Electricity Market Day 2015 - Fingrid

1. Area Price Differences – Reasons and Conclusions
Transmission System Operator's Standpoint
Electricity Market Day, 28 April 2015
Juha Hiekkala, Market Design Manager, Fingrid Oyj

2. The market situation of the Baltic Sea region has changed radically
The yearly average of electricity spot price
Source: Nord Pool Spot and SKM Market Predictor
• In Nordics, including Finland,
the electricity spot price is at
its lowest since 2007
• Price difference particularly to
Sweden has increased after
2011
• The electricity spot price in
Germany is lower than ever
after emissions trading started
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2012 2013 2014
Electricityspotprice[€/MWh]
SYS SE/SE3 FI DE

3. Transmission capacity increased by 50 % since 2011 –
The Finnish and Swedish area prices have diverged
D
K
1
18
3
4
D
K
1
F
2
11
2011 2014
SYS
29,6 €
SYS
47,1 €
Market fundaments change and markets evolve,
TSOs cannot change the production structure
Area prices
< 30 €/MWh
30-35 €/MWh
35-40 €/MWh
40-45 €/MWh
45-50 €/MWh
> 50 €/MWh
2
Main flow
direction
(TWh/a)
1

4. Increasing cross-border capacity is long-term activity
The objective is to increase in transmission capacity –
Fingrid only one counterparty
• Increase of 800 MW in Finnish import
capacity
• The Swedish TSO's priority is to
reinforce its internal grid
• Implementation in 2025 at the earliest
Third AC connection between
Finland and Sweden in 2025
• Objective is to restore the capacity of
the current interconnector to 500 MW
• Replacement investment at the end of
2020's
Fenno-Skan 1 interconnector

5. Fingrid's focus: high availability of interconnectors
Incentivizing the personnel
• Personnel bonuses depend on the
usability of links to Sweden
Fingrid's strategic project
• Improving the reliability of HVDC links
Minimizing market disruptions is a common issue for the whole personnel
Right timing and swift execution of outages
• Cross-border interconnectors require maintenance to ensure reliability
• Simultaneously on both sides of the border
• Optimal timing according to the forecasted Nordic market situation
• Realization during the weekends if feasible

6. Long-term transmission rights (LTRs)
• Not internally in use in the Nordics
• For hedging of area price differences, not for changing them
• EU is preparing a Guideline on Forward Capacity Allocation
– TSOs to sell LTRs
– exception possible for the Nordic countries
– implementation in 2018?
• Are they beneficial to the Nordic market?

7. Financial products for area price hedging
Electricity Price Area Differential
EPAD
Financial Transmission Right
FTR
In use in Nordics and Baltics Part of the European target model
Hedges the difference between an
area price and the system price
e.g. FI-SYS
Hedges the price difference between two
adjacent bidding zones
e.g. SE3-FI
Trade between market participants
(Nasdaq, OTC, bilateral)
TSO issues
Continuous trading
Auction
e.g. once a month

8. Market participants have diverging views on hedging markets
FTR not suitable for the
Nordic market
• EPADs' liquidity would decrease
• Reduces the credibility of the
system price
• Not a compatible product with
EPAD
Source: Fingrid Oyj's inquiry to stakeholders about hedging products and their markets
More efficient markets
with FTR
• Increases hedging possibilities
• Enhances competition
• Incentive to TSOs to maintain
the transmission capacity

9. Market participants would develop EPAD markets
Functioning of EPAD markets
• Derivatives market functions
• Imbalance in supply and demand
• Liquidity is a challenge in a small
bidding zone
• Trade not transparent enough
• Changes in regulation imply
uncertainty
Improvement of EPAD
markets
• Improvement of
transparency
• More attractive stock
exchange
• Better functioning of market
makers
• The role of a TSO?
Source: Fingrid Oyj's inquiry to stakeholders about hedging products and their markets

10. Fingrid's viewpoint to long-term transmission rights
• Benefits of FTR-products are questionable in Nordic market
• Fingrid aims to common Nordic solutions
• FTRs would make TSO an active market participant
• LTRs risky business for TSOs
– tends to be loss-making in Continental Europe
– would mean income transfer from transmission customers to participants in financial
market
• Increasing liquidity and transparency of EPAD markets would promote efficiency
Fingrid maintains the physical market and is responsible for the maintenance
of the power system – a role as an active financial market player not suitable

11. Conclusions
• Market fundaments change and markets evolve -
TSOs cannot change the physics
• TSO shall ensure maximum availability and reliability
of the power system
• TSO offers a platform for the physical market –
this role fits poorly to a player in the financial markets
• Improved liquidity and transparency of EPAD market
would be best way forward