Hedging Strategy and Electricity Contract Engineering - IFOR

34 The electricity market
1800
1600
Physical
Financial
Bilateral clearing
1400
1200
TWh
1000
800
600
400
200
0
1993 1994 1995 1996 1997 1998 1999 2000
Fig. 2.12: Turnover at Nord Pool from 1993 to 2000 divided into physical, financial
and bilateral clearing market.
liquidity of the Asian option was not sufficient, why now only European
options are traded. The liquidity is pretty thin also in these European option
contracts, which stands in contrary to the futures contracts, where liquidity
is good. Beside the standardized contracts, where the price is transparent,
Nord Pool is also clearing bilateral contracts with simple constructions. Since
Nord Pool is counterpart to every player, they have to calculate margins, to
be disposed at Nord Pool, in order to eliminate, or at least to lower the credit
risk. The bilateral contracts that they clear are, up to today, only contracts very
similar to the standardized contracts traded at Nord Pool.
The traded volume has increased substantially since Nord Pool’s launch in
1993. The turnover of the financial markets now dominates the physical market
and the clearing turnover of bilateral contracts has soared since 1997, as seen
in Figure 2.12. The volume of cleared bilateral contracts is now much larger
than the volume of traded contracts. The reason for this is, according to Nord
Pool, that some players are not willing to disclosure the price information and
therefore chooses OTC contracts. This in combination with some player’s
beliefs that they can achieve better deals on a bilateral basis explains why the
cleared OTC contracts show higher volumes.