On long-term transmission rights in the Nordic electricity markets

March 2, 2017 | Journal Article

Authors: Petr Spodniak , Mikael Collan , Mari Makkonen
Energies , Vol. 10 , No. 3, 295, 2017 , pp. 1-19

In vein with the new energy market rules drafted in the EU this paper presents and discusses two contract types for hedging the risks connected to long-term transmission rights, the financial transmission right (FTR) and the electricity price area differentials (EPAD) that are used in the Nordic electricity markets. The possibility to replicate the FTR contracts with a combination of EPAD contracts is presented and discussed. Based on historical evidence and empirical analysis of ten Nordic interconnectors and twenty bidding areas, we investigate the pricing accuracy of the replicated FTR contracts by quantifying ex-post forward risk premia. The results show that the majority of the studied FTR contain a negative risk premium, especially the monthly and the quarterly contracts. Reverse flow (unnatural) pricing was identified for two interconnectors. From a theoretical policy point of view the results imply that it may be possible to continue with the EPAD-based system by using EPAD Combos in the Nordic countries, even if FTR contracts would prevail elsewhere in the EU. In practice the pricing of bi-directional EPAD contracts is more complex and may not always be very efficient. The efficiency of the EPAD market structure should be discussed from various points of view before accepting their status quo as a replacement for FTRs in the Nordic electricity markets.

  • Publication Details

    Journal Article

    ESRI Series Number: 201705
    Research Area: Energy and Environment
    Date of Publication: March 2, 2017
    Published Online: March 02, 2017
    Publisher: MDPI
    Place of Publication: Basel
    View External Link

© 2015 The Economic and Social Research Institute. All rights reserved. Website by JET Design