Examining the Markets for Nordic Electricity Price Area Differentials (Epad)

The Nordic electricity market is often identified as one of the best functioning super-national electricity markets in the World, this widely spread understanding is often extended to cover all aspects of the Nordic electricity market. The Nordic electricity market maintains a system spot price for electricity and on the connected financial markets electricity future contracts exist to allow hedging the system price risk. As the Nordic electricity markets are segmented into multiple price areas, whose electricity price may differ from the spot price, Electricity Price Area Differentials (EPAD) are available for hedging the risk caused by the area price difference. In other words, to completely hedge a position in the Nordic electricity markets a market participant must obtain a hedge against the system price risk and the risk caused by the possible area price - system price difference. In order for the Nordic electricity markets to function well it is important that market participants have a possibility to fully hedge themselves against the price risk. In fact, many market participants, such as public organizations may have in place policies that do not allow them to keep un-hedged market positions on electricity. In this vein and in the absence of recent research on the markets for hedging electricity prices in the Nordic electricity markets, this report studies the markets of the Electricity Price Area Differentials (EPAD) in general and specifically the EPAD markets of the Price Area covering Finland (HEL/FI). The goal of this report is to present descriptive data on EPAD trading and to describe the market conditions that exist for trading EPAD contracts. Some preliminary conclusions about the functionality of the markets for EPAD contracts are drawn.