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Energies 2017, 10(3), 295; doi:10.3390/en10030295

On Long-Term Transmission Rights in the Nordic Electricity Markets

1
LUT School of Business and Management, Lappeenranta University of Technology, PL 20, 53851 Lappeenranta, Finland
2
The Economic and Social Research Institute (ESRI), Whitaker Square, Sir John Rogerson’s Quay, Dublin 2, Ireland
3
LUT School of Energy Systems, Lappeenranta University of Technology, PL 20, 53851 Lappeenranta, Finland
*
Author to whom correspondence should be addressed.
Academic Editor: Bin Chen
Received: 3 May 2016 / Accepted: 23 February 2017 / Published: 2 March 2017
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Abstract

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. View Full-Text
Keywords: Nordic electricity markets; financial transmission rights (FTR); electricity area price differentials (EPAD); risk management; hedging Nordic electricity markets; financial transmission rights (FTR); electricity area price differentials (EPAD); risk management; hedging
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Spodniak, P.; Collan, M.; Makkonen, M. On Long-Term Transmission Rights in the Nordic Electricity Markets. Energies 2017, 10, 295.

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