Improving the effectiveness of the electricity hedge market in the Nordic region

Purpose and goal: The EPAD is a spread contract between one bidding-area price and the Nordic system price. However, some concerns have been raised with available hedging instruments in the Nordic region: (a)First , system price does not always correlate sufficiently with area prices because of congestion

within the Nordic region. (b)Second, there is limite d liquidity in EPADs in certain trading areas. (c)Third, EPADs are of limited use for mitigating the risk faced by som e of the newer generation technologies, such as wind and solar. In this project we propose to study these three issues. Expected results and effects:

(1) Improves understanding of emerging challenges in financial markets. A key objective of the project is the development of understanding of the drivers of liquidity and, in particular, the role of market power in hindering liquidity. This is a key challenge facing the electricity hedge market which is offered based on the reference price published by Nord Pool.

(2) Develops more efficient and accurate tools for financial markets. A key objective of the project is the development of new hedging instruments to better allow the new generation of market participants to hedge their risks. Approach and implementation: We plan for four Work Packages (WPs) for this research project.

WP1: An exploration and identification of (1) the reasons for low correlation of system price with area prices, and (2) the low EPAD-market liquidity in certain pricing areas in the Nordic region; WP2: To propose policies for enhancing the liquidity in the EPAD market; WP3: A careful development of alternative financial instruments that could be provided in the Nordic region;

WP4: A demonstration of how our alternative financial instruments work within the Nordic region;