The day-ahead market is an auction where power is traded for delivery each hour the next day. The Nord Pool markets are divided into several bidding areas. The available transmission capacity may vary and congest the flow of power between bidding areas, and thereby different area prices are established.
When all customers have submitted their orders, equilibrium between the aggregated supply and demand curves is established for all bidding areas. System and area prices are calculated and published.
The system price is calculated based on sale and purchase orders disregarding available transmission capacity between bidding areas in the Nordic market. The system price is the Nordic reference price for trading and clearing of most financial contracts.
For each Nordic country, the local TSO decides which bidding areas the country is divided into. The number of Norwegian bidding areas can vary, today there are five bidding areas. Eastern Denmark and Western Denmark are always treated as two different bidding areas. Finland, Estonia, Lithuania and Latvia constitute one bidding area each. Sweden was divided into four bidding areas on in 2011.
The different bidding areas help indicate constraints in the transmission systems, and ensure that regional market conditions are reflected in the price. Due to bottlenecks in the transmission system, bidding areas may get different prices called area prices. When there are constraints in transmission capacity between two bidding areas, power will always go from the low price area to the high price area. This principle is right for society: the commodity ought to move towards the high price where the demand for power is the highest.
This system also secures that no market members are assigned privileges on any bottleneck, which is an important feature of a liberal market. Nord Pool calculates a price for each bidding area for each hour of the following day.