Hedging Strategy and Electricity Contract Engineering - IFOR

2.8 Power exchanges and pricing mechanisms 33
Price
B
Supply
C
S p
Demand
D
Volume
E
Fig. 2.11: Determination of the system price.
The system price is a theoretical price in the sense that it assumes that no
congestions will occur and is the same in the whole Nordic area. To avoid
congestions the Nordic market is divided into zones. In each zone the demandand
supply-curve is, if needed, shifted through a zone specific spot price in
such a way that congestions between the zones are avoided. The price in the
surplus areas will be lowered to decrease the supply of electricity, whereas
the price in the deficit areas will be increased to increase the supply in order
to regulate the power flow down below the capacity limit. Norway may be
divided into many areas, while Sweden always is one area, as is the case for
Finland and Denmark. The system price and the zone specific spot prices are
disclosured at 15.00.
The financial settled contracts are futures up to three years and options up to
one year with a delivery period of maximum one year. The market is according
to Nord Pool not yet ready for contracts expiring further out in the forward
curve. 29 For futures contracts, the value of each participant’s contract portfolio
is calculated daily, reflecting changes in the market price of the contracts. The
daily changes in value are settled financially between the buyer and the seller.
Through this process, a portfolio manager can quickly identify and realize
losses as well as profits, which keeps the credit risk at a low level.
Previously both European options with futures as underlying and Asian options
with the average spot price as underlying were traded at Nord Pool. However,
29 A forward curve is a plot of future prices against their maturity.