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On Long-Term Transmission Rights in the Nordic Electricity Markets

Author

Listed:
  • Petr Spodniak

    (LUT School of Business and Management, Lappeenranta University of Technology, PL 20, 53851 Lappeenranta, Finland
    The Economic and Social Research Institute (ESRI), Whitaker Square, Sir John Rogerson’s Quay, Dublin 2, Ireland)

  • Mikael Collan

    (LUT School of Business and Management, Lappeenranta University of Technology, PL 20, 53851 Lappeenranta, Finland)

  • Mari Makkonen

    (LUT School of Energy Systems, Lappeenranta University of Technology, PL 20, 53851 Lappeenranta, Finland)

Abstract

In vein with the new energy market rules drafted in the EU this paper presents and discusses two contract types for hedging the risks connected to long-term transmission rights, the financial transmission right (FTR) and the electricity price area differentials (EPAD) that are used in the Nordic electricity markets. The possibility to replicate the FTR contracts with a combination of EPAD contracts is presented and discussed. Based on historical evidence and empirical analysis of ten Nordic interconnectors and twenty bidding areas, we investigate the pricing accuracy of the replicated FTR contracts by quantifying ex-post forward risk premia. The results show that the majority of the studied FTR contain a negative risk premium, especially the monthly and the quarterly contracts. Reverse flow (unnatural) pricing was identified for two interconnectors. From a theoretical policy point of view the results imply that it may be possible to continue with the EPAD-based system by using EPAD Combos in the Nordic countries, even if FTR contracts would prevail elsewhere in the EU. In practice the pricing of bi-directional EPAD contracts is more complex and may not always be very efficient. The efficiency of the EPAD market structure should be discussed from various points of view before accepting their status quo as a replacement for FTRs in the Nordic electricity markets.

Suggested Citation

  • Petr Spodniak & Mikael Collan & Mari Makkonen, 2017. "On Long-Term Transmission Rights in the Nordic Electricity Markets," Energies, MDPI, vol. 10(3), pages 1-19, March.
    • Handle: RePEc:gam:jeners:v:10:y:2017:i:3:p:295-:d:91913
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    References listed on IDEAS

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    3. Spodniak, Petr & Collan, Mikael, 2018. "Forward risk premia in long-term transmission rights: The case of electricity price area differentials (EPAD) in the Nordic electricity market," Utilities Policy, Elsevier, vol. 50(C), pages 194-206.

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