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Today's modern society is becoming increasingly dependent on electricity, which means that electricity as an investment alternative is likely to attract much greater attention in the future than it has done in the past. Historically, the production and distribution of electricity has been owned and regulated by government agencies. In the 1990s, the electricity markets were deregulated in the Nordic countries and electricity is currently traded on an official electricity exchange where supply and demand determine the price.
Efforts to harmonise the infrastructure of the member states are currently being made in the European Union, with the view to create a common electricity market.
The electricity market today
The Nordic electricity market is divided into a physical and a financial market. In the physical market producers and distributors buy and sell electricity with physical delivery around the clock. Based on this trade, NordPool calculates a system price which is an equilibrium price for supply and demand. In the financial market this system price is used as a reference price for the determination of price levels for the financial contracts. In the financial part of the electricity market contracts are bought and sold for profit without any physical delivery.
NordPool and
NordPool Clearing
The Nordic electrical power exchange NordPool was set up in 1993 and since 1996 it is jointly owned by the Norwegian company Statnett SF and Swedish company
Svenska Kraftnät. The NordPool Clearing is the clearing house of the Nordic electricity market. Thus
NordPool Clearing eliminates the risk of a counterparty being unable to fulfil its obligations. For this purpose
NordPool Clearing requires a fee and a security deposit, depending on the positions taken in the market.
| Turnover |
|
2006 |
 |
2005 |
|
2004 |
|
2003 |
|
2002 |
 |
| Physical market in TWh |
|
251 |
|
176 |
|
167 |
|
119 |
|
124 |
|
| Physical expressed NOK billion |
|
99 |
|
44 |
|
39 |
|
36 |
|
26 |
|
| Financial market in TWh incl. OTC |
|
2220 |
|
2102 |
|
1797 |
|
1764 |
|
3108 |
|
| Financial in NOK billion incl. OTC |
|
637 |
|
399 |
|
350 |
|
369 |
|
434 |
|
| Source: NordPool |
Instruments in the financial electricity market
Since electricity is a commodity which cannot be stored and must be consumed and produced at an equal rate, the electricity market has a special instrument structure. It is based on the variations of supply and demand which are governed by the seasons and factors such as temperature, rainfall and wind. Due to these factors the instruments are initially divided into annual contracts and each annual contract contains
four quarterly contracts. These contracts are forwards. Furthermore there is a smaller
division of the time periods in monthly contracts, weekly contracts and daily contracts. The
two last contract type is a future.
The difference between forwards and futures:
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Forwards are traded over a period during which profits/losses are accumulated. This period is then followed by a settlement period. In the settlement period the accumulated profit or loss is divided by the number of days in the settlement period, which is then divided into periods and settled in
Euros. |
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Futures are traded and settled every day against the closing price at the end of each day. |
Options can only be traded through forwards as underlying instrument. |
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