LAPSE:2019.1393
Published Article
LAPSE:2019.1393
On Long-Term Transmission Rights in the Nordic Electricity Markets
December 10, 2019
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.
Keywords
electricity area price differentials (EPAD), financial transmission rights (FTR), hedging, Nordic electricity markets, risk management
Suggested Citation
Spodniak P, Collan M, Makkonen M. On Long-Term Transmission Rights in the Nordic Electricity Markets. (2019). LAPSE:2019.1393
Author Affiliations
Spodniak P: 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 [ORCID]
Collan M: LUT School of Business and Management, Lappeenranta University of Technology, PL 20, 53851 Lappeenranta, Finland [ORCID]
Makkonen M: LUT School of Energy Systems, Lappeenranta University of Technology, PL 20, 53851 Lappeenranta, Finland
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Journal Name
Energies
Volume
10
Issue
3
Article Number
E295
Year
2017
Publication Date
2017-03-02
Published Version
ISSN
1996-1073
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Original Submission
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PII: en10030295, Publication Type: Journal Article
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LAPSE:2019.1393
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doi:10.3390/en10030295
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Dec 10, 2019
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CC BY 4.0
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Dec 10, 2019
 
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Dec 10, 2019
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Original Submitter
Calvin Tsay
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