European power: Nord Pool Q&A

- Rachel Morison
- 01 Feb 2010

Q How has Nord Pool been able to achieve such a robust derivatives market?

A Trust in the underlying, which is used as a reference for the derivatives market, is very much the key element. Participants that don’t have the trust in the underlying physical market are never going to trade a derivatives market. The key has been developing high transparency and liquidity for the underlying.

In our market the participants only need to trade the day ahead and use the derivatives market to cash settle and hedge up to six years forward. They don’t need to trade the physical up to two weeks, four weeks or five years ahead.

Q How has liquidity in both physical and financial markets, developed so quickly on the Nordic market?

A We have a business development department that talks to customers all the time, but we also have product groups that examine different parts of the market. We are always open to suggestions for new products.

When we are looking to develop a new product, we discuss it with the product groups and market council to get their reactions and see if they are interested in what we are going to launch. This process is something I would highlight that the Nordic market does well.

Q What have volumes been like 2009/10 compared to 2008?

A They have not decreased as much as you might suspect from looking at the stock exchange. For the derivatives exchange we traded 1400Twh in 2008, compared with 2009 when it was 1200TWh. Economic conditions have reduced electricity consumption by 10-20% in the Nordic region.

Volumes are certainly picking up again and so far this year is looking better. The last part of December 2009 and the beginning of January 2010 have been excellent.

Q Why did volumes decrease? Was it due to players exiting the market?

A Overall, the need for hedging and trading is lower. Some of the funds may have left the market because of financial conditions, as well as investors taking money out and diverting it elsewhere. Other than that, there were no more players exiting the market this year than before.

Q Which areas of the Nordic market could be improved in future?

A All areas can always be improved and we are constantly looking to do that. We will continue to focus on the Nordic Market, which is our core regional market but we are looking to develop the UK market with the new power exchange N2EX and also our German products. This is part of our vision to become part of the most successful commodity exchange in the future.

Through our cooperation with NASDAQ OMX, we are working to take what we have done in the power market and extend it to other commodity markets.

Q There have been unsuccessful attempts to export the Nordic model in the past – what is different this time?

A Of course, we learn to adapt. The difference is that we are trying to adapt the basis of the model. We are taking the skeleton of our set-up and adapting everything to the needs of the local market – but it is a steep learning curve for everyone.

Q What is the timeframe for extended regional development?

A We started off a spot market in the UK in January and we are looking to launch derivatives based on that underlying, once we think we have established an underlying with the trust of the participants. This is going to happen in the next couple of months.