AREA PRICE DIFFERENCIES:

EPAD OR FTR Jouni Mäenpää

Development of Area Price Differencies• Price difference between Finland and system has been increased

due to:

• Delay of commissioning of Olkiluoto 3 (1600 MW)

• Russia introducing the capacity market, leading to reduced exports to

Finland

• Lithuania joining the EU, followed by decommissioning of Ingaliina NPP’s

and Lithuania joining the Nord Pool Spot market

• Slower progress in wind power projects in Finland compared to other

price areas

Trading with EPAD products• Approx. 10 % on-screen and 90 % voice-brokered by telephone

• Players with large interests are motivated to negotiate prices, thus

making voice-brokering more popular

• Access to a liquid market is only a phone call away!

• Voice-brokering does not bring any extra costs

Trading by telephone or on-screen?• On-screen:

• Small volumes

• Fast execution needed at current price level

• Market order; no negotiation

• Telephone (voice-brokering):

• Large volumes

• More room regarding price and time of

execution

Negotiation and the players views of the market

Financial Electricity Trading in Europe

• Financial products on the Nordic system price are the most appealing in the

Nordic countries. Similarly, financial products on the German spot price are the

most appealing in Continental Europe.

• EPAD products are used to connect physical market to larger financial market (to

system price forwards and futures) in Nordic markets. Similarly, FTR’s can be

used to connect physical electricity exchanges to larger financial market (to EEX

Phelix spot derivatives) in Continental Europe.

• The problem: Which financial market should the Helsinki price area be

connected to in order to gain access to liquid financial market if not to standard

system price instruments? Finland is not physically connected to EEX but access

to liquid market is needed.

XX1

XX2 XX(n) HEL

FTRXX1>XX2

FTRXX2>XX3

FTRXX(n-

1)>XX(n)

FTRXX(n)>HELO

p

e

n

P

o

s

i

t

i

o

n

+ S

Y

S-

SY

-

HE

L-

SY

-

XX

1-

S

Y

S-

O

p

e

n

P

o

s

i

t

i

o

n

+

XX1

• The neutral hedging positions presented here are identical

(based on the assumption that an FTR corresponds to two

EPAD products).

• Using an FTR results to more complexity and therefore

brings extra costs!

=> Using EPAD’s makes more sense

Hedging with Financial Transmission Rights (FTR)

• In certain critical circumstances the purchaser of an FTR is obliged to

return the FTR to the issuer, and exposes to full market risk

• FTR does not give the 100 % hedge that EPAD gives

• Essential part in FTR trading is a direction:

• Essential part in hedging is the bidding zone

• EPAD works perfectly in all situations

• Using FTR when the price difference is negative?

Conclusions

• Introducing a day-ahead index combining day ahead prices in all

physical exchanges to one single price index in the Europe makes

one common and liquid European financial market possible.

• EPAD products can be used to connect to this common European

financial market with one single trade everywhere.

• This will never work with FTR products.

• EPAD is the way forward!

Electricity Market day 2015

3.00 pm Area price differences – reasons and conclusions

Transmission System Operator's Standpoint

Juha Hiekkala, Manager Market Design, Fingrid Oyj

How to improve hedging

Anne-Marit Rudby, Product Director, Nasdaq Commodities

Comments from market players

Mikko Lepistö, Energy Manager, SSAB Europe Oy

Jouni Mäenpää, Senior Analyst, Power-Deriva Oy

4.20 pm Wrap up

Juha Kekkonen, Executive Vice President, Fingrid Oyj

4.30 pm Buffet