Marie Byskov Lindberg, Fridtjof Nansen Institute, Norway
While electricity prices have increased dramatically in the EU since summer 2021, higher prices have a different impact on different parts of the whole-sale market. For long-term markets (forward and futures markets), the high prices have a negative impact on market liquidity. This is a distinct effect for long-term trading, since the price that is bid into the market depends on the expectation about the future value of the traded good. If actors believe that the price in the market is too high, they simply refrain from trading. This is different from the short-term electricity market, where the traded volume reflects what is actually consumed in the given moment.
Forward market liquidity is an important topic for EU policy makers and market actors. Within the Third Energy Package, the EU decided the development of network codes and guidelines to determine the detailed regulation and harmonization of European electricity rules. One of the guidelines is the Forward Allocation Capacity Guideline (FCA GL), whose objective was to ensure a well-functioning and liquid forward market. The most important measures to enable this objective were the issuing of long-term transmission rights (LTTRs) on bidding-zone borders and the establishment of a single allocation platform for the trade of LTTRs.
Nevertheless, Nordic market actors have so far been reluctant to implement LTTRs. The FCA GL (Article 30) enables member states to refrain from issuing LTTRs if they can document that they have sufficient liquidity in their long-term market.
This paper assesses the Nordic approach to electricity market design and takes a particular look at the situation of the long-term market. It asks: Why have Scandinavian countries chosen not to issue LTTRs on their bidding zone borders? The paper analyses the Nordic approach to long-term hedging. It identifies the various measures utilized to achieve a liquid forward market and assesses the perspectives of various market participants. Finally, the paper evaluates the distinct Nordic approach in relation to EUs objective of harmonizing electricity market regulation. Following the EUs strategy of establishing the internal market for electricity, EU institutions have been fairly successful with its overall strategy. Is the Nordic “exemption” an example of a defiant group of countries that refuse obedience to European institutions or have they managed to develop an alternative approach to the European way?
The paper is based on interviews with various stakeholders in the Nordic countries, in particular national regulatory agencies (NRAs), TSOs, utilities, traders and researchers. Further, we carry out a document analysis of available reports on market liquidity and statistical data on electricity trading. The study reveals several important findings. As to the Scandinavian hedging approach, these countries have deliberately chosen not to implement the European hedging measures of LTTRs because they prefer their current model with a system price combined with EPADs. Even though long-term market liquidity has decreased over the past decades, this is a decision which has broad support among market participants and stakeholders. However, there is also an understanding that there is a need to intervene and develop alternative measures to improve the situation in the long- term market. Most stakeholders nevertheless hold that these should be a type of measures that support the existing market model, which does not involve a complete change of the basic instruments that are already in place.
As to the EUs take on the Nordic outsider pathway, the Nordic countries have not faced much criticism in the EU for its choice. Instead, a recent report from ACER and the CEER on the “further development of the EU electricity forward market” shows that the EU is questioning its own strategy with the LTTRs. 1 This indicates that the EU might adopt an approach more in line with the Nordic way in the time to come.
