NordPool - Financial Market

Nord Pool’s Financial Market

Trade at

Nord Pool’s Financial Market

Copyright Nord Pool ASA Oslo – Stockholm – Fredericia - Helsinki

1 April, 2004

Trade at Nord Pool’s Financial Market 2

Content

Introduction .................................................................................................................3

1. History of Nord Pool’s Financial Market ...............................................................4

1.1. Timeline.............................................................................................................................................. 4 1.2. Financial Market Overview ..................................................................................................................... 6

2. The Financial Market at Nord Pool........................................................................7

2.1. Futures Contracts ................................................................................................................................. 8 2.2. Forward Contracts ...............................................................................................................................10 2.3. Contracts for Difference (CfD) ...............................................................................................................12 2.4. Option Contracts .................................................................................................................................14 2.5 Electricity certificates ...........................................................................................................................16

3. Trading in Nord Pool’s Financial Market .............................................................17

3.1. Daily routines .....................................................................................................................................18 3.2. PowerCLICK Exchange trading system ....................................................................................................18 3.3. Trading via Telephone..........................................................................................................................20

4. Traded Volume Growth ......................................................................................21


Introduction

This report on Nord Pool’s financial market is intended for introductory-level training at

organisations involved in electric power markets and as a guide for the general public.

The report is part of a four-part series prepared by the Corporate Communications department

of Nord Pool – the Nordic Power Exchange. These reports provide an overview of the Nordic

power system, the Nordic power market’s infrastructure, key concepts in the restructured

Nordic power market, the spot and financial markets, types of electricity contracts, clearing

services, trading activities and members.

The report series and contents are summarised below:

• The Nordic Power Market

− A short presentation of the power system

− Roles and responsibilities of key companies, such as grid owners, system operators, the

Nordic Power Exchange and its participants

− Transition from national power markets to a unified Nordic power market

− Wholesale and retail power markets

− Trading activities and prices at Nord Pool’s markets and in OTC and bilateral markets

• Trade at the Nordic Spot Market (Nord Pool Spot AS)

− Discussion of the spot market auction trade concept

− Daily trading activity – a timeline from bidding to financial settlement of traded spot

contracts

− Establishing area prices to handle grid capacity bottlenecks

− Settlement and pricing of imbalances

• Trade at Nord Pool’s Financial Market

− Product description of financial electricity contracts (futures, forward, CfDs, options and

Electricity certificates)

− Electronic trading system and trade via the financial desk

− Trading procedure

− Financial settlement

− Summary of risk management, collateral and clearing routines

− Market information

• Clearing Services Offered by Nord Pool Clearing ASA

- Interface between trading and clearing

− Roles and responsibilities of settlement banks, clearing members, and Nord Pool

Clearing

− Cash flow in clearing

− Determination of collateral

− Risk management and market monitoring

− Structure of agreements between parties involved

Copies of this report are available from Nord Pool, or they can be downloaded

from Nord Pool’s website: www.nordpool.com


1. History of Nord Pool’s Financial Market

Deregulation of the Nordic power market began in Norway when the country’s energy act,

aimed at restructuring and liberalising power market trade, went into effect on 1 January 1991.

Nord Pool (then Statnett Marked AS) established a forward market in 1993; this market used an

auction trade system, with physical delivery of the traded power contracts.

After a testing period focused on

the preferences of participants,

the forward market was

established, with three products

with physical delivery at

maturity.

The traded products initially

comprised base load contracts,

peak load contracts, and off-

peak load contracts, all with a

time horizon of up to six months.

All three contract types listed for

trade covered a single calendar

week, or blocks that comprised

four weeks. As the maturity date approached, block forwards were split into weeks, in

accordance with product specifications.

1.1. Timeline

As the Nordic power market developed, experience showed that the forward power contracts

concept needed to change to increase liquidity and promote trade. Nord Pool’s financial market

concept evolved as follows:

• In the period 1993-1994, peak load contracts and off-peak load contracts were removed

from exchange trading, due to low activity and in order to concentrate trading liquidity into

base load contracts.

Peak Power (75 hours per week)

Off-peak Power (93 hours per week)

Mon. Tues. Wed. Thurs. Fri. Sat. Sun.

Base Power (168 hours per week)

MW


• In 1994, the financial market’s weekly auction trading system was replaced by a continuous

trading system, with bids written on a whiteboard on the trading floor. All bidding, price

quotation and execution of trades were carried out by phone between market participants

and the trading floor at Nord Pool.

• To promote trading by new market participants and stimulate greater liquidity, the financial

contracts were changed from physical-delivery contracts to financial electricity contracts

with only cash settlement at maturity. The reference price for all financial contracts was the

system price of Nord Pool’s spot market. The time horizon of listed contracts was increased

in stages to three years.

• On 1 January 1996, Sweden joined the markets organised by Nord Pool and the first

multinational exchange for trading of electrical power was formed.

• In the fall of 1996, the PowerCLICK electronic trading system developed by Sweden’s OM

Group replaced the trading floor’s manual whiteboard.

• Nord Pool introduced trade in financially settled forward power contracts in 1997. Because

non-exchange trade activity in forward contracts was very high, Nord Pool standardised the

forwards to conform them to the OTC market.

• A similar potential was observed in the trading of option contracts. This lead to options

being launched as standardised products at Nord Pool in 1999.

• In 2000, after completing unification of the four neighbouring Nordic countries into a

common power market, Contracts for Difference (CfD) were introduced as a new forward

product. Contracts for Difference were introduced to give market participants listed products

for hedging against possible price differentials between the Elspot System and individual

area prices.

• In 2003, a new product structure was gradually introduced replacing blocks with months

and seasons with quarters, allowing Nord Pool contracts to be more compatible with

international standards.

• In 2004, Nord Pool launched its first product related to renewable energy production. The

product will be listed as the Swedish green certificates (“elcertificate”). Nord Pool is the first

European commodity exchange to offer a standard exchange traded contract for green

certificates. On 1 May 2003, Sweden became the first Nordic country to introduce a system

for green certificates. The elcertificates are subject to quotas for Swedish consumers, with

the exception of certain heavy industries. The purpose of this program is to provide an

incentive for investments in renewable energy production.

• All contracts with delivery period after 2006 will be listed in Euros rather than Norwegian

Crowns. This allows for easier cross-border trade and further standardisation with other

products and exchanges.


1.2. Financial Market Overview

At present the contract types traded on Nord Pool’s Financial Market comprise of both power

derivates and electricity certificates. The derivates are base load futures, forwards, options, and

Contracts for Difference. The reference price for these contracts is the System Price of the total

Nordic power market. The maximum trading time horizon is currently four years. There is no

physical delivery of financial market electricity contracts. Cash settlement is made throughout

the delivery period, starting at the due date of each contact.

The initial contract launched for the electricity certificates market is a spot contract with

physical delivery.

The Nord Pool group consists of Nord Pool ASA, running the financial market; Nord Pool Spot

AS, running the physical-delivery spot markets; and Nord Pool Clearing ASA, running the

electricity contract clearing services. Nord Pool Clearing, clears all contracts traded on the

Nordic Power Exchange. Nord Pool Clearing also clears contracts traded in the bilateral financial

markets that are registered for clearing – an important service for the Nordic power markets.

Market projections indicate that trade in financial contracts will predominate in the developing

European market. The reference prices will be spot prices and indexes based on spot prices and

OTC prices.

Financial contracts are entered into

without regard to technical

conditions, such as grid congestion,

access to capacity, and other

technical restrictions.

Price hedging based on financial

contracts at power exchanges or in

the bilateral market, combined with

physical procurement at national or

regional spot markets approximates

a hedge. A key tool in risk

management, this method of

hedging has largely replaced

traditional bilateral trade in physical-

delivery contracts.

As power markets become more

tightly integrated, physical trading

strategies become more difficult to

carry out. A high level of trade

Seller 100 MW

Buyer 100 MW

Time

Elspot System Price

Price

Financial contract price

Seller pays buyer

Physical trade through Nord Pool

Buyer pays seller Price hedging

settlement

Nord Pool


activity in traditional physical contracts would require rather complex monitoring of a large

number of contracts across different transmission system operator areas and of

interconnections.

2. The Financial Market at Nord Pool

All financial power contracts are cash-settled. They have been designed to satisfy the needs of

various participants:

• Generators, retailers and end-users who use the products as risk management tools.

• Traders who profit from volatility in the power market, and contribute to high liquidity and

trade activity.

Prior to the introduction of financially settled forwards in 1997, the time horizon of the futures

market was about three years ahead in time. Most trading activity and liquidity were

concentrated in contracts at the near end of the time horizon. In the OTC market, however,

considerable trade in standardised season contracts and year contracts at the far end of the

time horizon was conducted.

Nord Pool adapted to the non-exchange trading patterns by launching forwards that were

standardised in the same manner as in the OTC market, and that offered a time horizon of up to

four years. The time horizon for futures contracts was reduced from three years to 8-12

months. Forward contracts were listed up to four years ahead.

At the beginning of 2003, Nord Pool began to make new changes to its product structure. The

futures horizon was shortened to 8-9 weeks ahead, where the remaining contracts up to four

years ahead are listed as forwards. The current product structure is undergoing a transitional

phase, with a mix of old and new products.

The market thus seems to prefer short-term futures close to due date and long-term forwards

at the far end of the time horizon. The main reason for this preference is the different margin

calls for futures and forward contracts. Financial settlement of futures includes daily mark-to-

market settlement, which requires a large amount of cash in pledged/non-pledged cash

accounts, especially for the long period contracts at the far end of the time horizon. Financial

settlement of forwards involves no daily mark-to-market settlement, and thus requires posting

cash collateral only during the delivery period, starting at the contract’s due date.


2.1. Futures Contracts

Nord Pool lists for trading base load day and week futures contracts:

Day contracts, Base load, ENODxxxx-xx Period = 24 hours

Week contracts, Base load, ENOWxx-xx Period = 7 days

The ENO prefix that has been added to the contract ticker codes indicates commodity and

underlying market. E is for Electricity and NO for Nordic area.

As of fall 2003, the week contracts have been listed with 8 consecutive contracts, in a

continuous rolling cycle, as opposed to the current cycle that implies listing of weeks in groups

of 4 after split of a block contract. Simultaneously, the block futures contracts have been

replaced with forward month contracts.

Settlement of futures contracts involves both a daily mark-to-market settlement and a final spot

reference cash settlement, after the contract reaches its due date.

Mark-to-market settlement covers gains or losses

from day-to-day changes in the market price of

each contract.

Final settlement, which begins at maturity, covers

the difference between

the last closing price of the futures contract and

the System Price in the delivery period.

8-9 weeks

Days

Weeks


Net procurement

cost

Received duringmark-to-market

settlement

Received duringfinal settlement

Procurement cost in the Spot Market

Time

System Price

One hour

Trading Period Delivery Period

288

285

270

270 275

260

Market price

Mark-to-Market Settlement

+10 -5 +5 +15

Spot Ref. Cash Settlement

+3

Contract Price

Futures Contract Settlement

In the illustration above, an Exchange Member/Clearing Member is assumed to have bought a

futures contract at a price of NOK 260/MWh. During the trading period, from the date the

contract was bought to the contract’s due date, the market price for the contract increased to

NOK 285/MWh.

The price NOK 285/MWh is the final closing price prior to delivery. Daily mark-to-market

settlement during the trading period credited the member a total gain of NOK 25/MWh

(NOK 285-260). (The Exchange Member who sold the contract was debited NOK 25/MWh during

the trading period).

Throughout the final settlement period, which starts on the due date, the member is

credited/debited an amount equal to the difference between the spot market price and the

futures contract’s final closing price.

For the specific single hour indicated in the figure, the member has received NOK 25/MWh in

daily mark-to-market settlement (during the contract’s trading period) and a final settlement

amount of NOK (288-285)/MWh = NOK 3/MWh for a total profit of NOK 28/MWh.

If the Exchange Member/Clearing Member in the above example chose to procure the power

from the spot market rather than cash in the profit, his procurement cost in the spot market for

the specific hour is NOK 288/MWh. However, he has already received a profit of NOK 28/MWh in

the futures market. The total cost, with hedging in the futures market and physical procurement

in the spot market, is thus equal to the hedging price NOK 260/MWh.


2.2. Forward Contracts

Nord Pool’s forward contract structure is currently in a transition phase. The previous product

structure lists base load for three seasons: Winter 1, Summer, Winter 2; and Year forward

contracts:

Winter 1 (FWV1xx) base load Season contract in year xx Period = 1 January - 30 April

Summer (FWSOxx) base load Season contract in year xx Period = 1 May - 30 September

Winter 2 (FWV2xx) base load Season contract in year xx Period = 1 October - 31 December

Year xx (FWYRxx) base load Year contract for Year xx Period = 1 January – 31 December

Year contracts are split into

season contracts, in

accordance with product

specification rules.

Forward season contracts are

not subject to further

splitting.

The new product structure lists base load contracts for each calendar Month, Quarter and Year

contracts:

Month (ENOMmmm-yy) base load Month contract for calendar month mmm and year yy

Quarter (ENOQx-yy) base load Quarter contract for quarter x (3 calendar months) and year yy

Year (ENOYR-yy) base load Year contract for year yy Period = 1 January - 31 December

Month contracts are listed on a 6 month continuous rolling basis, and are not subject to

splitting. Quarter contracts will gradually replace seasons, and will first be listed in 2004. The

season contracts currently listed will not be de-listed. Quarters are split into month contracts.

Year contracts will be split into quarter contracts in accordance with product specification rules.

Year contracts for 2006 and on will have the new ticker code above.

In the trading period prior to the due date, there is no mark-to-market settlement. The mark-

to-market amount is accumulated as daily loss or profit, but not realised, throughout the trading

period.

2nd year …1st year

Seasons

Year

4th year


Throughout the delivery period, starting

at the due date, cash is required in the

Exchange Member’s / Clearing Member’s

pledged / non-pledged cash accounts,

and settlement throughout the delivery

period is carried out in the same way as

for futures. The non-pledged cash

account must be supported by a bank

guarantee.

The example bellow illustrates the similarity between forwards and futures. The same data as

that used in the example for futures is assumed.

In the example, an Exchange Member/Clearing Member has purchased a forward at a price of

NOK 260/MWh. At the due date, the value has increased to NOK 285/MWh. During final

settlement for the hour specified in the figure, the member receives NOK (288-260)/MWh =

NOK 28/MWh. This amount is the total of the accumulated value NOK (285-260)/MWh from the

trading period (the pending settlement) and NOK (288-285)/MWh from the Spot Reference Cash

Settlement. The pending settlement will be realised in the delivery period.

Purchasing the contract’s volume in the spot market costs NOK 288/MWh. The total cost of

hedging the power purchase through a forward contract followed by a spot market purchase is

equal to the hedging price, NOK 260/MWh.

Contract Price

Spot Ref. Cash Settlement

+3

Net procurement

cost

Received duringfinal settlement

Procurement cost in the Spot Market

Time

System Price

One hour

Trading Period Delivery Period

288

285

270

270 275

260

Market price

Forward Contract Settlement

Pending Settlement

2nd year …1st year

Year

4th year

Quarters

Months


2.3. Contracts for Difference (CfD)

The reference price for forward and futures contracts is the Nord Pool Spot AS System Price.

Actual physical-delivery purchase costs are determined by actual area prices. An area price

differs from the System Price when there are constraints in the transmission grid; CfDs allow

Exchange Members / Clearing Members to hedge against this area price risk.

A perfect hedge using forward or futures instruments is possible only in situations when there is

no transmission grid congestion in the market area, that is, area prices are equal to the System

Price. In 2003 the area prices were only equal 27,5 % of the time. Hedging in forwards or

futures therefore implies a basis risk equal to the difference between the area price at the

member’s physical location and the System Price.

Contracts for Difference were introduced to provide the possibility for a perfect hedge even

when the markets are split into one or more price areas. New forward contract types based on

the area prices would have been another way to accomplish this goal. However, this method

would have split the total liquidity among several products, and was rejected. A separate

product, Contracts for Difference (CfD), was therefore introduced.

To create a perfect hedge that includes the basis risk when area prices are not equal to the

System Price, a three-step process using CfDs must be followed:

1. Hedge the required volume using forward contracts.

2. Hedge any price difference – for the same period and volume – through CfDs.

3. Accomplish physical procurement by trade in the spot market area of the member’s

location.

Nord Pool ASA provides trading in CfDs for the following area price differentials:

CfD name and reference area CfD definition

Norway ∆P = Oslo area price minus System Price

Sweden ∆P = Stockholm area price minus System Price

Finland ∆P = Helsinki area price minus System Price

Denmark West ∆P = Aarhus area price minus System Price

Denmark East ∆P = Copenhagen area price minus System Price

A CfD is a forward contract with reference to the difference between the Area Price and the Nord

Pool Spot System Price. The market price of a CfD during the trading period reflects the

market’s prediction of the price difference during the delivery period.


Contract Price

Final Settlement

Net CfD hedging costs

Received during final

Total price difference

Time

Pricedifference

One randomly selected hour

Trade Period Delivery Period

20

16

9

10 13

7

Market Price

Contract for Differences

0

Spot Price<Are Price

Received during CfD settlement

(5)

Received during Forward settlement

(15)

Net procurement

costs (270)

Procurement costs in Spot

(290)

290

285

Spot Area Price

System Price

Forward + CfD hedging cost

(260+10=270)

The market price of a CfD can be positive or negative or zero. CfDs trade at positive prices

when the market expects a specific area price to be higher than the System Price, (that is, the

selected market area is in a net import situation). CfDs will trade at negative prices if the

market anticipates an area price below the System Price (the market area is in a net export

situation).

In this example, an Exchange Member/Clearing Member purchased a CfD at a price of

NOK 7/MWh and no forward market hedge of the power volume was made. During the trading

period, the market price of the CfD increased to NOK 16/MWh. For the randomly selected hour

during the delivery period shown in the illustration, the member receives NOK (20-7)/MWh =

NOK 13/MWh. Spot market purchase cost over the System Price for the specified hour is

NOK 20/MWh. However, the member’s net cost is equal to the hedging cost NOK 7/MWh.

The next two examples illustrate

a perfect hedge using CfDs and

forward contracts. Here, the

Exchange Member has carried

out the two steps required to

make a perfect hedge of area

prices. He has purchased a

forward contract (at a cost of

NOK 260/MWh) to hedge the

Nordic Power Exchange spot

market price, and a CfD (at a

cost of NOK 10/MWh) to hedge


any area price differential. Total hedging costs are NOK 270/MWh.

The financial results of using CfD hedging can be illustrated in a comparison of two delivery

hours. In one case, the System Price is less than the area price, while in the second example

the System Price is higher than the area price.

In the chart above, the area price for the selected hour is NOK 290/MWh. The System Price is

NOK 285/MWh.

In the forward settlement during the delivery period, the member receives NOK 15/MWh, and in

the CfD settlement, NOK 5/MWh.

Net procurement cost is NOK 270, which equals the initial hedging costs of the forward, plus the

CfD. In the chart above, the System Price for the selected hour is NOK 287/MWh. The area price

is NOK 280/MWh.

In the forward

settlement, during

the delivery period,

the member receives

NOK 17/MWh, and in

the CfD settlement

he is charged

NOK 7/MWh. Again,

the net procurement

cost is NOK 270,

which equals the

initial hedging costs

of the forward and

the CfD.

2.4. Option Contracts

An option is a right to buy or sell an underlying contract at a predetermined price at a

predefined date in the future. Options, combined with forwards and futures, offer valuable

strategies for managing the risk associated with power trade.

Option contracts to buy are termed call options, and option contracts to sell are termed put

options. Thus, the holder of a call has the right to buy the underlying contract, and the holder of

a put has the right to sell.

System Price > Area Price

Procurement costs in Spot

(280)

Received in forward settlement (17)

Paid in CfD settlement (7)

Net procurement

costs (270)

Forward + CfD hedging cost

(260+10=270)

Spot Area Price

System Price

280

287


The option contracts at Nord Pool are European-style, i.e., they can only be exercised at the

exercise date. The following definitions apply.

Underlying contracts: These are season forward contracts (to change to quarter forward

contracts) and year forward contracts. When an option series expires,

new series are listed, in accordance with product specification rules.

Exercise day: This is the day the right to buy/sell the underlying contract is executed.

Exercise day is set as the third Thursday in the month before the

delivery period of the underlying contract starts, as defined in the

option’s product specifications. The holder of an option can only exercise

his right on exercise day.

Exercise price: This is the predefined price, or strike, of the underlying contract. Nord

Pool sets five strikes when an options series is initially listed for trade.

Strikes are based on the closing prices of the underlying forwards. The

spread intervals between the five strikes are defined in the option

product specifications.

New exercise prices are automatically generated when the traded price

or the closing price of an underlying forward is at or below (above) the

second lowest (highest) exercise price.

The premium: The option premium is quoted in Norwegian kroner, NOK/MWh.

The premium is settled the day after the option is traded. The size of an

option contract is calculated by multiplying the number of MW by the

number of hours in the underlying contract.

Listing of new series: New option series are listed for trade on the first trading day after the

exercise day of the previous contract series.

Premium

Premium

Forward price

Forward price

Forward price

Forward price

Profit

Profit

Written Call Written Put

Purchased Call Purchased Put

Profit

Profit

Premium

Premium


On the exercise day, options have four basic profit and loss curves. Potential profits and losses

for each option strategy depend on the price of the underlying forward contracts, exercise

prices, and the premium paid.

In the case of a purchased option, the risk of loss is limited to the premium paid and the

potential profit is unlimited. The contrary applies to written options; i.e. the risk of loss is

unlimited while the potential profit is the premium received.

A purchased call option can be compared to an insurance against increases in the forward price

of power. A buyer can use call options to insure that his fixed price of future power will not

exceed certain levels, while at the same time enjoying a fall in power prices should it occur.

A purchased put option could be used by a producer to insure future sale of power. It could also

be used to insure against volume risk, for example in a dry seasons, where high prices coincide

with low volumes, causing a reduction in profits.

A variety of options strategies are used for price hedging. Because of their flexibility, options are

useful to both hedgers and traders. An Exchange Member seeking trading profit, rather than

price hedging, might combine a put and a call in positions known as a straddle or a strangle, if

prices are expected to move sharply up or down.

An option can be described as “in-the-money” if it would result in a profit if exercised

immediately (i.e., the underlying forward price is above (below) the strike price for a call (put)

option). An option which would result in loss of premium is “out of the money” while it is “at the

money” if the underlying forward price is equal to the strike price. The profitability of an in-the-

money purchased call option is similar to the profit potential of holding a long position in the

underlying instrument. Out-of-the-money puts or calls offer potential profits, if they move as

anticipated past at-the-money value into an in-the-money position.

2.5 Electricity certificates

3 March 2004, Nord Pool initially launched a spot contract that is integrated with other financial

products. Trading is done directly electronically or indirectly by phone on PowerClick. The

product being launched is a spot product with physical delivery three days after the trading

date. Quotations are in SEK and the contract will be referred to as Elcert (ticker code ECS). The

minimum traded contract volume will be 100 Elcert. The market is open for trading five days a

week between 10:00 a.m. and 2:00 p.m. The trading days for elcertificates follow Nord Pool’s

financial market.


3. Trading in Nord Pool’s Financial Market

Futures and forwards contracts, options, CfDs, and electricity certificates are traded

continuously, as in other advanced commodity markets. Nord Pool operates an electronic

trading system, PowerCLICK Exchange, where Exchange Members can trade in the following

ways:

• Electronically by using PowerCLICK Trade application installed in the traders premises. This

can either be connected via fixed telecom lines, or via a secure VPN channel over Internet.

•

• Via telephone to the financial desk at Nord Pool, where orders are placed in the trading

system on behalf of the member

PowerCLICK Exchange Electronic matching of trades

Financial desk

Internet

Trading thorough telephone Fixed line

PowerCLICK VPN Internet PowerCLICK


3.1. Daily routines

The derivatives market opens is open between 8:00 and 15:30, Norwegian local time, and the

electricity certificates market is open between 10:00 and 14:00.

An Exchange Member’s orders are binding until the end of the trading day, or until the member

has changed or cancelled them and received a confirmation receipt.

Once the market has closed for the day, written trade confirmations are made available for

Exchange Members. For derivatives 17:30 is the deadline for Filing Complaints for Exchange

Trades, and correspondingly 15:45 for electricity certificates.

Closing prices for financial derivatives contracts, used for settlement and margin calculations,

are determined at a random time within the last 10 minutes of the trading day. The precise time

is selected by a random number generator to avoid any potential closing price manipulation.

Nord Pool distributes closing prices to the market as soon as possible after the market closes at

15:30.

The closing price of a financial derivatives contract is calculated as the last trading price if the

traded price is within the buy and sell spread, or bid and offer price, at the randomly selected

time. For contracts outside the spread, or contracts that have not been traded, the closing price

is defined as the average of the bid and offer, as specified by the rulebook for the financial

electricity market.

3.2. PowerCLICK Exchange trading system

The heart of the electronic trading at the financial market at Nord Pool is the PowerCLICK

Exchange trading system. It is a system for continuous electronic trading of power contracts. It

is a high performance trading system, build to handle more than 1 000 deals and 10 000 orders

pr minute.

The PowerCLICK allows generators, distributors, consumers, and traders of electricity with an

electronic connection to participate directly on the exchange. The system handles electricity

Future, Forward, CfDs, Option contracts and electricity certificates.


3.2.1. PowerCLICK Trade application

The PowerCLICK Trade is the front end application available to members of the exchange, and is

an effective component of the PowerCLICK Exchange System. However members are also free

to use third-party or internally developed trading applications.

By using PowerCLICK Trade, market participants can quickly and simply display information,

enter orders and execute trades. The PowerCLICK Trade is a powerful trading application that

provides full order management and execution capabilities. The application has a Windows

based format and is very easy to use, allowing users to:

• Post orders

• Change posted orders

• Cancel posted orders

• Trade on orders posted by other Exchange Members

• Price Ticker

• Handling mass order quotations

• Linking up the PowerCLICK to spreadsheets

Through the electronic system, the Exchange Member always has access to updated locally

available information. Examples of such information include:

• Best buy and sell price, as well as order depth

• Last traded price, as well as highest and lowest price distributed during the day

• The total volume behind the individual prices

• Intra day graphs displaying price and volume movements throughout the trading day.

• Overview of the orders posted to the market by the Exchange Member, and an overview of

trade conducted by the Exchange Member during the trading day

Exchange Members connected to the electronic trading system also have access to telephone

trade if they, for example, wish to make an inquiry about a price or enter a combination trade.

PowerCLICK Trade is continuously updated and enhanced to keep pace with the rapidly

changing requirements of energy markets.


3.2.2 PowerCLICK Connectivity

A fixed line connection to PowerCLICK is the fastest and most reliable way to connect to the

Exchange.

Using virtual private network (VPN) encryption technology, a secure link to the PowerCLICK

Exchange can be established via the Internet. PowerCLICK’s VPN link-up is an alternative to

leased-line connection between Nordic Power Exchange members and Nord Pool.

Key benefits of VPN connectivity are lower connection costs and reduced lead time to new

PowerCLICK customers’ ability to trade. Connecting to a local ISP (Internet Service Provider) is

cheaper than subscribing to a long-distance leased line; further, the wait for leased line

installation is avoided. New PowerCLICK VPN accounts will normally be up and running, and

ready to trade directly on the exchange, within one week after an application request.

PowerCLICK accessed over Internet can either be used as the main connection or as a backup

connection towards Nord Pool.

Tests conducted by OM and Nord Pool have confirmed that a VPN PowerCLICK link is as fast as

today’s fixed-lines solution, even at high system loads. That said, Internet communications are

subject to interruptions that are impossible to anticipate or diagnose, and throughput and

response times cannot be guaranteed.

3.3. Trading via Telephone

Exchange Members can place buy and sale orders by telephone to the financial desk, which then

enters orders in the electronic trading system. The electronic trading system then posts them to

the market. All orders placed in the market by an Exchange Member are binding until the end of

the trading day or until the Exchange Member contacts the financial desk with an order

cancellation or alteration. Exchange Members can obtain information about prices and order

depth through the desk.

If a trade is made on one or more of the Exchange Member’s orders, the financial desk notifies

the Exchange Member immediately to confirm the transaction.

Exchange Members who trade by telephone will usually have access to market information from

an online-based information system. These systems update the prices on the market in real

time. The system displays information such as product series, best buy and sell prices on the

market, last paid price, and accumulated volume for the current trading day. Some information

distributors also offer historical data and tools for analysis.


Nord Pool’s also provides market information for Exchange Members who don’t require

continuously updated data. The website (www.nordpool.com) provides updates on Financial

Market prices every 15 minutes, which is accessible to the public. In addition, Exchange

Members have free access to Nord Pool’s ftp-server. This database includes historical physical

and financial prices.

4. Trade Volume Development

The traded volume at Nord Pool’s financial market has increased considerably since the first

products were launched in 1993. In analysing the evolution of volumes and market shares, it

should be observed that since 1993 the products, trading systems, and market area have gone

through many changes.

The major changes include the following:

• Introduction of financial futures in 1994.

• Merger of Norway and Sweden into one common power market and implementation of an

automatic trading system, PowerCLICK, in 1996.

• From 1996-2000 forward contracts, options, and Contracts for Difference (CfDs) were listed.

Finland, Denmark West, and Denmark East joined the Nordic Power Exchange’s market area

during this period.

• The new Exchange Act was adopted by

the Parliament November 17, 2000 and

went into effect March 2002.

• The changes in the Securities Trading

Act was adopted by the Parliament June

7, 2001.

• Nord Pool applied for exchange license

in May 2001 and was approved March

2002.

• The license was taken into effect Monday March 18, 2002.

• New and updated Rulebook reflecting the changes in the market structure set in force March

1, 2002. • The new market in Swedish electricity certificates was established 3 March 2004.

The Financial Market

0

200

400

600

800

1000

1200

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

TWh


The total volume of financial contracts traded at Nord Pool’s financial market in 2003 was 545

TWh. In 2003, the total volume of trades cleared by Nord Pool Clearing was 1743 TWh. This

would give Nord Pool ASA a market share of approximately 31% of all cleared contracts.

Total generation in the Nordic Power Exchange area is about 380 TWh per year. Accordingly,

trade in financial contracts is about five time’s physical load (not including non-cleared financial

contracts).

NordPool - Financial Market

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