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How do the power markets work?
In deregulated power market there must be a well-functioning system for determining how much the electricity should cost and how it should be delivered.
The Nordic power market consists of many very different players: households, companies, large and small electricity suppliers, energy-intensive large-scale industry and everything from small local power plants to large electricity producers. Important prerequisites for a well-functioning electricity market are sound trading models and a sufficient number of buyers and sellers. Consequently, the power market comprises a number of sub-markets, a retail market, a physical wholesale market, a financial market and a regulating power market.
The end-user electricity market
We are all participants in the end-user electricity market when we select our electricity suppliers. The retail electricity market is deregulated in all the Nordic countries, but not harmonised. Although the end-users can freely choose their electricity supplier, they can for the time being only choose among domestic suppliers.
The physical wholesale market
In the Nordic countries, most of the electricity is traded on the power exchange Nord Pool Spot. Nord Pool Spot is currently the largest power exchange in Europe. About 350 companies from 20 different countries trade electricity on Nord Pool Spot for same-day or next-day delivery, and 316 TWh was traded on Nord Pool Spot in 2011. Nord Pool Spot operates two markets. One market, the Elbas market, is an intra-day market, whereas the other market sells and purchases electricity on a day-ahead basis.
74 percent of total consumption in the Nordic region is traded on the day-ahead market. The prices will fluctuate according to supply and demand throughout a 24-hour period. The high market share in the power exchange strengthens liquidity and the spot price as a reference price. Statnett has an ownership interest in Nord Pool Spot of 30 percent.
In addition to the Nordic market, Nord Pool Spot is represented in Estonia, Germany and the UK.
The financial market
The major players also trade in power derivatives on the financial market, which is operated by Nasdaq OMX Commodities. This is where trading in forward contracts takes place, that is to say in futures, forward contracts and power options. Futures and forward contracts and options are used by generators and large end-users in the wholesale market for the purpose of price hedging and risk management.
The regulating power market
The regulating power market works as a common balancing market for the Nordic power market, by a combined utilization of the regulating resources. The players in the regulating power market nominates a price to change their physical production or consumption. The transmission system operators use these measures to obtain balance in the power system.