Utility Week

Utility Week 22nd November 2013

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

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Interview Mikael Lundin, Nord Pool Spot chief executive B ehind the squabbling and political sabre-rattling over UK retail energy prices is a move scheduled for early next year that promises to throw a bright light into the darker corners of electricity pricing. Four power exchanges and 13 transmission system operators have collaborated to link up electricity markets across northern and central Europe, including Britain. Power exchange Nord Pool Spot, which owns N2EX, one of the UK's two electricity exchanges, has a central role in the UK's involvement. According to Nord Pool Spot chief executive Mikael Lundin, the UK stands to be the chief beneficiary of the imminent coupling of dayahead power markets of Europe's biggest economies. "The main implication for market coupling is for the UK because central Europe and the Nordic area are already coupled and largely seamless," he says. Market coupling will pull together electricity markets across the European Union to realise the European Commission's goal of creating a single European energy market by 2014. Coupling across the North West Europe (NWE) region will link Britain, the Central West Europe (CWE) region (Belgium, France, Germany, Luxembourg and The Netherlands) and the Nordic region (Denmark, Sweden, Finland, Norway, Latvia, Lithuania and Estonia). It will pull together more than two-thirds of the EU power market. According to its designers (see box on page 10), NWE day-ahead price coupling will optimise the use of crossborder transmission links. They also claim that it will provide signals to bring on new investment in power infrastructure across Europe in a more efficient way. "Liquidity will be increased, volatility will decrease, buyers' and sellers' surplus will be optimised across all involved markets," its creators claim. Power coupling could address problems at the heart of the political turmoil over energy in Britain because it is expected to increase the liquidity in the day-ahead market here. And exchange trading promises to improve the prospect of new entrants to the market by tackling poor transparency. Greater competition may rein in retail prices and better transparency may bolster public confidence that consumers are not being ripped off. Nord Pool Spot sales and business development man- Richard Sarti, sales and business development manager ager Richard Sarti is keen to emphasise that exchange trading in itself does not bring down prices. "This is something that people misconstrue – that exchange trading can keep prices low. It really should be reflective of generation availability and supply and demand and that can be anywhere," he says. "We view price as a by-product of efficiency in the market. We provide a price that is truly reflective of supply and demand – a true price. From a government standpoint, one of the concerns has been price transparency and the auction has been able to deliver that." N2EX has established itself swiftly in Britain with its day-ahead auction already topping 45 per cent of the market from a standing start less than four years ago. "Auctions enable market coupling to happen because they provide robust, transparent prices, which are used to determine the 'direction of flow' on spare interconnector capacity, moving electricity from low price areas to high price areas. The use of day-ahead auctions in EU markets is very different to how the GB market has traditionally traded. But in four years we've gone from people refusing to accept an auction and the reference price it produces, to an auction becoming a standard practice, and a day-ahead price that is used a as a benchmark for hedging tools, such as futures contracts," says Sarti. Lundin says Nord Pool Spot has about 85 per cent of the Nordic day-ahead market and he expects it to be close to that in the UK in far less time than the 17 years taken in Scandinavia. The impetus, he says, will come from market coupling: "Maybe in eight years, with the cross-bidding arrangement, 70 per cent is realistic. Integration with the EU will expedite that process." Sarti anticipates that the need for renewable generation to gain access to day-ahead shape will see a boost in liquidity. He says exchange trading gives new players a way round the complex and lengthy UK process which has traditionally relied on bilateral over-the-counter deals. That requires participants to hold, for all other counterparties, grid trade master agreements (GTMAs) which set out terms for settling each deal and delivering the power. "When you become a member of the N2EX market you instantly have access to all our counterparties (at the UTILITY WEEK | 22nd - 28th November 2013 | 9

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