“ For us as a power producer in northern Norway , it is a major challenge when we want to hedge our future production ”
rely on system price contracts for price hedging . Instead , they must conclude separate deals indexed to local spot prices bilaterally or trade area price differential contracts ( Epads ) on the Nasdaq exchange .
Epads are used to hedge the variation between local spot prices and the system price but the products suffer from notoriously low liquidity which makes it difficult to find counterparties at acceptable prices .
In a recent survey by Thema Consulting , 24 out of 44 respondents in Norway , Sweden and Denmark said they had insufficient opportunities to hedge their own power price exposure , while 17 out of 29 companies trading on behalf of others held a similar view .
Most of them cited a lack of liquidity and depth in the Epad market , which suffers from a lack of competition within each bidding zone and often mismatched generation and consumption volumes that distort the price picture .
The study was commissioned by energy regulators in Denmark , Sweden and Norway , as they are obliged by EU regulations to ensure market participants have sufficient hedging opportunities .
Regulators in the Nordic region have traditionally opted to reserve all capacity for the day-ahead market and let market participants use Epads to hedge future price area deviations .
But if they are unable to prove the current set-up provides sufficient hedging opportunities , they will have to introduce changes , such as introducing financial transmission rights ( FTRs ), which are the preferred method to facilitate cross-border hedging in other European markets .
FTRs could link future buyers in one bidding zone with sellers in a neighbouring zone and thereby help resolve the problem of structural imbalances between buyers and sellers in smaller zones , said Thema in its report .
Denmark has already introduced transmission rights on its borders with Germany , as well as between its DK1 and DK2 bidding zones but Sweden had previously insisted the current set-up with system price contracts and Epads was sufficient .
This may change , however , as Sweden ’ s Energy Markets Inspectorate is mulling whether to introduce FTRs or other measures before the summer , says analyst Kaj Forsberg .
“ It feels like more [ market participants in Sweden ] feel dissatisfied with their hedging opportunities ,” he says , adding FTRs could be introduced on cross-border links with Finland , Denmark and Lithuania initially .
Currently there are no plans to introduce transmission rights on links between Sweden and Norway since the latter , as a non-EU member , has yet to implement the relevant regulation on forward capacity allocation , which is awaiting parliamentary approval .
Nevertheless , Gunnestad says the introduction of transmission rights will not remove the underlying problem . “ We have to correct the physics . We need a balance between supply and demand . We can achieve that either through increasing consumption in low price areas like northern Norway , or through increasing connections between the areas .” n
Montel Magazine 2 – 2021