On February 12th the Ministry of Energy asked the Norwegian TSO, Statnett, to support liquidity in the financial electricity market by offering to be a counterparty in the trade of EPAD contracts. EPADs are a financial contract that allow one to hedge the difference between the Nordic system price and the area price specific to one of Norway’s five bidding zones. These contracts are necessary, if hedging via the financial market, to hedge the bidding zone prices that market participants are ultimately exposed to.
This decision is part of a broader process to consider the adequacy of current hedging arrangements. This winter, the Norwegian Energy Regulatory Authority RME evaluated the sufficiency of power price hedging opportunities in the Norwegian bidding areas and ultimately concluded that these opportunities were insufficient. In accordance with European legislation, specifically the Guideline on Forward Capacity Allocation (FCA GL) Article 30, RME has therefore instructed Statnett to consider possible measures.
EPAD auctions supported by TSOs are one possible measure. This approach has been piloted by Svenska kraftnät in Sweden since the beginning of 2023. The figure below shows the bidding zone borders included in the current Swedish pilot as well as which borders could be included if the scheme is expanded to Finland and Norway.
Figure: Overview of bidding zone borders included in today’s EPAD pilot in Sweden and possible extensions to Finland and Norway
The Ministry of Energy and RME’s assessments are in line with our own analysis. From November to January, we conducted an extensive analysis of the challenges facing the financial electricity market, focusing on the bidding zone in northern Norway, NO4. Our report highlights the insufficiency of current opportunities as identified by RME and recommends the same medicine currently being explored by the Ministry of Energy.
However, we also note that there are several problems facing the market and that EPAD auctions alone are unlikely to be a silver bullet. It would also be useful to pursue the equal treatment of all hedging activity in the tax system and to examine whether market power is exacerbating liquidity problems. We also conclude that the allowance of ‘non-fully backed’ bank guarantees and changes to the process by which bidding zone boundaries are reformed could secure a better functioning financial power market.
A well-functioning long-term market is important for the efficiency of the broader electricity system and, consequently, we have been following this debate for several years. See here and here . Looking forward, we’ll be following closely Statnett’s approach, EEX’s forthcoming introduction of zonal contracts at the end of March, as well as their possible acquisition of Nasdaq’s power exchange to see what these developments imply for power price hedging activity in the region.
Our latest report on the topic can be read (in Norwegian) via the link below.
