Statnett’s recommendation to the Norwegian regulator is that EPAD auctions be introduced on an enduring basis to support liquidity in the Norwegian forward market. These auctions are due to be introduced as a pilot this autumn. If the regulator agrees, the auctions would continue beyond the initial pilot phase.
THEMA supported the study that underpins Statnett’s recommendations.
Based on the experience of a similar pilot in Sweden, the auctions are expected to increase traded volumes in the relevant EPAD products. They should also provide more accurate information on the market-clearing price, potentially reducing the spread in the buy and sell prices offered (bid-ask spread).
The bulk of the costs for Statnett will result from the need to provide collateral. Statnett will need to place collateral with a clearing house to cover possible losses from the EPAD positions it takes. Since the interest it earns on these funds is less than its own cost of obtaining capital, this collateral implies a cost even if it is never needed. The size of these costs will scale with the size of the positions (in MW) that Statnett obtains via the auctions.
The auctions are intended to improve market actors’ opportunities to hedge power risks related to prices in Norway’s bidding zones. This objective can be supported through other options and the study also assesses the possibility of supporting market-making. A market maker is a party that is obligated to post bids and offers, thereby ensuring that a potential counterparty is always available via the exchange. However, the study concludes that auctions represent the preferred intervention.
The investigation was conducted at the request of the Norwegian regulator and assessed options to support price hedging in Norwegian bidding zones consistent with the requirements of the European guideline on forward capacity allocation (FCA).
THEMA has worked with several public and private actors on the future design of the European forward power market and has an in-depth understanding of both the market and actors’ needs.
The full study is available to read on Statnett’s website via the link below.