Improving the effectiveness of the electricity hedge market in the Nordic region
| Reference number | |
| Coordinator | Kungliga Tekniska Högskolan - KTH Skolan f elektroteknik och datavetenskap |
| Funding from Vinnova | SEK 4 238 559 |
| Project duration | June 2022 - November 2026 |
| Status | Ongoing |
| Venture | Financial Market Research |
| Call | Research on Financial markets 2022-2024 |
Purpose and goal
The EPAD is a spread contract between one bidding-area price and the Nordic system price. However, some concerns have been raised with available hedging instruments in the Nordic region: (a)First , system price does not always correlate sufficiently with area prices because of congestion within the Nordic region. (b)Second, there is limite d liquidity in EPADs in certain trading areas. (c)Third, EPADs are of limited use for mitigating the risk faced by som e of the newer generation technologies, such as wind and solar. In this project we propose to study these three issues.
Expected effects and result
(1) Improves understanding of emerging challenges in financial markets. A key objective of the project is the development of understanding of the drivers of liquidity and, in particular, the role of market power in hindering liquidity. This is a key challenge facing the electricity hedge market which is offered based on the reference price published by Nord Pool. (2) Develops more efficient and accurate tools for financial markets. A key objective of the project is the development of new hedging instruments to better allow the new generation of market participants to hedge their risks.
Planned approach and implementation
We plan for four Work Packages (WPs) for this research project. WP1: An exploration and identification of (1) the reasons for low correlation of system price with area prices, and (2) the low EPAD-market liquidity in certain pricing areas in the Nordic region; WP2: To propose policies for enhancing the liquidity in the EPAD market; WP3: A careful development of alternative financial instruments that could be provided in the Nordic region; WP4: A demonstration of how our alternative financial instruments work within the Nordic region;