Is the Icelandic market ready for new challenges?

Rickard NilssonProject Manager

Nord Pool Spot AS

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

Conference 11 February in Reykjavik:

Power exchange for electricityOpportunities or constraints?

Agenda

1. 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?

2. 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

3. 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:1. Limited cross-border capacity for market due to historical bilateral priority

contracts lasting until about 19992. Only hourly bids in spot although Swedish needs for blocks3. 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

4. Switch of supplier was costly in Sweden because until ”profile ontracts” were introduced in 1999 customers has to buy metering device to switch supplier

5. 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:1. Tariffs imposed Swe-Fin and Swe-Den in the first few years2. 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

3. 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

4. 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 marketSome 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

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

Next days delivery hours opened at:

TSO:s real time market

C o n t i n u o u s t r a d i n g until 1 hour before delivery

14:00in SE, FI and DK2

Deliveryhour

• 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

The Elbas timelineThe Elbas timeline

Landsnet’s real time market

C o n t i n u o u s t r a d i n g until 2 hours before delivery

09:00

Deliveryhour

• 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.

An idea for ”Isbas” timeline & structureAn idea for ”Isbas” timeline & structure Note: The point is merely to illustrate how it could functionNote: The point is merely to illustrate how it could function

15:00Opening hoursfor trading

Hour 13 (time 12-13)is nearest hour possible to trade when market opens

Trading on the Elbas market

Bid = BuyBid = BuyAsk =SellAsk =Sell

“Back office”

The menus of the trading system

The priority of the bid: 1. The price2. The time when the bid was registered in the trading system

A bid consists of- the delivery hour- the volume- the price

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

The bid – ex. single hourly bids

• The minimum price difference is 0,1 € (=tick size)

• The minimum volume is 1 MWh

PH(hh)(yy)(mm)(dd) PH(hh)(yy)(mm)(dd)

• Trading currency is Euro

7.6.2002 10:00-11:00 a.m.7.6.2002 10:00-11:00 a.m.

Common information: price volume order time of trade information on cancellation of trade

Individual party information is not public information!

Anonymity

All trades go automatically to clearing All trades go automatically to clearing at Nord Pool Spot AS at Nord Pool Spot AS

Delivery Delivery

NPF informs the TSO once per hour (a few NPF informs the TSO once per hour (a few minutes after change of hour) the Elbas minutes after change of hour) the Elbas trades netposition for every hour open for trades netposition for every hour open for tradetrade

Money transactions Money transactions

Invoicing every bankdayInvoicing every bankday

Collateral Call Collateral Call

7 days net bought (netted with the 7 days net bought (netted with the Elspot collateral call) Elspot collateral call)

The The consequenceconsequences of a trades of a tradeBuy 10 MWh

PH12

21,2 €

Sell 6 MWh

PH12

21,2 €

Trade 6 MWhPH1221,2 €

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 System requirements for endend useruser

Minimum requirements for hardware, system software anddata communications lines:

- Web browser: Microsoft Internet Explorer 5.0 or lateror Netscape 6.0 or later, Opera

- Computer: Processor minimum Pentium II128 MB RAM, recommended 256 MB

- Data communications link to ISP service: Recommended 2 Mbit/s

- Operating system Windows 2000/NT/XP or Unix

SVK

Energinet.dk

ParticipantParticipant B BSell (10 MW)

Buy (10 MW)ParticipantParticipant A A

FG

ParticipantParticipant D DBuy (4 MW)

ParticipantParticipant C C Sell (4 MW)

10 MWh10 MWh

6 MWh6 MWh• Capacities are updated automatically by the trading system

Automated Market Splitting divides areas dynamically when bottlenecks occur

DirectionDirectionCapacitCapacit

y to y to ElbasElbas

Capacity Capacity after after Elbas Elbas

trade 1trade 1

Capacity Capacity after after Elbas Elbas

trade 2trade 2

FI-SEFI-SE 2300 2300 2310 2310 2310 2310

SE-FISE-FI 1100 1100 1090 1090 1090 1090

DK2-SEDK2-SE 2000 2000 1990 1990 19941994

SE-DK2SE-DK2 0 0 10 10 66

The trading system automatically updates crossborder capacities

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

Extra slides

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

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

Source: www.nordpool.com

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.

Nord Pool Group markets turnover in TWh 2000-2007

68,9

2.369

1.299

1.060

292

2007prel.

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 2000200320042005

359545590786Financial

2530,942,245,2Elspot %-Share ofNordic** consumption

1.6361.8831.9642.278Total

1.1801.2191.2071.316Clearing (bil. fin.)

97119167176Elspot*

68,9

2.369

1.299

1.060

292

2007prel.

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 2000200320042005

359545590786

2530,942,245,2Elspot %-

1.6361.8831.9642.278Total

1.1801.2191.2071.316Clearing (bil. fin.)

97119167176Elspot*

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 - WEEKLY PRICES IN SWEDEN AND SYSTEM PRICE 1996 - 2007

0

100

200

300

400

500

600

700

800

900

1 16 31 46 9 24 39 2 17 32 47 9 24 39 2 17 32 47 10 25 40 3 18 33 48 11 26 41 4 19 34 49 11 26 41 4 19 34 49 12 27 42

SEK/MWh

Area Sweden System Price

1997 1998 1999 20001996 2001 2002 2003 2004 2005 2006 2007

Elspot prices in SEK/MWh

Year Sweden System

1996 260,01 263,021997 143,77 145,951998 120,49 122,681999 119,42 118,402000 120,42 107,952001 210,93 213,622002 252,35 245,902003 332,99 334,862004 256,29 263,942005 276,45 272,482006 445,38 449,792007 280,13 258,54

Average 1996 - 2007 234,87 233,08

Elspot monthly prices 2006-2007 in EUR/MWh

Elspot volumes in GWh/week 2005-2007

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

2005 2006 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

OperatorSystem Operator

Participants:

The Power Exchange

Generation SchedulesConsumption forecastsTrading Schedules (Spot+Bilateral)Bids in Real Time Market

Bids Spot Market (Trades in Financial)

Management of: The Spot Market(The Financial Market)

Real Time Operation Ancillary ServicesThe Real Time MarketImbalance settlement

Spot Trading Schedulesand Flows

GridCapacities

GeneratorsDistributorsGrid OwnersTradersBrokersLarge scale Industry

TradeResults

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 EuropeShown current EuroPEX members

Nord Pool ASA & Spot

OMEL

APX

EEXGielda Energii

Powernext

Borzen

EXAA

GME

Belpex

OMIPOPCOM

OTE

Endex

Volume in TWh 2007 (2006)

Spotauction

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)

0,00

10,00

20,00

30,00

40,00

50,00

60,00

70,00

80,00

90,00

100,00

110,00

120,00

130,00

140,00

150,00

160,00

170,00

180,00

2006

-01-

0120

06-0

1-16

2006

-01-

3120

06-0

2-15

2006

-03-

0220

06-0

3-17

2006

-04-

0120

06-0

4-16

2006

-05-

0120

06-0

5-16

2006

-05-

3120

06-0

6-15

2006

-06-

3020

06-0

7-15

2006

-07-

3020

06-0

8-14

2006

-08-

2920

06-0

9-13

2006

-09-

2820

06-1

0-13

2006

-10-

2820

06-1

1-12

2006

-11-

2720

06-1

2-12

2006

-12-

2720

07-0

1-11

2007

-01-

2620

07-0

2-10

2007

-02-

2520

07-0

3-12

2007

-03-

2720

07-0

4-11

2007

-04-

2620

07-0

5-11

2007

-05-

2620

07-0

6-10

2007

-06-

2520

07-0

7-10

2007

-07-

2520

07-0

8-09

2007

-08-

2420

07-0

9-08

2007

-09-

2320

07-1

0-08

2007

-10-

2320

07-1

1-07

2007

-11-

2220

07-1

2-07

2007

-12-

22

EURO/MWh

EEX Phelix price

NPS - System Price

Prices through year 2007 (Yr. 2006) EEX Phelix average: € 37.99 (50.79) NPS System average: € 27.93 (48.59) Daily averages high/low: EEX high: € 158.97 Dec 19 (301.54 Jul 27)EEX low: € 5.80 Jan 1 (13.98 Dec 31) NPS high: € 53.03 Nov 27 (80.41 Aug 28)NPS low: € 8.80 Aug 19 (16.87 May 7)

Turnover through year 2007 (Yr. '06)Elspot Auction NPS: 290.6 TWh (249.9)Spot Auction EEX: 117.3 TWh (87.6)

EEX and Nord Pool Spot Auction Markets Daily Average Prices 2006-2007 (EURO/MWh)