Hedging Strategy and Electricity Contract Engineering - IFOR

32 The electricity market
Price Hour 0 NOK Possibly 12 additional price buckets 5000 NOK
00-01 11 MWh -80 MWh
01-02 9 MWh 0 MWh
02-03 10 MWh -90 MWh
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Tab. 2.1: Exemplification of bid to be filled in by all participants in the spot
market.
by studying the generally regarded most developed power exchange in Europe,
Nord Pool.
2.8.1. Nord Pool
The Norwegian deregulation came into force in 1991 when grid owners were
compelled to open up their grids to competitors. In 1993 Nord Pool started
its business as a power exchange for the Norwegian market. In 1996 Sweden
was integrated into the exchange. One year later, in 1997, Nord Pool started
to offer clearing also of some bilateral contracts as a service to eliminate the
counterparty risk. In 1998 Finland was integrated and in 1999 the western part
of Denmark also joined the exchange.
Nord Pool offers two types of standardized contracts, physically settled and
financially settled contracts. The physically settled contracts are limited to the
spot market. Every day is divided into 24 hourly contracts. Before noon, the
previous day, all participants send in their bids for each hour as exemplified in
Table 2.1. 28 Each participant specifies how much he is willing to buy or sell
and at which price for each hour. This bid is binding and the procedure is called
an auction, in contrary to continuous trading. This is done in order to gather all
the liquidity to one point in time. From the bids Nord Pool achieves a supply
and demand curve for each participant and hour, which is thereafter aggregated
to a total supply and demand curve, from which the system price S p , is calculated
as the equilibrium for each of the 24 hours, as illustrated in Figure 2.11.
28 Norwegian Kronas (NOK) is the currency used by Nord Pool, 1 NOK A 0.19 USD.