Nordic Market report 2011

Report 3/2011

Nordic Market Report 2011 Development in the Nordic Electricity

Market

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Report 3/2011

NordREG c/o Energitilsynet Nyropsgade 30 1780 København V Danmark Telephone: +45 172 26 80 70 Telefax: +45 33 28 14 27 E-mail: et@dera.dk Internet: www.nordicenergyregulators.org July 2011

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1 PREFACE .........................................................................................................................................5

2 SUMMARY.......................................................................................................................................6

3 INTRODUCTION: NORDREG......................................................................................................7

4 SUPPLY – GENERATION..............................................................................................................8

SUMMARY ................................................................................................................................................8 4.1 GENERATION CAPACITY.............................................................................................................8 4.2 GENERATION..............................................................................................................................9 4.3 MAIN PLAYERS.........................................................................................................................10 4.4 CONDITIONS FOR GENERATION.................................................................................................12

5 DEMAND – CONSUMPTION ......................................................................................................15

SUMMARY ..............................................................................................................................................15 5.1 CONSUMPTION.........................................................................................................................15 5.2 CONDITIONS FOR CONSUMPTION..............................................................................................18 5.3 SECURITY OF SUPPLY...............................................................................................................18 5.4 PEAK LOAD ..............................................................................................................................20

6 ELECTRICITY TRANSMISSION...............................................................................................22

SUMMARY ..............................................................................................................................................22 6.1 TRANSMISSION NETWORK........................................................................................................22 6.2 CONGESTIONS IN TRANSMISSION..............................................................................................24

7 WHOLESALE POWER MARKET..............................................................................................29

SUMMARY ..............................................................................................................................................29 7.1 FRAMEWORK............................................................................................................................29 7.2 PRICE DEVELOPMENT IN THE SPOT MARKET.............................................................................31 7.3 VOLUMES IN THE SPOT MARKET...............................................................................................36 7.4 BALANCING MARKETS..............................................................................................................37

8 FINANCIAL MARKET.................................................................................................................40

SUMMARY ..............................................................................................................................................40 8.1 VOLUME TURNOVER ................................................................................................................40 8.2 VALUE TURNOVER ...................................................................................................................41 8.3 NUMBER OF TRANSACTIONS.....................................................................................................42

9 RETAIL MARKETS......................................................................................................................43

SUMMARY ..............................................................................................................................................43 9.1 DEVELOPMENT OF RETAIL PRICES............................................................................................44 9.2 SUPPLIER SWITCHING...............................................................................................................45 9.3 SUPPLIERS................................................................................................................................46

10 MARKET INDICATORS FOR THE NORDIC ELECTRICITY MARKET S ........................47

SUMMARY ..............................................................................................................................................47 10.1 COMPETITION IN THE NORDIC RETAIL MARKETS......................................................................47

11 ONGOING NORDREG WORK ...................................................................................................51

11.1 A TRULY COMMON NORDIC RETAIL MARKET WITH FREE CHOICE OF SUPPLIER.........................51 11.2 A WELL-FUNCTIONING NORDIC WHOLESALE MARKET WITH COMPETITIVE PRICES...................52 11.3 RELIABLE SUPPLY....................................................................................................................52 11.4 EFFICIENT REGULATION OF TSO..............................................................................................53

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APPENDIX A DESCRIPTION AND DEFINITIONS OF MARKET IN DICATORS FOR THE NORDIC ELECTRICITY MARKETS......................... .........................................................................54

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1 Preface The Nordic Market report describes on a yearly basis status and developments in the Nordic electricity market with focus on generation, consumption, transmission, wholesale power market and retail markets. The Nordic market report 2011 also brings an updated version of the statistical indicators introduced in the Nordic Market report 2010 to describe and assess market functioning and competition in the retail markets. In 2010 NordREG published a report on the Nordic financial electricity market. An update of the set of statistics regarding the liquidity of the financial electricity market has been incorporated in the Nordic Market report 2011. The report is based on data and information for the year 2010 available in late spring 2011. A working group with participants from the regulators in Denmark, Finland, Norway and Sweden has prepared the report. The members of the group were Henrik Gommesen (Energitilsynet, chairperson), Elin Söderlund (Energimarknadsinspektionen), Mats Øivind Willumsen (Norges vassdrags- og energidirektorat) and Timo Partanen (Energiamarkkinavirasto). Copenhagen, July 2011 Finn Dehlbæk Chair of NordREG

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2 Summary The Nordic power system is a mixture of generation sources: Hydro, wind, nuclear and thermal power based on coal, oil and gas. Total generation in the Nordic countries was 373.3 TWh in 2010, a small increase of 1 %cent compared with 2009. The high share of hydropower makes inflow and reservoir levels vital. In general 2010 was a dry year creating a deficit in reservoir levels. At most the deficit was around 30 TWh. The total Nordic electricity consumption was 396 TWH in 2010, which is an increase of 3.8 % compared to 2009. The largest rise in consumption was in Finland, due to the recovering in the energy intensive industries after the financial crisis. Total consumption was also generally affected by low temperatures in the region. The transmission grids in the Nordic region are closely linked to perform a solid foundation for a common Nordic electricity market. The Nordic region operates almost entirely as one synchronous system through the transmission grid enabling increased security of supply and more efficient use of the generation capacity. However, increased cross border flows also strain the transmission system leading to congestions. Between the Nord Pool bidding areas these are handled through market splitting. Internal congestions in general are handled through counter trade or by reducing interconnector capacity at the bidding area borders. The Nordic whole sale power market is a common Nordic market, where electricity is traded on the Nordic electricity exchange, Nord Pool. During 2010 average spot prices at Nord Pool were higher than prices in 2009. The beginning of 2010 saw several price peaks in most of the Nordic price areas. Low temperatures, low Swedish nuclear power generation and low available transmission capacities contributed to these prices. The Nordic retail markets are to a large extent still four separate markets, but the work of integrating the four markets has begun with a goal to have an integrated well-functioning Nordic end-user market for electricity no later than 2015. Price developments differed slightly between the countries during 2010. Norway and Sweden experienced relatively volatile prices while Finland and Denmark experienced more steady developments throughout the year. The competition statistical indicators show competitive markets throughout the Nordic region in general but also highlights areas of each national market which could question the effectiveness of competition in that market thus suggesting the need for further analysis to determine whether further initiatives could be called for.

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3 Introduction: NordREG NordREG is a cooperative organisation for Nordic energy regulatory authorities. The mission and common goal of the organisation is to actively promote a legal and institutional framework and conditions necessary for developing the Nordic and European electricity markets. The cooperation in NordREG is based on consensus and common understanding of the Nordic market. NordREG works by exchanging information and views, mapping and analysing energy market issues and by delivering statements and reports for harmonisation and improvement with the aim of identifying areas where NordREG can take joint action to influence Nordic or European electricity market development.

NordREG mission

In cooperation, we actively promote legal and institutional framework and conditions necessary for developing the Nordic and European electricity markets.

The specific strategic priorities of NordREG are to provide for a well-functioning Nordic wholesale market with competitive prices, be conducive to establish a common Nordic retail market with free choice of supplier, to ensure a reliable supply within the region, and finally, to regulate and monitor the transmission system operators (TSO’s) with focus on efficiency and Nordic harmonisation. NordREG has formulated its vision for the development of the electricity market

NordREG vision for the development of markets

All Nordic electricity consumers will enjoy free choice of supplier, efficient and competitive prices and reliable supply through the internal Nordic and European

electricity market.

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4 Supply – Generation The Nordic power system is a mixture of generation sources such as wind, hydro, nuclear and other thermal power1. Hydropower is the major source of electricity generation in the Nordic region. It normally constitutes with a little more than half of the total production capacity in the Nordic countries.

Summary The total power generation in the Nordic region in 2010 was 373.3 TWh which – with a rise of app. 1% – was at the same level as 2009. Vattenfall is the largest electricity generator in the Nordic region with 18.4 % of the total generation followed by Statkraft (13 %), Fortum (12.7 %) and E.ON (7.3 %). The high share of hydropower makes inflow and reservoir levels vital when calculating and analysing potential generation levels. In general 2010 was a dry year. At most there was a deficit in the reservoir levels at around 30 TWh.

4.1 Generation capacity The Nordic region has a total of 97 552 MW installed capacity for power generation (see table 1 below). More than half of the installed capacity comes from renewable power sources. Hydropower alone accounts for more than 50% of the total generation capacity. It is representing virtually all of the Norwegian and nearly half of the Swedish generation capacity. The large share of hydropower is due to large rivers and significant quantities of precipitation in the mountains, filling the reservoirs during the spring flood. CHP (Combined Heat and Power) is the second largest generation source accounting for 31 % of the total Nordic power generation capacity. The third largest power source is nuclear power, only located in Sweden and Finland and with a share of 12 % of the total Nordic generation capacity. Wind power accounts for about 7 % and has increased considerably during the last few years.

1 Based on for example coal, gas and biofuels.

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Table 1 Nordic Generation capacity (MW) by power so urce, 2010. Source: Swedenergy, NVE, DERA, EMI

Denmark Finland Norway Sweden Nordic region

Installed capacity (total) 13 530 16 918 31 393 35 713 97 552 Nuclear power - 2 696 - 9 151 11 847 Other thermal power 9 719 10 901 1 045 8 187 29 850 - Condensing power 1 702 2 405 - 1 801 5 908 - CHP, district heating 7 229 4 300 - 3 563 15 092 - CHP, industry 588 3 362 - 1 216 5 166 - Gas turbines etc. 200 834 - 1 607 2 641 Hydro power 9 3 124 29 913 16 200 49 246 Wind power 3 802 197 435 2 163 6 597

4.2 Generation Total power generation in the Nordic region increased with 2.7 TWh, 1 %, in 2010 compared to 2009. In total the generation amounted to 373.3 TWh. The development of the total power generation in the Nordic region during 2008-2010 is Illustrated below (see figure 1). The development in yearly Nordic generation shows the same trend. In the summer, when the demand (consumption) is low, the supply (generation) decreases, while it is higher in the winter time when there is a bigger need for power heating.

Figure 1 Total power generation in the Nordic regio n, 2008-2010

Source: Nord Pool

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The development shows that even though the generation increased it was still lower than in 2008.This has to do with the constraints in the Nordic reservoirs levels and the continued problems in nuclear power production in Sweden. In general, thermal power generation (Finland and Denmark) in the Nordic region acts as a “swing-production” determined by the level of hydropower generation in Norway and Sweden. In the end of 2010 there was lack of hydropower in the Nordic generation system, it decreased with 6.2 % compared with the year before. This caused an increase in the use of other thermal power, shown in figure 2. In total thermal power increased with 14.7 %. There was also an increase in wind power with 18.8 % which depends on the last year’s expansion of windmills. In 2009 the Swedish nuclear power production was suffering from many boot problems. The generation from nuclear power increased with 4.7 % from last year.

Figure 2 Power generation by power source in the No rdic region 2010

Source: Nord Pool

4.3 Main players Vattenfall has a generation capacity of 15 326 MW which is 15.7 % and the largest share of the Nordic capacity (shown in table 2). Statkraft is the second largest generator with a capacity of 12 953 MW amounting for about 13.3 % of the total Nordic generation capacity. Fortum has a total capacity of 10 707 MW and 11 % of the Nordic capacity.

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Table 2 Generation capacity by producers, 2010 Source: Swedenergy, NVE, DERA, EMI

Capacity (MW) Share

Denmark

- Dong Energy 6265 6,4% - Vattenfall 1774 1,8% Finland - Fortum 4888 5,0% - PVO 3706 3,8% - Helsingin Energia 1342 1,4% Norway - Statkraft 12953 13,3% Sweden - Vattenfall 13552 13,9% - E.ON Sweden 6552 6,7% - Fortum 5819 6,0% Other generators 40 701 41,7% Total Nordic region 97 552 100% The largest electricity generator in the Nordic region is Vattenfall AB. In 2010 Vattenfall generated 70.3 TWh. This represents 18.4 % of the total Nordic generation. Vattenfall has approximately 38 % of the total Swedish generation capacity. The company is owned by the Swedish state. Fortum increased its generation from the year before with 2.3 TWh ending up generating 48.5 TWh of electricity in the Nordic region in 2010. Fortum has 28.9 % of the total Finnish generation capacity. When adding the Swedish division Fortum generated 12.7 % of the total Nordic generation. Fortum Oy is majority owned by the Finnish state. Statkraft generated 49.8 TWh in the Nordic region in 2010 that gives a share of 13 % of the total Nordic generation. Statkraft is the largest of the Norwegian generators with more than 30 % of the total Norwegian generation capacity in a normal hydrological year. The yearly amount of electricity generated by Statkraft varies heavily because of the large share of hydropower in Statkraft’s generation portfolio. Statkraft is owned by the Norwegian government. E.ON generated 28.1 TWh, in 2010, in the Nordic region which represents 7.3 % of the total Nordic generation. E.ON Sverige AB is owned by the Germany Company E.ON and has 18.4 % of the total Swedish generation.

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Figure 3 Share of total Nordic electricity generati on by the four largest generators, 2002-2010

Source: Swedenergy, NVE

4.4 Conditions for generation The two main sources of electricity generation in the Nordic region are hydropower and thermal power making inflow, reservoir levels and the price of CO2 emissions important factors in the price formation of electricity. Inflow and reservoir levels are of crucial importance for hydropower generation. Even though electricity in itself cannot be stored, the water creating the electricity can be stored in reservoirs along the rivers. The main bulk of the inflow to the reservoirs occurs during the spring when the snow in the mountains melt and during rainy autumns. In 2010 there was a large inflow in a couple of weeks during the spring flood otherwise the inflow was generally much lower than in 2009 and 2008 (see figure 4). In general 2010 was a dry year. The inflow level was 175 TWh to the Nordic water reservoirs (week 1 – 53) which is a decrease with 14 % from the year before.

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Figure 4 Effective inflow to the Nordic water reser voirs, 2008 – 2010

Source: Nord Pool Spot The reservoir levels was below the median level during the whole year 2010, see figure 5. At most the actual reservoir level diverged from median level with 25 %. It correspond to a deficit around 30 TWh. At the beginning of 2010, the total reservoir levels in the Nordic region were 58 % of the total capacity in the end of the year the levels where 45 %. There are many reasons behind the low reservoir levels. Cold weather led to increased demand and the inflow, shown in figure 4 above, was low. Another reason is that the year 2010 started off with a constraint in Swedish nuclear production which made generation from other sources, such as hydro power, more significant. The nuclear production improved during the year while the reservoir levels stayed beneath normal. On top of this there was a period during fall when the inflow temporarily increased when non-reservoir producers had to produce or the extra inflow would go to waste. The situation was most constrained in Norway where the hydropower generation is very important. Norway has the largest reservoir capacity of 84.3 TWh followed by Sweden with a capacity of 33.8 TWh. The capacity in Finnish reservoirs is 5.5 TWh. The total Nordic reservoir capacity is 123.6 TWh.

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Figure 5 Reservoir levels in the Nordic region, 200 8 – 2010

Source: Nord Pool Spot In the Nordic region thermal power is the second largest generation technology; hence the price on CO2 emissions is an important factor influencing the price on electricity. Most thermal generation units within the Nordic region are located in Denmark and Finland. Figure 6 shows the price of CO2 allowances during 2010. The price of CO2 allowances started at about 13 €/ton and increased during the year. At most it was around 17 €/ton. In the end of 2010 allowances was traded at a price around 14.5 €/ton.

Figure 6. Price on CO 2 allowances on Nord Pool, 2010 and 2011

Source: Nord Pool Spot

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5 Demand – Consumption Electricity consumption in the Nordic region is relatively high in comparison with other European countries. This is due to the influence of cold winters in combination with electricity heated houses and the relative high proportion of energy intensive industries.

Summary The total Nordic electricity consumption in 2010 was 396 TWh. Sweden has the largest share of the total consumption followed by Norway and Finland. Nordic consumption rose by 3.8 % compared to 2009. Finland had the largest increase in consumption during 2010. This was mainly due to the recovering in the energy intensive industries after the turbulence in the financial market. The total consumption was also influenced by generally low levels of temperatures. The Nordic peak load was 69675 MW and took place in January 8 in the evening, where the aggregated consumption exceeded the aggregated production resulting in a net import of 4096 MW.

5.1 Consumption The electricity consumption in the Nordic region varies widely due to specific conditions in each country (see figure 7). Sweden has the largest share of the total electricity consumption of the Nordic countries with around 37 %. The Swedish electricity consumption is highly influenced by a large share of energy intensive industries as well as a large share of electricity heated houses. In 2010, the total electricity consumption in Sweden was 145.1 TWh, which is an increase of 3.4 % compared to 2009. It could be explained by the recovery in industrial consumption after the recession and also by two very cold winters. Norway also has a large share of the total Nordic electricity consumption. The consumption in Norway was 128.4 TWh in 2010, an increase of 3.7 % compared to 2009. As well as Sweden and Norway, Finland has a large share of energy intensive industries leading. The total electricity consumption in Finland increased most in the Nordic countries during 2010 with 6 %, the same as 87.1 TWh, compared to 2009. The large increase could be explained by the fact that industries in Finland had a longer way to recover after the recession than industries in the other Nordic countries. Finland, Sweden and Norway has significant seasonal temperature variations and a large amount of electricity heated houses, and hence a much more fluctuating electricity consumption than Denmark. The Danish electricity consumption has been very stable in the past five years. In 2010 the total electricity consumption in Denmark was 35.4 TWh which is an increase of 0.5 % compared to 2009. Denmark has a relatively small share

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of the total consumption in the Nordic countries. One reason why Denmark has considerably lower electricity consumption than the other Nordic countries is a small share of energy intensive industries.

Figure 7 Electricity consumption in the Nordic coun tries (last 52 weeks), 1998-2010

Source: Nord Pool Spot Total electricity consumption in the Nordic region is back on previous levels following a decline in 2009, see figure 8. In 2010 the total electricity consumption was 396 TWh, an increase of 14.4 TWh or 3.8 % compared to 2009. The development could be partly explained by the recovery after the turbulence in the financial market that started of 2008 which lead to falling demand. The growth in 2010 could also be explained by cold weather which increased demand.

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Figure 8 Development of the total electricity consu mption (last 52 weeks) in the Nordic region, 1998-2010

Source: Nord Pool Spot Figure 9 compares the development of the total electricity consumption in the Nordic region for the year 2008-2010. The figure shows the effects weather conditions have on the demand, with lower consumption in the summer and increased consumption in the winter.

Figure 9 Electricity consumption in the Nordic regi on (GWh/week), 2008-2010

Source: Nord Pool Spot

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5.2 Conditions for consumption

5.2.1 Temperatures in the Nordic region The temperatures were generally lower in 2010 than compared to normal, see figure 10. The year was characterised by very cold winter periods. The temperature was down to 7 degrees beneath normal. The cold weather increased the demand for electricity for heating.

Figure 10 Mean temperature in the Nordic region 2 in 2010 compared to a normal year

Source: Nord Pool Spot

5.3 Security of supply

5.3.1 Finland The Finnish Energy Market Authority has estimated that Finland had 13 360 MW of generation capacity available in winter season 2010 - 2011. Capacity has increased 260 MW compared to previous winter season. This is mainly because of new CHP plants. Installed wind power capacity is expected to increase greatly in the next few years because of new feed-in tariff that was introduced spring 2011. Capacity of wind power is currently about 200 MW. The power reserves related to system disturbances in Finland is 1 240 MW. Last winter was very cold and the peak load in total electricity consumption in 2010 was 14,588 MW compared to the record peak load in February 2007 of 14 808 MW. During the 2010 peak demand, power generation in Finland was about 11 640 MW and import to Finland 2 950 MW. Because total production of Finland is not able to meet up with

2 Temperature measured weekly in 12 Nordic cities (Oslo, Bergen, Trondheim, Tromsø, Helsinki, Ivalo, Stockholm, Gothenburg, Östersund, Luleå, Copenhagen and Billund).

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demand during wintertime, imports from neighboring countries are essential to full fill demand. Dependency on imported electricity will decrease in the end of 2013 when Olkiluoto 3, a new nuclear power plant of 1600 MW, will be ready for production. Building project of Olkiluoto 3 has been delayed considerably. Original commissioning should have been in year 2009. In 2010 Finnish parliament accepted two new building permissions for nuclear power plants. These plants should be ready in the early 2020’s. Currently the major infrastructure projects related to Finnish power system are Fenno- Skan 2 and EstLink 2. Fenno-Skan 2 is a submarine 500 DC cable of 800 MW between Finland and Sweden. It is due to be ready by the end of 2011. EstLink 2 also is a submarine HVDC cable of 650 MW between Finland and Estonia. The new transmission link should be ready at the beginning of 2014

5.3.2 Sweden In 2010 the generation capacity of Swedish power stations was increased by 685 MW, while 697 MW were lost. Hence there was a net decrease in capacity compared to last year 2009 with 12 MW. The major part of the total increase in generation capacity in 2010 came from wind power which contributed with 603 MW thereby increasing the installed wind power capacity by almost 40 % compared to 2009. The decrease in generation capacity was seen in nuclear power (191 MW) and condensing power (470). In 2010 the power reserve in Sweden was 1809 MW. It mainly consisted of oil-fired condensing power plants. The power reserve in Sweden is formed by Svenska kraftnät concluding agreements with producers and consumers on making available further production capacity or cutting consumption. From winter 2011/2012 reduction part of the power reserve will be made available for trading on the electricity spot market. It’s in line with the gradual transition to a market solution that will envisage the complete abolition of the power reserve by the end of the winter of 2019/2020. A large number of projects in new generation capacity are planned for the next few years. Most of them are planned wind power projects. There is a great deal of uncertainty about these projects but if all of them will be launched, it will be possible to increase the electricity generation capacity by 499 MW by 2012. Several projects are currently under way to increase the capacity and operational reliability of the Nordic power system. One example is the South-West Link which is planned to reduce the existing transmission restrictions Southern Sweden and between southern Norway and Sweden. The entire link is expected to be operational by 2015/2016. Svenska kraftnät is also planning a link between Sweden and Klaipeda in Lithuania that is called NordBalt. There are also a number of projects designed to strengthen the electricity networks in the major urban regions of Sweden.

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5.3.3 Denmark Danish generation capacity rose 722 MW from 12 808 MW in 2009 to 13 530 MW in 2010. The increase was made in wind generation capacity and condensing power while capacities of CHP district heating and gas turbines were reduced. There are no loads generally classified as special peak load reserves and operational reserves are used to cope with disturbances. To enhance security of supply Danish grid companies are reinforcing the grids (both transmission and distribution) according to the national Danish cable action plan. New interconnectors will also contribute to security of supply.

5.3.4 Norway In Norway, more than 95 % of the installed capacity is hydro based, thus production is highly dependent on weather conditions. Installed Norwegian power production capacity was 31 393 MW at the turn of 2010 - 2011, an increase of 437 MW from the year before. In addition, Norway has two reserve gas power turbines in Middle Norway with a total capacity of 300 MW. In 2010, the inflow level was 100.7 TWh. That is about 22 TWh less than in a normal year. This contributed to Norway being net importer last year.

5.4 Peak load Peak load3 usually occurs during periods of cold spells. The load decreases significantly during night-time and peaks during the morning and late afternoon. The morning peak coincides with the time people arrive to their place of work while the afternoon-peak is related to cooking, washing, increased heating demand and turning on TVs when getting home from work. In 2010, the peak load in the Nordic region was 69 675 MW and took place in January 8 in the evening (hour 18). Week 1, the time for the Nordic peak load, is shown in figure 11. The peak load was higher than the previous year 2009 when the peak load was 65 098 MW. It took place on December 18 winter 2009/2010. In Denmark the peak load took place on November 29, hour 18 with a load of 6 498 MW. The Swedish consumption peaked on December 21, hour 18 (26 800 MW). The Finnish peak load happened on January 28, hour 8 with a load of 14 320 MW while Norway had its peak on January 6, hour 10 (23 994 MW).

3 Peak load is defined as the maximum instantaneous electricity consumption or the maximum average electricity consumption over a designated interval of time.

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Figure 11 Load in the Nordic region during week 1, 2010

Source: Nord Pool Spot During the most strained hour in the Nordic region in 2010 the aggregate consumption in the Nordic area exceeded the aggregate production leading to a net exchange (net import) of 4 096 MW from neighbouring countries, see figure 12. In cold spells, such as week 1, most of the available generation capacity of the Nordic region is taken into operation.

Figure 12 Consumption, generation and exchange in t he Nordic region, January 8, hour 18

Source: Nord Pool Spot

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6 Electricity transmission

Summary The key future challenge for transmission network operations both in the Nordic area, and as well on the European level will be to facilitate the functioning of the pan-European wholesale electricity markets and especially the substantial increase in intermittent generation. The year 2011 will mark a new beginning for the development of the operational framework for European electricity industries. The introduction of the third package for European electricity market, the setting up of Entso-E and ACER will all change fundamentally the way forward. Today, the transmission grids in the Nordic region are closely linked together providing a solid foundation for a common Nordic electricity market. The transmission grids were originally built to meet the needs of each country, but early in the development of the national power systems it was recognized that the systemic differences between the countries meant that linking the systems together would enhance security of supply and make possible a more efficient use of the existing generation capacity. The Nordic region operates almost entirely as one synchronous power system through transmission grid. The combined system has enabled an increased security of supply as well as a more efficient use of the generation capacity – during wet years hydropower flows southwards and eastwards whereas during dry years thermal power flows northwards and westwards. However, increasing cross border power flows also strains the transmission lines and increases the demand for transmission capacity. Sometimes this leads to congestion. Congestions occurring between the Nord Pool bidding areas are handled through market splitting, while internal congestions in general are handled through counter trade or by reducing interconnector capacity at the bidding area borders. Counter trade is mainly applied after gate-closure of day-ahead markets and in certain cases on day-ahead markets.

6.1 Transmission network The Nordic transmission grid is part of the transmission network in north-western Europe, as shown in figure 13.

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Figure 13 Transmission network in north-western Eur ope

Source: Svenska Kraftnät The Nordic transmission grid basically combines the whole Nordic region to one synchronous power system (excluding western Denmark). Interconnectors also link the Nordic market to Germany, Poland, Estonia and Russia and the Netherlands. Eastern Denmark is synchronous with the Nordic grid while western Denmark is synchronous with the UCTE area in continental Europe. A DC cable linking eastern Denmark and western Denmark has been operational since 2010. In November 2009 EMCC (European Market Coupling Company) started operations. This connection combined the German and Nordic power markets into one market, where the prices and capacities were calculated in a coordinated fashion. A further

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continuation to this process was achieved in November 2010 by connecting the EMCC to France, Belgium, Luxembourg and the Netherlands. As the second phase of this interconnection, the NorNed cable was later included. Each Nordic country has an appointed Transmission System Operator (TSO). The TSO’s are responsible for the safe operation of the grid while allocating as much interconnector capacity as possible to the market.4 The Nordic TSO’s have the overall responsibility to ensure balance between supply and demand of electricity during the operating hour.

6.2 Congestions in transmission The electricity price in the Nordic wholesale market is determined on a day-ahead auctioning process. In this process the objective is to utilize the generation fleet in an optimal way and generate electricity using the combination of generating plants that yields the lowest total cost of electricity. As the demand patterns and specific costs of the generation fleet over the entire area do not coincide there subsequently emerges a need for transmission of electricity through the Nordic grid. This demand may sometimes even exceed the available physical capacity of the transmission system. As a result of this congestion the generation fleet across the Nordic region will need to be operated in a suboptimal fashion, which subsequently leads into price differentials. Eliminating entirely these congestions that lead into regional price differentials would require substantial investments in the transmission capacity. Congestions in the Nordic spot market are handled through market splitting, while internal congestions within TSO control area are handled through counter trade or by reducing interconnector capacity at the bidding area borders. Counter trade is mainly used after gate closure of the day-ahead markets and in certain cases on day-ahead markets in Statnetts control area. In 2010 the price area structure used in the Nord Pool Spot bidding area was modified. The fourth Norwegian price area was introduced on January 11, and the fifth on March 15th. Subsequently the price area Estonia was introduced on April 1, as the capacity of the Estlink cable was included in the Nord Pool Spot trading. Further structural changes are expected when the Swedish market will be split into four price zones. Market splitting was enforced in 74 % of the time in 2010, meaning that there were one or more bottlenecks between the spot areas within the Nordic power system. During these hours, there was different prices in two or more areas, indicating the value of the connectors between areas. For different reasons the allowed exchange capacities are often lower than the nominal transmission capacities. Figures 14 and 15 show the transmission capacities between the different Elspot areas as per May 2011 and the percentages the price areas have shared the price in 2010.

4 Energinet.dk in Denmark, Fingrid in Finland, Statnett in Norway and Svenska kraftnät in Sweden.

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Figure 14 Transmission capacities between the Nordi c price areas May 2011.

Figure 15 Shares of the annual hours the different prices areas have shared the same price. Figure 16 below shows the congestion hours between all the price areas. The percentages in the figure illustrate the share of annual hours the neighbouring price

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areas have had different prices. The percentages are given to both directions separately and adding the percentages of both congestion directions yields the total congestion between the two price areas.

Figure 16 Shares of the annual congestion hours bet ween different prices areas. Substantial reinforcements in the Nordic transmission system are planned to be made in the coming years, though generally it is not economically efficient to expand the network capacity to a level where the demand for transmission is met at all hours and at all interconnectors. In June 2004, Nordel recommended, based on energy balances and market based analysis, reinforcement of five limiting cross-sections in the Nordic transmission grid. The following lists these connections and their commissioning or expected year of commissioning:

6,4 %

10,6 %

4,1 %

10,9 %

13,6 % 29,9 %

2,8 %

21,0 %

34,9 %

6,1 %

0,4 %

8,0 %

6,4 %

0,3 % 19,8 %

44,0 % 45,4 %

13,5 %

0,1 %

0,8 %

NO2 0,7 %

NO1 ->

NO3 25,1 %

NO5 1,8 %

SE 20,7 %

NO2->

NO1 11,6 %

NO5 12,4 %

DK1 15,5 %

1,1 %

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– Norway to Sweden (new connection Nea-Järpströmmen), commissioned 2009 – Funen to Zealand in Denmark (Great Belt connection), commissioned 2010 – Finland to Sweden (new Fenno-Skan 2 connection), 2011 – Central to Southern Sweden (The South Link), 2013 – Norway to Denmark (Jutland) (new Skagerrak connection), 2014

The recommendations were given with the five reinforcements as a non-prioritized ”package”. For all the cross-sections, except the one between Funen and Zealand in Denmark (the Great Belt), there are transmission lines today which have limited capacity in relation to the demand. In March 2008 Nordel announced a new Grid Master Plan recommending three new reinforcements to the Nordic Grid:

– Sweden – Norway, South (Extension of the South Link into South-West Link), 2015/2016 – Sweden – Norway, North – South axis (420 kV AC line Ørskog – Fardal), 2013 – The Arctic region (420 kV AC line Ofoten – Balsfjord – Hammerfest), 2014/2016

Estlink 1 cable connecting the Estonian and Finnish markets has been used for trading under Nord Pool Spot since April 2010. However, the capacity of the connection has not been sufficient to remove congestions and to even out the price differences between the markets. New Estlink 2 cable of 650 MW is intended to improve the situation in the beginning of the year 2014. Another important link was the commissioning of the link connecting the eastern and western parts of Denmark together. This link is especially important as a way to channel the wind generation to other parts of the market. The third package of the European Energy Market Opening will further impact the development even on the Nordic level. The creation of ENTSO-E as a pan-European body arranging the common action of the various regional TSO:s has already replaced the well established Nordel action pattern. Further changes can be expected through harmonization of the operational patterns and the introduction of common tools for assessment of network investments. Regulation 714/2009 was introduced as the platform setting the fair rules for cross-border exchanges in electricity, thus enhancing competition within the internal market in electricity. This regulation provides in its Annex the Guidelines on the Management and Allocation of Available Transfer Capacity of Interconnections between National Systems.

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The roles of the regulatory authorities in the Nordic countries with regard to capacity allocation and congestion management vary. It is clear though, that the main responsibility for this issue lies with the system operators. The role of the regulatory authorities with regard to the system operators differ, from a very limited role for the Swedish regulator to a situation where NVE as only regulatory authority has to approve of the Nordic Grid Code. However, after the establishment of the ENTSO-E and the pan-European regulatory agency, ACER the preparation of the network codes has entered a new era.

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7 Wholesale power market

Summary During 2010 average spot prices at Nord Pool were higher than prices in 2009. The highest monthly spot price in 2010 was noted in December, when the average system price reached 81.65 €/MWh. Cold weather, problems at Swedish nuclear power plants and an increasing hydrological deficit during the year contributed to high prices last year. 2010 saw several price peaks in most of the Nordic price areas. On the evening of December 7 prices in East Denmark reached the technical maximum of 2 000 €/MWh for two hours. On February 22, prices peaked at above 1 400 €/MWh for three hours in East Denmark, Sweden, Finland and Middle and North Norway. In the same elspot areas prices reached 1000 €/MWh on January 8. Low temperatures, low Swedish nuclear power generation and low available transmission capacities contributed to these prices. Trade at Nord Pool has increased steadily since it was established in 1993. The volume traded at Nord Pool in 2010 was about the same share of total consumption as that of the last two years. Although trading at Nord Pool is voluntary, significantly more power is traded on the power exchange than bilaterally.

7.1 Framework The wholesale power market is a common Nordic market, where electricity is traded on the Nordic electricity exchange, Nord Pool. The market participants at Nord Pool – more than 400 members from over 20 countries – are electricity generators, electricity suppliers, portfolio managers, industrial companies and other large electricity consumers. Nord Pool was founded in 1993 in Norway as Statnett Marked. In 1996 Sweden joined the power exchange and the world’s first multinational exchange for trade in power contracts was established. Statnett Marked was renamed as Nord Pool. In 1998 Finland joined Nord Pool and in 1999 Western Denmark joined the market place. In 2000 the Nordic wholesale power market became fully integrated when Eastern Denmark joined Nord Pool. Trading at Nord Pool is voluntary, however all day-ahead cross-border trading must be done at Nord Pool Spot. About 75 % of the power generated in the Nordic region is traded via Nord Pool Spot. The remaining 25 % is traded bilaterally. The Norwegian Water Resources and Energy Directorate (NVE) are responsible for regulating Nord Pool Spot.

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The capacities for the exchange of electricity between the bidding areas are calculated and coordinated by the TSO’s and distributed to Nord Pool Spot for exchange purposes, before price calculation at Nord Pool Spot. The prices for the spot areas and the flow between the areas are then calculated. This ensures an exchange where electricity flows from a low price area to a high price area. If the available capacity between the areas is adequate, the prices will be equal. If not, there will be price deviations between the spot areas. Nord Pool Spot consists of two sub-markets, the day-ahead market Elspot and the intra-day market Elbas. In the day-ahead market, electricity is traded for the next day’s 24 hours. In the intra-day market, participants in Norway, Finland, Sweden, Germany and Denmark can trade for the forthcoming day after the day-ahead spot market has closed. Remaining transmission capacities or capacities in the opposite direction of the day-ahead outcome is available for the intra-day market. In the financial market the players can secure prices for future purchases or sales of electricity. The Nordic market also has a common regulating market in order to ensure the balance between generation and consumption in the hour of operation. The different market solutions are used depending on the distance to the operating hour, see figure 17.

Figure 17 Timeframes for Nordic physical electricit y markets Market players can list their available generation/limited consumption volumes and accompanying price to the TSO’s for the regulating market (common bid ladder for Nordic TSOs). This is a helpful tool for the TSOs, which have the overall responsibility to ensure the balance between supply and demand within the operational hour. The

Delivery hour

(occurs any of the 24

hours during day 2)

Day 1

hour

12:00

Day 2

ELSPOT ELBAS

System operators provide data on transmission capacity between price areas to the North Pool.

1 hour before delivery

hour

The estimation of equilibrium price and the exchange between the price areas is based on the buy and sell bids.

Regulating power market

hour

14:00 Day 3

Time

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TSO’s can then employ the right regulating object after taken into consideration location and capacities in the network.

7.2 Price development in the spot market The Nord Pool system price5 has varied considerably since 1996 (see figure 18). In 2010 the average system price was 53.06 €/MWh, compared to 35.02 €/MWh in 2009. The average price in 2008 was 44.73 €/MWh. The highest monthly spot price in 2010 was noted in December, when the average system price reached 81.65 €/MWh. The highest weekly system price occurred in week 8, when the average system price was 88.64 €/MWh. Extremely cold weather, problems at Swedish nuclear power plants and low available transmission capacities caused the high price. In week 20 the system price was 36.68 €/MWh – the lowest weekly system price of the year. The lowest weekly system price of the year has never been higher. By week 50 it had risen again to 87.26 €/MWh. Again cold weather and lower output than normal for the season at Swedish nuclear power plants contributed to the price increase. In addition an increasing hydrological deficit during the year meant resources were scarce at the time.

Figure 18 Development of weekly system price at Nor d Pool Spot, 1996-2010

Source: Nord Pool

5 The system price is calculated as the price that would be realized if there were no congestions between the elspot areas.

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There were slightly higher price differences on average between the different Nord Pool spot areas in 2010 than in 2009, see table 3. The highest average price during 2010 was in Middle Norway while West Denmark had the lowest average price. The average price in West Denmark was more than 11 €/MWh lower than the average price in Middle Norway. Table 3 also shows that prices were considerably higher in the Nordic region in 2010 than in 2009. As mentioned, higher demand as a result of lower temperatures, low inflow and low reservoir levels, and problems with Swedish nuclear power production at the start of the year and in the end of the year, contributed to that. Table 3 Average price in the different Nord Pool sp ot areas, 2010 Source: Nord Pool Spot 6

Spot prices €/MWh 2010 Change from 2009

East Norway (NO1) 54.25 61 % South West Norway (NO2) 50.82 - Middle Norway (NO3) 58.04 43 % North Norway (NO4) 57.33 63 % West Norway (NO5) 51.79 - Sweden (SE) 56.82 54 % Finland (FI) 56.64 53 % West Denmark (DK1) 46.49 29 % East Denmark (DK2) 56.94 43 % The price differences between the spot areas in 2010 shows that the price in Sweden (SE) was lower than the price in Finland (FI) in only 1 % of the hours in 2010 (see table 4). That is the same percentage as the year before. The price in Middle Norway was lower than in its neighbour areas North Norway, Sweden and Finland only 2, 3 and 3 % of the time repspectively, and higher than the price in West Denmark in 60 % of the time. There was a common Nordic price for 18.6 % of the time in 2010. That is less than in 2009, when there was a common Nordic price for 25.0 % of the time.

6 South West and West Norway was NO1 in 2009

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Table 4 Price differences in percentage of all hour s in 2010 between Nordic spot areas, 2010. Source: Nord Pool Spot

NO1 NO2 NO3 NO4 NO5 SE

FI DK1 DK2 2009

Less than NO1 27 % 19 % 22 %

16 % 22 %

25 % 51 % 23 %

NO2 1 % 19 % 21 %

0 % 21 %

23 % 44 % 22 %

NO3 30 % 50 % 11 %

42 % 16 %

21 % 60 % 21 %

NO4 24 % 46 % 2 %

37 % 11 %

16 % 58 % 16 %

NO5 2 % 12 % 19 % 22 %

21 %

24 % 48 % 23 %

SE 22 % 43 % 3 % 6 %

35 %

6 % 52 % 7 %

FI 22 % 42 % 3 % 7 %

34 % 1 %

51 % 7 % DK1 14 % 16 % 14 % 17 %

16 % 15 %

16 % 13 %

DK2

Higher than

26 % 46 % 10 % 13 %

39 % 9 %

14 % 50 % A table listing area prices for chosen percentiles, as in table 5, shows that East Denmark (DK2) had both the highest and lowest price in the Nordic area i 2010. On the evening of December 7 prices reached the technical maximum of 2000 €/MWh for two hours. On the night of July 5, prices were below minus 38 €/MWh for four hours. West Denmark also had negative prices during 2010. Negative prices were introduced in 2009. They are used in for instance situations with high wind feed in Denmark were sales bids otherwise would have been curtailed at price EUR 0. Such curtailment of sales may give an imbalance cost for the affected seller and thus create a willingness to pay in order to deliver power in the market (negative price) instead of paying imbalance costs. On February 22, prices peaked at above €1400/MWh for three hours in East Denmark, Sweden, Finland and Middle and North Norway. In the same Elspot areas prices reached 1000 €/MWh on January 8. Low temperatures, low Swedish nuclear power generation and low available transmission capacities contributed to these prices. For further information and background on the price peaks, see https://www.nordicenergyregulators.org/upload/Reports/Nordic_Price_Peak_Report20111.pdf.

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Table 5 Area prices from highest to lowest. €/MWh. Chosen percentiles. Source: Nord Pool Spot

Percen-tile

NO1 NO2 NO3 NO4 NO5 SE FI DK1 DK2

Highest 199.52 125,00 1400 1400 185.49 1400 1400 131.80 2000

90 % 77.48 64,32 81,98 80.66 65.16 80.75 80.30 59.15 80.02

75 % 56.02 53,5 59,12 57.38 53.56 58.52 57.96 51.56 59.40

Median 49.59 49,11 49,83 49.51 49.13 49.43 49.20 46.81 49.50

25 % 46.35 45,97 45,94 45.96 45.97 45.10 44.76 40.60 44.79

10 % 42.23 42,09 41.86 41.90 42.09 39.54 39.07 33.49 36.95

Lowest 1.82 1,82 1.82 1.82 1.82 0.28 0.28 -20.14 -38.07 As figure 19 illustrates there are considerable differences between a hydro dominated system and a system dominated by thermal power. In a hydro dominated system, it is less costly to respond to demand changes. Therefore intraday prices will vary more in a system like the German, where thermal power dominates. Fluctuations in wind power generation also contribute to volatile prices in Germany. However, peak prices in the Nordic region last winter shows that prices can be volatile in this region too.

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Figure 19 Comparison between the Nordic system pric e (upper figure, Nord Pool) and German wholesale price (lower figure, EEX). Note: Blue curve = average price, grey curve = max/min price.

Source: Nord Pool Spot and EEX Figure 20 illustrates the Nord Pool system price together with the forward price7 for the forthcoming period until 2013. The price expectations for the next three years were at the start of 2011 influenced by the hydrological deficit in the Nordic region. The forward price otherwise follows an expected cycle of lower prices during the summer and higher prices during the winter.

7 As of January 3 2011.

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Figure 20 Weekly Nord Pool system and forward price s

Source: Nord Pool Spot

7.3 Volumes in the spot market The volume traded through the spot market is often regarded to be a measure of liquidity in the spot market. With the exception of 2003 and 2009, there has been a consecutive increase in volumes traded through the spot market since the formation of Nord Pool in 1993, see figure 21. The volumes in the spot market went up with an increasing speed from 2004 to 2007. This can to some extent be explained by the introduction of gross bidding. Particularly this has increased the volumes traded in Sweden from 40-45 % to approximately 90 %. The incentives for some of the larger vertically integrated companies to notify both buying and selling were strongly improved, as the total fees rebated netting from producers with both buying and selling orders. The total volume traded at Nord Pool Spot in 2010 was about 77 % of the total Nordic electricity consumption – about the same percentage as the year before. The total volume traded at Nord Pool Spot in 2010 was over 305 TWh.

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Figure 21 Volumes traded at Nord Pool Spot market a s a percentage of total Nordic consumption, 1997 – 2010

Source: Nord Pool Spot

7.4 Balancing markets A common Nordic balance management is an important part of the development of a common integrated end-user electricity market in the Nordic region. A proposal to harmonize important features of balance management was presented in February 2007. The proposal consisted of:

• Common principles for cost allocation between balance responsible parties and grid

• Two balances – one for production and one for consumption • Common model for the settlement of imbalances - one price settlement for the

consumption balance and two price settlement for the production balance • Common fee structure • Elbas available in all Nordic countries • Common gate closure for final plans to the TSOs

The agreement for common Nordic balance management with one imbalance price for consumption and two imbalance prices for production was implemented in the Nordic countries during 2009. In Finland generation under 1 MW installed capacity are settled as consumption (against a one-price-settlement), and in Norway generation units under 3 MW are settled as consumption.

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The purpose of the balance settlement is in all Nordic countries to settle imbalances resulting from electricity deliveries between parties in the electricity market. The system operators perform two types of balance settlement. The first is the balance settlement between the countries. Balance power between two countries is priced and settled in the Nordic balancing market (regulation power market), Since 2002, bids from market participants with available regulating capacity are entered into a common price list in the common Nordic Operational Information System (NOIS), which serves as a common merit order for the TSOs balance settlement for balancing the national and the Nordic system. This is a so-called TSO-TSO market with a common merit order. The second balance settlement is inside the countries. This is a settlement between the system operators and the balance responsible parties. This settlement is governed by national balance agreements. These agreements describe how the balance responsible parties can participate in the regulation power market. There are currently efforts among the TSOs to reach common procedures for balance settlement between the TSO and the balance responsible parties – Nordic Balance Settlement (NBS). Procedures for a common balance settlement will form an important part of the joint efforts towards a common Nordic retail market, and the TSOs are cooperating with NordREG on this. The total volume of the Nordic balancing market was app. 4.5 TWh in 2010, see table 6. Among the different Nordic price areas Sweden had the largest volume with 1.6 TWh while South West Norway had the second largest volume with 0.6 TWh. Table 6 Volume of Nordic balancing market 2010 Source: Nord Pool Spot

NO1 NO28 NO3 NO4 NO59 SE FI

DK1 DK2 Total

GWh 493 646 162 215 420 1590 366 460 125 4477 The total weekly balancing in the Nordic region is illustrated below in figure 22.

8 South West Norway was an Elspot area from 11 January 9 West Norway was an Elspot area from 15 March

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Figure 22 Weekly regulating volumes for the whole o f Nordic area.

Source: Nord Pool Spot The largest downward regulation was in week 9 while the largest upward regulation was in week 1. The balancing volume of an average week in the whole Nordic region is shown in figure 23.

Figure 23 Hourly regulating volumes for the whole N ordic area for an average week. MWh, absolute values

Source: Nord Pool Spot

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8 Financial market In November 2010 NordREG published a report “The Nordic financial electricity market”10 and it was decided to update some of the statistics on a yearly basis in the Nordic market report. Below are these statistics – volume turnover in the financial Nordic electricity market, value turnover in the financial Nordic electricity market and number of transactions in the Nordic financial electricity market – presented. The statistics shows how the liquidity of the financial market has developed.

Summary The Nordic financial electricity market seems to be recovering some from the fall backs in 2009 due to – first and foremost - the financial crisis. While the volume turnover is at the same level as in 2009 both the value turnover and the number of transactions are rising. However, the activity and turnovers are still below the all time high level of 2008.

8.1 Volume turnover

Figure 24 Volume turnovers in the Nordic financial electricity market 1998-2010

Source: Nasdaq OMX The volume turnover in the Nordic financial electricity market fell very slightly in 2010 compared with 2009 after a gradual growth from 2003 to 2009, see figure 24. The years from 1998 to 2002 was marked by rapid expansion due to the geographical expanse of the market to all Nordic countries and the inflow of US energy companies to

10 The report can be downloaded from the NordREG website www.nordicenergyregulators.org

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the Nordic financial electricity market. But the collapse of Enron by the end of 2001 and the collapse of TXU Europe by the end of 2002 drastically changed the view in the US stock market with severe reductions in stock prices for power companies with international trading operations making it essential to ease international operations. The exodus of the US power companies in 2003 resulted in a sharp decline in the turnover in the Nordic financial electricity market. From 2004 to 2008 volume turnover grew steadily until the effects of the financial crisis showed in 2009 as a marked fall in volume turnover. In 2010 volume turnover fell a bit more but not significantly.

8.2 Value turnover

Figure 25 Value turnovers in the Nordic financial e lectricity market 1998-2010

Source: Nasdaq OMX The value turnover on the Nordic financial electricity market has had similar development as the volume turnover, see figure 25. However, there are significant differences. In 2008 the value turnover was double as high than in 2002 while the volume turnover had fallen 20 %. The difference can be attributed to higher electricity prices in 2008. In 2010 the value turnover was up more than 25 % compared to 2009 due to higher electricity prices as the volume turnover was slightly smaller than in 2009. The sharp fall in value turnover in 2009 can be seen in light of the financial crisis.

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8.3 Number of transactions The number of transactions has risen from 2009 to 2010 thus going back to the general trend of a steady rise since 2003. However the number of transactions in 2010 is still slightly below the level from 2008 which so far represents the highest number of transactions.

Figure 26 Number of transactions in the Nordic fina ncial electricity market 2003-2010

Source: Nasdaq OMX

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9 Retail markets

Summary Unlike the integrated Nordic wholesale power market, the retail markets in the Nordic region are to a large extent still national in scope, but in May 2009 NordREG published a joint report about the creation of a well-functioning Nordic end-user market for electricity.11 It suggests that no later than 2015, suppliers in the Nordic countries should be able to offer electricity to consumers in any Nordic country on equal terms. Even though the work of integrating the Nordic retail markets has begun, there are still four separate markets; hence comparisons between the markets have to be made with caution. Retail prices in the Nordic markets had an upward trend in 2010 with prices higher in December than in January 2010. Price differences between the months were almost 50 % in Norway, 20 % in Denmark, 14 % in Sweden and app. 10 % in Finland. However, price developments differed slightly throughout the year. Norway and Sweden experienced relative volatile prices with significant peaks and falls. Largest peaks occurred in February (Norway) and March (Sweden). In Finland and Denmark price developments where more steady in 2010 with an upward trend throughout the year. However, comparing Danish prices to the rest of the Nordic countries should be taken the Danish regulation of prices of supply obligation products should be taken into account when prices/developments are considered. Supplier switching and active customers are essential for a well-functioning electricity market and the rate of consumers changing supplier can be seen as an indicator of consumer awareness and activity on the market. The share of customers switching electricity supplier differs between the Nordic countries; from 4.2 % in Denmark, 7.5 % in Finland, 10.2 % in Norway and 10 % in Sweden. However, this is still a much smaller variation than before 2009. The number of suppliers on the Nordic markets varies significantly but on all markets the number of suppliers seems sufficient to support and maintain active competition on the markets. In Norway there are some 20 suppliers operating nation-wide, in Sweden app. 100, in Finland app. 35-40 and in Denmark app. 25.

11 The report “Market Design – Common Nordic end-user market” can be downloaded from: https://www.nordicenergyregulators.org/Publications/

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9.1 Development of retail prices The retail prices for a household with an annual consumption of 20 000 kWh/year (Danish12 annual consumption 4 500 kWh/year) in the Nordic countries in 2010 are shown below, see figure 27.

Figure 27 Retail prices (excl. taxes, VAT, distribu tion tariffs etc.) in the Nordic region, 2010

Source: Regulatory authorities Retail prices in the Nordic countries seem to have followed two separate developments: Norwegian and Swedish prices were rising in the first quarter of 2010, were especially Swedish prices soared with a rice of 80 % in the average price from January to March. In second quarter prices dropped and remained relatively calm during summer. However towards the end of 2010 prices rose again to a level between 6.92 eurocent/kWh (Sweden) and 8.41 eurocent/kWh (Norway). In December 2010 Norwegian prices were close to 50 % higher than in January 2010 while Swedish prices were up app. 14 %. Finnish and Danish retail prices generally had a more steady development with a rising trend. Finnish prices in December 2010 were app. 10 % higher than prices in January (from 4.8 eurocent/kWh to 5.3) and Danish prices were up nearly 20 % (from 4.7 eurocents/kWh to 5.6).

12 The Danish retail market differs considerably from the markets in the other Nordic countries e.g. regarding average consumption pr. Consumer. The supply obligation product - a quarterly product supplied by companies granted a concession - covers approx. 90-95% of the Danish consumers (households and small businesses and enterprises). The prices for this product apply for one quarter and are under supervision by The Danish Regulatory Authority (DERA).

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9.2 Supplier switching A well-functioning retail electricity market depends – among other things – heavily on active consumers. The share of consumers having switched electricity supplier illustrates consumer awareness and activity in the market. However, the collection of information about switching and definitions of key figures describing switching activity differ among the Nordic countries, hence precise comparisons should be taken with caution. Supplier switching in the Nordic markets seems to have levelled off or dropped a bit in 2010. However, in Norway the supplier switching increased from 8% to more than 10%. Swedish supplier switching also remains at a relatively high level with around 10 % in 2010. On the Finnish market supplier switching dropped marginally to just over 7.5 % from an all-time high of 8.1 % in 2009. Danish supplier switching dropped most – app. 30 % – but remains at a relatively high level compared to the very low levels of supplier switching until 2009. Table 7 Supplier switching on Nordic electricity ma rkets 2008 – 2010 Source: Regulatory authorities

2008 2009 2010 Norway 9.0 8.0 10.2 Sweden 9.0 11.0 10.0 Finland 4.4 8.1 7.6 Denmark 2.8 6.1 4.2 There is no single explanation of the variations in supplier switching from one year to another, but consumer’s propensity to switch depends on many factors like:

• Transparency about the price differences • Information – i.e. prices, switching procedures, suppliers etc. • Economic incentives – i.e. the possibility to save money or a big consumption • Active marketing activities by suppliers etc.

Actual supplier switching also depends of factors like contract lengths, demand for variable/fixed prices etc. Information about products, prices, switching procedures etc. are crucial for the market and the consumer’s actions here. One of the ways consumers can access such information are through web-portals offering price and product information, information about switching procedures, suppliers etc. The web portals in the different countries are listed below: Norway:www.konkurransetilsynet.no Sweden: www.elpriskollen.se Finland: www.sahkonhinta.fi Denmark: www.elpristavlen.dk

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9.3 Suppliers In Norway, the number of active suppliers varies over time. At the end of 2010 there were a total of about 110 suppliers in the whole country, most of these former incumbent suppliers. 20 of these suppliers had offers in all grid areas in Norway13. Some of these nation-wide suppliers are former incumbent suppliers, while others are independent suppliers established after liberalization. The number of electricity suppliers in Sweden has fallen since the deregulation of the electricity market. In 1996 there were over 220 suppliers in Sweden. By 2010, this figure has fallen to 121. About 100 of these companies operate throughout the country. In Finland there are currently more than 70 retail suppliers of which approximately 35-40 suppliers are also giving price offers to customers located outside their traditional supply area. In the Finnish electricity retail market there are less than five electricity retailer suppliers with a larger than 5 % of share of retail market. The total number of electricity suppliers to households in Denmark is around 55-60. The 33 supply obligation companies have each been granted a concession for a specific geographic region where they supply households and small businesses having not concluded an individual contract. App. 90-95 % of the Danish households and small businesses are supply obligation customers. The rest of the trading companies supply the small customers which have used the liberalised market and changed supplier, larger businesses and enterprises.

13 Data collected from the National price comparison site. All suppliers offering at least one of the three main contract types in Norway are obliged to register on this comparison site.

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10 Market indicators for the Nordic electricity mar kets The Nordic electricity markets have been liberalized so that ordinary market mecha-nisms have become increasingly influential on the market. Well functioning markets help ensure that society’s resources are used as efficiently as possible and that the goods and services supplied to consumers are no more expensive than necessary. In this way well functioning markets promote welfare and growth. Well functioning markets are characterized by effective competition between suppliers, and good market information for consumers which enables them to make rational decisions. One of the objectives of NordREG is to monitor/evaluate the development of the electricity markets in the Nordic area. To monitor developments in the market and to develop methods of quantitatively evaluation of the market, NordREG has developed a set market indicators. The indicators have been selected on the criteria’s that they should be based on of hard reliable data and data should be immediately available. The indicators are based and calculated using comparable data from all Nordic countries. The definitions and descriptions of the indicators are presented and explained in detail in appendix A. See also Nordic Market Report 2010, where the indicators were presented and used for the first time.

Summary Based on the indicators, the Nordic retail markets for electricity appear competitive with a sufficient range of competing suppliers and active price competition but also showing areas where the competitive environments of the markets might be better, e.g. concentration on the whole-sale markets. The indicators also highlights the differences between the markets where all the countries have different stronger and weaker positions suggesting room for improvement but also suggesting that different actions and remedies should be considered for the different markets.

10.1 Competition in the Nordic retail markets In the following section competition in the Nordic retail market will be described by a set of market indicators developed by NordREG.

10.1.1 Number of suppliers In a perfectly competitive industry there will be a large number of sellers. According to competition theory, the number of sellers could on the one hand be an indicator of economies of scale and scope and the existence of switching costs, and on the other hand an indicator of price taker behavior and utilization of market power in general. The scores on the number of suppliers indicator are shown in table 8. All of the Nordic countries score a 5 on the indicator showing that the customers in every market have a

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wide range of suppliers to choose among, i.e. conditions for competition on the supply side are basically favourable. Table 8 Number of suppliers indicator, 2010.

Denmark Finland Norway Sweden Score 5 5 5 5 Share of suppliers covering the whole market 35% 35% 27 % 83%

10.1.2 Supplier switching rate Perfect competition also means that consumers should be fully aware of their alternatives. The question is whether they are. The supplier switching rate is an indicator of consumer awareness. The scores on the supplier switching indicator are shown below in table 9. Table 9 Switching rate, 2010

Denmark Finland Norway Sweden Score 2 3 4 4 Share of consumers who have switched supplier 4,2% 8,1% 10,2% 9,6% The indicator presents the customers of Finland, Norway and Sweden as the most active with switching rates just around 10 %. Danish customers are the least active with a switching rate of app. 4 %. However, it should be taken into account that there are substantial differences between the Danish market and the other markets, e.g. average consumption for a Danish household is significantly lower than in the other Nordic countries due to fact that there is virtually no electric heating in Denmark. This minimizes the economic benefits of switching supplier thus limits consumer interest in the electricity market.

10.1.3 Price differences in the retail market (Pric e spread) The theoretical optimum of a fully competitive market is a market where no player is able to influence the price of the product in the market or any prices in the factor markets thereof. In practice this would mean that the market share of any player is so small that changes in supply by any individual actor would not alter the supply and demand balance.

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Price takers thus believe or act as if they can sell or buy as much or as little as they want without affecting the price. The scores on the indicator are shown in table 10 below. Table 10 Price spread for product most commonly use d on each national market, 2010 Denmark Finland Norway Sweden Score 5 4 5 5 Price spread on most commenly used product 9,0% 18,5 % 3,4 % 7,3 %

The price spread indicator shows markets with a reasonable price competition. However, compared to 2010 the price spread in Finland has risen considerably suggesting a slightly weakened pricecompetition.

10.1.4 Concentration in whole sale markets (HHI) In addition to indicators associated directly with the retail market NordREG has incorporated a component that illustrates the characteristics of the wholesale market. The key argument for this is that without a well-functioning wholesale market the development of competitive retail market is not feasible. If the wholesale market is not competitive, the actors in the wholesale market can discriminate between actors in the retail market, thus constraining the competition in the retail market. It should be noted however that there are strong structural reasons for expecting a relatively high concentration on the supply/production side at the outset. Electricity production facilities come at a very heavy price, establishing facilities are highly regulated through environmental regulation, licensing arrangements etc. which all makes heavy barriers to entry. Furthermore the pricing in the retail market is often derived from the wholesale market and thus it is often not possible to distinguish entirely between the two markets. It is difficult to imagine a well functioning retail market without a well functioning wholesale market, but the reverse is in use in several markets around the world. The scores of the indicators are shown below in table 11.

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Table 11 Concentration index for the Nordic whole s ale markets, 2009

Denmark Finland Norway Sweden Score 1 3 3 2 HHI-index 2530 1280 1305 2193 The indicator shows high concentration on the Danish and – though to a lesser degree – the Swedish markets and only moderate concentration on the Finnish and Norwegian markets. Highly concentrated markets can be a cause for concern for restricted or weakened competition. However, concentration in a market does not in itself constitute a problem regarding competition. Whether or not competition on a highly concentrated market is hampered requires further analysis of the behavior of the market participants etc.

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11 Ongoing NordREG work The market report has so far provided a general presentation of the recent development of the Nordic electricity market based on NordREG’s running electricity market monitoring. But NordREG also makes deeper analyses on market issues and proposes changes to facilitate market development and market integration. Some of NordREG’s most important projects are presented in this chapter based on conclusions drawn in NordREG’s reports published in 2010. The descriptions below are organised according to NordREG’s strategic priorities:

• A truly common Nordic retail market with free choice of supplier • A well-functioning Nordic wholesale market with competitive prices • Reliable supply • Efficient regulation of TSOs

11.1 A truly common Nordic retail market with free choice of supplier

One of the main priorities for NordREG over the coming years will be the work to achieve a common Nordic retail market. The project for a common Nordic retail market is driven by strong political backing. The work during 2010 was addressed by NordREG reports on the processes and works toward the goal: Implementation Plan for Common Nordic Retail Market Common Nordic Retail Market – Organization of the further work The reports describes in detail the timetable and the necessary steps toward a common Nordic retail market that have been taken, what needs to done and how the work will organized. NordREG also published a paper describing the NordREG approach to the 3rd package retail and consumer issues. The reports and the paper can be be found at the NordREG website: www. nordicenergyregulators.org

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11.2 A well-functioning Nordic wholesale market with competitive prices

In addition to the work on a common retail market NordREG will continue the work on development and improving the functioning of the wholesale market. The fortcoming work in 2011 will be influenced by follow up on the “NordREG report on the price peaks in the Nordic wholesale market during winter 2009-2010”. In the report several issues that help reduce the likelihood of future price peaks were emphasized and should be analyzed in 2011. Furthermore increased focus will lie on the market development at the power exchange Nord Pool Spot. The work during 2010 was addressed by NordREG reports on the following themes which can be found at the NordREG web-site: Peak load report Harmonizing the balancing markets – issues to be considered NordREG memo on price peaks in the Nord Pool Spot Market The Nordic Financial Electricity Market

11.3 Reliable supply Another of NordREG’s priorities is to contribute to reliable supply of electricity in the Nordic region. The priority has two dimensions:

• To promote market-based or legal environment for security of supply • To ensure harmonised procedures for handling extreme situations

The roles of national regulatory authorities of the Nordic countries in relation to security of supply issues are very different. Other public authorities, too, have important responsibilities and in certain cases the responsibilities assigned to regulatory authorities are minor. In 2007 NordREG conducted a review of the roles and responsibilities as well as of the legislation relevant to the issue. In 2010 NordREG published two reports with significance for a reliable supply:: Grid investment in a Nordic perspective Grid investment in a Nordic perspective – NordREG recommendations

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These can also be found at the NordREG website.

11.4 Efficient regulation of TSO TSOs play a crucial role in the efficient operation of the market, especially the wholesale market. Therefore the strategic priorities of “efficient regulation of TSOs” and of “a well-functioning Nordic wholesale market with competitive prices” are closely linked. Congestion management is an issue of vital importance in the Nordic market. NordREG has investigated to what extent the Congestion Management Guidelines have been implemented in the Nordic market. In the report issues requiring Nordic approach in the implementation of the guidelines have been identified. Furthermore, some clarifications from the Nordic perspective in implementation are discussed and also issues irrelevant for the Nordic interconnections are identified and reasons omitting these issues in Nordic interconnections are given.

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Appendix A Description and definitions of market indicators for the Nordic Electricity Markets

Indicator: Number of suppliers It is difficult to determine the number of suppliers that is needed for competition to be efficient. The optimal number of competitors would basically depend on the characteristics of the production costs and the market. For example, in a market with no entry and exit barriers, no cost of switching, only one supplier would be necessary, as the threat of entry would be sufficient to keep prices in line with marginal cost. Thus the number of suppliers should be considered in relation with indicators of entry barriers, cost of production and switching costs. Scaling is a problem with this indicator. It is hard to determine where to draw the line between the number of suppliers that indicates imperfect competition and what number of suppliers indicates more efficient competition. It should also be mentioned that not all suppliers are active in all regions of a national market, thus leading to different competitive situations in the regions. A large number of suppliers could as such actually indicate a large degree of market segmentation. Particular if there is cross ownership between the different suppliers. Only suppliers covering the whole of the individual countries are counted. NordREG considered selecting eg. the capital region to work as a proxy, but concluded that selecting the whole country would still be more representative. When presenting this indicator in the Nordic Market Report, the total number of suppliers and the percentage share of the suppliers covering the whole market will be elaborated. When presenting the number of suppliers’ indicator, the following scale will apply: Number of suppliers

Score

>10 5 >8 4 >5 3 >3 2 >0 1 The scale has been chosen in order to measure the indicators’ impact on competition and in order to enable comparisons between the different indicators. The scale 1-5 has on the one hand been chosen in order to differentiate and on the other hand not to pretend accuracy which is not available.

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Indicator: Supplier switching rate Perfect competition also means that consumers should be fully aware of their alternatives. The question is whether they are. The supplier switching rate is an indicator of consumer awareness. Switching supplier is defined as the action through which a consumer changes supplier. The switching rate measures the consumer awareness and activity which is crucial to a well functioning market. High switching rates could be interpreted as a sign of adequate consumer information, and vice versa. The switching rate also reflects a number of other aspects in the retail market, such as general prevailing options among general public, innovativeness of contract offering, marketing activity and overall dynamics. Though a low switching rate could indicate low consumer awareness, it is not necessarily so. No hinders to switching together with perfect consumer information would imply that the consumers switch supplier as soon as there is a better offer available. That again means that the switching rate could be low because of hinders to the switching or low price spread. If the former is the case, the switching rate would be low due to entry barriers on the demand side. If the latter is the case, low switching rate could be misinterpreted as imperfect consumer information when in fact the market could be working perfectly well. The indicator should thus be considered in relation with the price spread. An insignificant budget impact of switching supplier could also explain a situation of low switching rate. The less the share of what the consumer will gain from switching supplier makes of his or her budget, the less is his or her incentive to make the switch. The indicator will be calculated as number of household switching contracts per year as a percentage share of the total number of household consumers and presented in the following manner: Switching rate, %

Score

>12 5 >9 4 >7 3 >3 2 >0 1

Indicator: Price differences in the retail market ( Price spread) A low price spread (no or only small price differences) in the retail market is regarded as an indication of a high level of competition as a competitive market tends to

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minimize price differences between homogenous products. The price spread indicator will illustrate that a consumer can save money by switching the supplier. With a homogenous product14 like electricity consumers should always choose the lowest price on comparable products. The price spread is included among the indicators to reflect the price taking behavior in the market, as if the law of one price would apply and the difference between different suppliers’ prices would be negligible. Choosing the same product in each country is problematic. Even though a product is available in each country the use of that product varies and may not be representative for the individual market. However, comparing price spreads of the most commonly used product in the free market in each country will constitute a coherent measure as an indicator for the competition in each national market.

The price spread will be calculated as the ratio between the lowest and highest price at the retail market, offered for the most commonly used product in each country. The supply obligation products are excluded. The aim is to measure price competition on the most used product in different markets; hence the product itself has less importance. The price of the most commonly used product will be defined as the price of the offer for this product to an average consumption household. The capital regions will be used as a geographical proxy. Observations defined as typical outliers could cause a problem when calculating the price spread as the ratio between the highest and lowest price. NordREG believes that the prices observed are actual prices for actual products. Thus there should be no general problem of outliers. However, this is first and foremost an empirical question, that will be dealt with if outliers appear. When calculating the price spread it is also a question of whether to base the calculation on one or more observations. The more observations, the more robust the indicator might be. However, NordREG find the question best be answered and a decision taken, when there has been an opportunity to scrutinize the actual data collected for the indicator.

14 Electricity in itself is a homogenous product. In recent years certain attributes has been inscribed to the product, such as green attributes for electricity generated from renewable energy sources. If green attributes are important for the consumers, the products are no longer homogenous but heterogeneous. And the consumers may not necessarily choose the product with the lowest price.

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The price spread indicator will be presented in the following manner: Price spread, %

Score

<10 5 >10, <20 4 >20, <30 3 >30, <50 2 >50 1 A low spread is regarded as an indication of a high level of competition as a competitive market tends to minimize price differences between homogenous products. The price spread indicator will illustrate that a consumer can save money by switching the supplier. With a homogenous product15 like electricity consumers should always choose the lowest price on comparable products. The price spread is included among the indicators to reflect the price taking behavior in the market, as if the law of one price would apply and the difference between different suppliers’ prices would be negligible. Choosing the same product in each country is problematic. Even though a product is available in each country the use of that product varies and may not be representative for the individual market. However, comparing price spreads of the most commonly used product in the free market in each country will constitute a coherent measure as an indicator for the competition in each national market.

The price spread will be calculated as the ratio between the lowest and highest price at the retail market, offered for the most commonly used product in each country. The supply obligation products are excluded. The aim is to measure price competition on the most used product in different markets; hence the product itself has less importance. The price of the most commonly used product will be defined as the price of the offer for this product to an average consumption household. The capital regions will be used as a geographical proxy. Observations defined as typical outliers could cause a problem when calculating the price spread as the ratio between the highest and lowest price. NordREG believes that the prices observed are actual prices for actual products. Thus there should be no general problem of outliers. However, this is first and foremost an empirical question, that will be dealt with if outliers appear. When calculating the price spread it is also a question of whether to base the calculation on one or more observations. The more observations, the more robust the indicator

15 Electricity in itself is a homogenous product. In recent years certain attributes has been inscribed to the product, such as green attributes for electricity generated from renewable energy sources. If green attributes are important for the consumers, the products are no longer homogenous but heterogeneous. And the consumers may not necessarily choose the product with the lowest price.

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might be. However, NordREG find the question best be answered and a decision taken, when there has been an opportunity to scrutinize the actual data collected for the indicator. The price spread indicator will be presented in the following manner: Price spread, %

Score

<10 5 >10, <20 4 >20, <30 3 >30, <50 2 >50 1

Indicator: Concentration in whole sale markets (HHI ) In the economic theory of industrial organisation a basic assumption is that the potential to abuse market power is related to the firm’s market share. It is assumed that the more concentrated the market is the likelier it is that market is not well functioning. In the prolonging this implicates that an increase in markets concentration can lead to higher prices and lower consumer welfare. The Herfindahl-Hirschman index (HHI) serves as indicator of market concentration and thus price taker behaviour of the wholesale market. The index however is not a very good indicator of the competitive character of a market since it merely points out the structural dominance of the market. The HHI should be calculated for several market areas in order to reflect the Nordic electricity markets: The whole Nordic market as one, national markets and other subdivisions hereof (e.g. Sweden-Finland) subject to specific evaluations when numeric figures have been calculated. NordREG has calculated the indicator for each national generation market and complemented this by weighing it with the time fragment the entire Nordic market shares a common price in the set of indicators. The indicator both illustrates the concentration of the national generation market and the share of pan-Nordic sourcing. As the calculation of HHI for each country is based on market shares in the wholesale market, a market that in reality is a Nordic market, bottlenecks within the Nordic market is taken in to account.

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The indicator will be presented according to the following scale: HHI Score < 1000 5 >1000 <1100

4

>1100 < 1500

3

> 1500 < 2200

2

> 2200 1

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NordREG c/o Energitilsynet Nyropsgade 30 DK - 1780 København V Denmark Telephone: +45 7226 8070 Telefax: +47 33 18 14 27 Internet: www.nordicenergyregulators.org