The power market
Power is a vital element that supports our lives at home and at work. As power production and transmission capacity has been extended over the years, transmission of power between countries has become more common. As a result a dynamic market has evolved where power can be bought or sold across areas and countries more easily.
Supply and demand set the price
The power price is determined by the balance between supply and demand. Factors such as the weather or power plants not producing to their full capacity can impact power prices.
Today, there is general agreement among politicians and other stakeholders that this model serves society well. While the price of power is determined according to supply and demand, it also becomes clear where there are issues in the grid when the price of power goes up. This makes it easier to identify where production or capacity is lacking, as there is too high demand compared to production supply.
Integrating Nordic and Baltic markets
The Nordic countries deregulated their power markets in the early 1990s and brought their individual markets together into a common Nordic market. Estonia, Latvia and Lithuania deregulated their power markets, and joined the Nord Pool market in 2010-2013.
The term ‘deregulation’ means that the state is no longer running the power market, and instead that free competition is introduced. Deregulation was undertaken to create a more efficient market, with exchange of power between countries and increased security of supply. Available power capacity can be used more efficiently in a large region compared to a small one, and integrated markets enhance productivity and improve efficiency.
An emerging European market
Now that transmission capacity and coupling is in place between the Nordic countries, the European continent and the Baltics, the power market covers large parts of Europe. This means that power from many different sources – hydro, thermal, nuclear, wind and solar – enters the grid. This ensures a more ‘liquid’ market, where large volumes are traded daily, and a more secure power supply.
Financial contracts are used for price hedging and risk management. The contracts have a time horizon up to ten years, covering daily, weekly, monthly, quarterly and annual contracts. The system price calculated by Nord Pool is used as the reference price for the financial market in the Nordic region.
There is no physical delivery for financial power market contracts. Cash settlement takes place throughout trading – and/or the delivery period, starting at the due date of each contract, depending on whether the product is a future.
Technical conditions such as grid congestion and access to capacity are not taken into consideration when entering financial contracts. However, with the help of the financial power market, buyers and sellers can manage the risks associated to the physical market prices.