000 100 1992 50 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Desc Source: Nord Pool Market prices in the Nordic Electricity Market 1992 -2001 1 Euro = 8.30 NOK (01.09.2003)

21. Area prices at Nord Pool 05.2002 – 03.2003

22. From Theory to Practice - Nordic experience • Political willingness / political consensus • Legal framework adjusted to ensure competition • Independent TSO facilitating competition • Regulator and TSO responsible for market development • Extensive experience with power exchange • Supply industry structure • Simple solutions -understandable for participants • Be true to the facts, - electricity is a commodity • Socio-economic criteria for grid investment Positive experiences Improvement potential • Mechanism for securing new generation capacity investments • Investment incentives (general problem)

23. From Theory to Practice - Key Success Factors Energy act • Establish legal framework for securing competitive market and attracting private capital • Separation of generation / retail from monopoly business (main grid and distribution) • Functional competitive sector Unbundling • Establish regulator • Regulation of natural monopolies • Pricing of transmission and distribution services Regulation • Secure open access to all grids • Transmission tariffs • Tools for system balancing • Future development of grid TSO operation

24. Arranging for a Competitive Environment - Nordic experience • TSO as a facilitator for the market • Link up between TSOs and power exchange • Increased efficiency - economic focus • Handle flexible power flow (national and between Nordic control areas) • Better utilisation of grid • Simple rules and by-laws Positive experiences Improvement potential • Further development in co-operation between Nordic TSOs - harmonisation and common investments • Market based linking towards Europe • Investment incentives • Efficient market for capacity

25. Furnishing the Market - Nordic experience • Spot trading as a tool for balancing the system • Price transparency and liquid market leading to a trusted reference price • Competition also among market places • Financial market for price hedging purposes • Spot market as instrument for integration of Nordic control areas • Power exchange as centralised information source for market participants • Establishment of retail market • The spot market as an instrument for congestion management Positive experiences Improvement potential • Harmonization of the Nordic market • Linking the Nordic market to neighbouring markets

26. Why choose a TSO-solution System-operator Time Snapshot Long-term changes in production- and consumption patterns create a need for transmission capacity adaptations • An ISO lacks necessary instruments to make grid capacity adaptations • A grid owner without system-operator responsibility will often lack incentives to choose instruments that the ISO finds socio-economic efficient TSO-solution is necessary in order to ensure an efficient adaptation of the grid to long term changes in production- and consumption patterns Grid development in a socio-economic perspective is not needed System operator Grid owner Grid owner A TSO-solution is necessary to carry out the right development of the grid, responding to long-term changes in production- and consumption patterns Possible to separate tasks between system-operator and grid owner in a snapshot perspective

27. Reduced prices to the customers Better service to the customers Cost efficient operation Flexible power flow Reduced overcapasity Focus on the economy Conclusion –The Nordic Experience

28. Political signals to form a common Nordic market Long tradition in co-operation A regulatory framework that committed to facilitate trade and establishment of a liquid spot market TSO ownership of a power exchange A spot power pool for producers that were established already in 1971 First mover advantages The Nordic market - why a success ? (1)

29. An appropriate market concentration A non-mandatory power exchange: Based on market pricing not cost based simulations Price transparency No mix between balancing costs and power procurement costs Competition between power exchange and bilateral trade Easy access to relevant market information A market that facilitate establishment of service providers: Trade representatives Market analysts The Nordic market - why a success ? (2)

30. WEB-SITES www.nordpool.com www.nordel.org www.fingrid.fi www.landsvirkjun.is www.statnett.no www.svk.se www.eltra.dk www.elkraft.dk