Concern is mounting among Nordic power traders over a potential liquidity split which could threaten the integrity of the market’s long-standing day-ahead reference price model.
The existing Nordic day-ahead system price is used as a reference against which both forward and futures products are settled when hedging the risk of shorter-term price movements. It is calculated on a voluntarily basis by incumbent power exchange Nord Pool based on bids and offers received prior to the day-ahead settlement.
But this benchmark could become obsolete when Paris-headquartered EPEX SPOT enters the Nordic day-ahead market, which is scheduled for the last quarter of 2017.
This is because a credible reference price relies on full access to all bids and offers in the spot market. Or at the very least, the vast majority of this volume.
It is uncertain whether Nord Pool, owned by the Nordic grid operators, would be able to retain its role as system price provider if rival platforms are able to muscle in on a chunk of Nord Pool’s liquidity.
Nordic energy regulators are now mulling provisions for a system price or other reference price that encompasses all day-ahead bids and offers regardless of the platform they are submitted to.
The regulators acknowledged earlier this year that the existence of competing reference prices could stymie liquidity in the futures market.
The issue has arisen now because the region is preparing to enforce the EU’s network code for capacity allocation and congestion management, which enables competition among power exchanges in European power markets.
NordREG, the main body for Nordic energy regulators, said in a note in April this year that it was hard to see “any set-up in the foreseeable future [that could] enjoy the same level of trust and liquidity as the system price has done until today”.
It added: “In the mid- to long-term, it is likely that the market will identify other ways to calculate a reliable and relevant reference price to use for financial contracts.”
But still, NordREG warned, the initial liquidity split “could have detrimental effects on the possibilities for hedging in the Nordic market”.
There is no legislation requiring Nord Pool or any other market operator to calculate the system price.
One industry source, close to the process of EPEX SPOT’s entry, said the system price, in the long run, could be converted to a volume-weighted average price, as is used in the Italian and UK power markets, which would remove concerns about competition and increase transparency in the Nordic power market.
“The system price is in a legal no man’s land. Mathematically it’s not difficult to calculate … but you need a watchdog to oversee it,” the source said.
A range of market participants contacted by ICIS said they were strongly in favour of a system price calculated across all relevant platforms, saying it would be negative if competing references prices diverged because this could undermine the credibility of the financially-settled futures markets.
“There is no problem with competition, but obviously there is a concern about the split of liquidity,” said Jens Nordberg, head of trading at Swedish utility Goteborg Energi and board member at the Nordic Association of Electricity Traders.
“You need some kind of coupling, some type of aggregation of bids and offers between the power exchanges,” he said. firstname.lastname@example.org