Area Price Differences – Reasons and ConclusionsTransmission System Operator's Standpoint

Electricity Market Day, 28 April 2015

Juha Hiekkala, Market Design Manager, Fingrid Oyj

The market situation of the Baltic Sea region has changed radically

The yearly average of electricity spot price

Source: Nord Pool Spot and SKM Market Predictor

• In Nordics, including Finland,

the electricity spot price is at

its lowest since 2007

• Price difference particularly to

Sweden has increased after

2011

• The electricity spot price in

Germany is lower than ever

after emissions trading started

0

10

20

30

40

50

60

70

2008 2009 2010 2011 2012 2013 2014

Ele

ctr

icity

spot price [€/M

Wh]

SYS SE/SE3 FI DE

Transmission capacity increased by 50 % since 2011 –

The Finnish and Swedish area prices have diverged

D

K

1

18

3

4

D

K

1

F

2

11

2011 2014

SYS

29,6 €SYS

47,1 €

Market fundaments change and markets evolve,

TSOs cannot change the production structure

Area prices

< 30 €/MWh

30-35 €/MWh

35-40 €/MWh

40-45 €/MWh

45-50 €/MWh

> 50 €/MWh

2

Main flow

direction

(TWh/a)

1

Increasing cross-border capacity is long-term activity

The objective is to increase in transmission capacity –

Fingrid only one counterparty

• Increase of 800 MW in Finnish import capacity

• The Swedish TSO's priority is to reinforce its internal grid

• Implementation in 2025 at the earliest

Third AC connection between Finland and Sweden in 2025

• Objective is to restore the capacity of the current interconnector to 500 MW

• Replacement investment at the end of 2020's

Fenno-Skan 1 interconnector

Fingrid's focus: high availability of interconnectors

Incentivizing the personnel

• Personnel bonuses depend on the

usability of links to Sweden

Fingrid's strategic project

• Improving the reliability of HVDC links

Minimizing market disruptions is a common issue for the whole personnel

Right timing and swift execution of outages

• Cross-border interconnectors require maintenance to ensure reliability

• Simultaneously on both sides of the border

• Optimal timing according to the forecasted Nordic market situation

• Realization during the weekends if feasible

Long-term transmission rights (LTRs)

• Not internally in use in the Nordics

• For hedging of area price differences, not for changing them

• EU is preparing a Guideline on Forward Capacity Allocation

– TSOs to sell LTRs

– exception possible for the Nordic countries

– implementation in 2018?

• Are they beneficial to the Nordic market?

Financial products for area price hedging

Electricity Price Area Differential

EPAD

Financial Transmission Right

FTR

In use in Nordics and Baltics Part of the European target model

Hedges the difference between an

area price and the system price

e.g. FI-SYS

Hedges the price difference between two

adjacent bidding zones

e.g. SE3-FI

Trade between market participants

(Nasdaq, OTC, bilateral)TSO issues

Continuous tradingAuction

e.g. once a month

Market participants have diverging views on hedging markets

FTR not suitable for the

Nordic market

• EPADs' liquidity would decrease

• Reduces the credibility of the

system price

• Not a compatible product with

EPAD

Source: Fingrid Oyj's inquiry to stakeholders about hedging products and their markets

More efficient markets

with FTR

• Increases hedging possibilities

• Enhances competition

• Incentive to TSOs to maintain

the transmission capacity

Market participants would develop EPAD markets

Functioning of EPAD markets

• Derivatives market functions

• Imbalance in supply and demand

• Liquidity is a challenge in a small

bidding zone

• Trade not transparent enough

• Changes in regulation imply

uncertainty

Improvement of EPAD

markets

• Improvement of

transparency

• More attractive stock

exchange

• Better functioning of market

makers

• The role of a TSO?

Source: Fingrid Oyj's inquiry to stakeholders about hedging products and their markets

Fingrid's viewpoint to long-term transmission rights

• Benefits of FTR-products are questionable in Nordic market

• Fingrid aims to common Nordic solutions

• FTRs would make TSO an active market participant

• LTRs risky business for TSOs

– tends to be loss-making in Continental Europe

– would mean income transfer from transmission customers to participants in financial

market

• Increasing liquidity and transparency of EPAD markets would promote efficiency

Fingrid maintains the physical market and is responsible for the maintenance

of the power system – a role as an active financial market player not suitable

Conclusions

• Market fundaments change and markets evolve -

TSOs cannot change the physics

• TSO shall ensure maximum availability and reliability

of the power system

• TSO offers a platform for the physical market –

this role fits poorly to a player in the financial markets

• Improved liquidity and transparency of EPAD market

would be best way forward