How to avoid market manipulation
– lessons learnt in Norway
10th Baltic Electricity Market Mini-Forum
June 4, 2010
Anne Dønnem, NVE
Overview
■
■
2
Nord Pool Spot
■
History and organisation
■
The role of the power exchange
Regulation of Nord Pool Spot
■
The Market place license
■
Renewal of the Market place licence from 2010
■
Market surveillance
■
Cooperation
■
Supervisory Authorities
■
Nordic cooperation – NordREG
Nord Pool Spot history
1971
First spot
market in
Norway, for all
producers
3
1993
Norwegian spot
market in
separate legal
entity, open to all
actors
1996
Common
NorwegianS
wedish
power
exchange /
market
Nord Pool
1998
Finland
joined the
Nordic
power
exchange
1999
WestDenmark
joined
2000
EastDenmark
joined
2002
Establishment
of physical
spot exchange
in separate
legal entity:
Nord Pool
Spot AS
2010
Estlink
established
as price
area
Nord Pool Spot AS
(physical exchange)
■ Nord Pool Spot AS is owned
jointly by the Nordic TSOs
■
Statnett SF (30%)
■
Svenska Kraftnät (30%)
■
Fingrid Oyj (20%)
■
Energinet.dk (20%)
Energinet.dk
20 %
Statnett
30 %
Fingrid
20 %
Svenska
Kraftnät
30 %
4
100%
30%
The NASDAQ OMX Group, Inc.
100%
Nord Pool
Consulting AS
100%
NASDAQ OMX
Commodities
100%
Nord Pool
Clearing ASA
Norwegian
Ministry of
Petroleum and
Energy
30%
20%
Norwegian Water
Resources
and Energy
Directorate
20%
100%
20%
100%
Nord Pool
Finland Oy
50%
European
Market
Coupling
Company
Nord Pool
Gas AS

5
NORD POOL CONSULTING AS
72 % of market volume now traded on
Elspot (2009)
■ Nord Pool Spot is the
market place for physical
power trade
Source: Nord Pool Spot Annual Review 2008
6
■
producers
■
distributors
■
industrial companies
■
energy companies
■
trading representatives
■
large consumers
■
TSOs
Regulation of the electricity market
■ Physical trading
■
Nord Pool Spot AS: >70 %
• NVE issues the Market Place Licence with renewal
every 3 years
■
Bilaterally: < 30 %
• Energy Act, NVE issues ”Omsetningskonsesjon”
Licence to all participants
■ Financial trading (derivatives)
■
Nord Pool ASA
• The Financial Supervisory Authority of Norway
■
7
Nord Pool Clearing
• The Financial Supervisory Authority of Sweden
The role of the power exchange
Nord Pool Spot – main functions
■ Nord Pool Spot AS runs the Nordic market place for physical
power, offering both day-ahead (Elspot) and intra-day (Elbas)
markets to its participants.
■ In the preparatory works to the Norwegian Energy Act, the
Ministry stated that the marketplace should have two main
functions:
8
■
Administration of the market place for physical power by
facilitating daily bidding and price determination
■
Clearing of all contracts entered on the marketplace, i.e.
enter as the central counter party in all trades,
guaranteeing settlement for trade and anonymity for
participants.
The role of the power exchange
Nord Pool Spot
■ Provides merit order operation through
commercial decisions taken by both generators
and customers
■ Provides a neutral, transparent reference price for
both the wholesale and retail markets
■ Provides a reference price for power derivatives
traded at the Nordic power exchange for financial
contracts in Nord Pool ASA and bilaterally
■ Provides a reference price signalling the optimal
development of generation and transmission
capacity of the system
■ Serves as a grid congestion management tool
■ Nord Pool Spot AS is a non-mandatory power
exchange
■
9
All market participants are free to negotiate
OTC contracts
Overview
■
■
10
Nord Pool Spot
■
History and organisation
■
The role of the power exchange
Regulation of Nord Pool Spot
■
The Market place license
■
Renewal of the Market place licence from 2010
■
Market surveillance
■
Cooperation
■
Supervisory Authorities
■
Nordic cooperation – NordREG
Regulation of NPS
■ Market place license given to NPS to organise
and operate a market place for physical power
trade
■
day a head spot market
Contribute to efficient price formation
Objective and appropriate flow of power
Scope
11
Organising and operating a market place
for physical trade
Regulation of NPS
■ The Market place license covers the whole Nordic
Elspot market and all participants trading at the market
place (renewal every 3 years)
■ The regulation is based on basic efficiency principles -
not detailed regulatory involvement
■ NPS is also holding a licence for organising cross
border trade in the Nordic Market. This license is
issued by the Ministry, but NVE monitors compliance
with the licence
12
13
Regulatory structure
Government
Licensing
Auhority
Ministry of
Finance
Ministry of Oil
and Energy
Clearinghouse
license
Supervisory
Authority
Managing
responsibility
Exchange
license
Kredittilsynet
Cross-border
trading
license
NVE
Marketplace
license
Nord Pool
Entity
Nord Pool
Clearing ASA
Nord Pool
ASA
Nord Pool
Spot AS
Clearing Rules
Trading Rules
Trading Rules
Rulebooks
Market Conduct Rules + Ethical Guidelines
The Market place license –
Conditions (1)
■ NPS shall
15

act in a neutral and non-discriminatory manner,
e.g. ensuring all parties neutral and efficient
access to information that is of importance to
determining prices

create regulations that encourage efficient trade

have an advisory board with broad representation
from the participants in the market.

establish appropriate arrangements for market
surveillance to monitor the behaviour of parties in
the organised market place (market surveillance)
The Market place license –
Conditions (2)
NPS’ information duties towards NVE:
■ report to NVE of any activity that can lead to
distortion of competition
■ inform NVE of changes to its organisation,
ownership situation, activities, amendments in
contracts with market parties or associated
regulations or other changes that have or may
have an influence on price formation.
16
■
Material changes that have or may have an
influence on price formation must be approved by
NVE
■
The assessments of the advisory board and any
comments from market parties must be presented
to NVE
The Market place license –
Conditions (3)
■ The concessionaire’s revenue from the
organisation and operation of the market place
shall cover the costs and provide a reasonable
profit through efficient management
■ The concessionaire shall have adequate liable
capital in relation to the activities being operated
■ NVE can require NPS to organize activities not
subject to regulation in a separate company
17
Overview
■
■
18
Nord Pool Spot
■
History and organisation
■
The role of the power exchange
Regulation of Nord Pool Spot
■
The Market place license
■
Renewal of the Market place licence from 2010
■
Market surveillance
■
Cooperation
■
Supervisory Authorities
■
Nordic cooperation – NordREG
NPS’ Market Surveillance (1)
■ Shall ensure that the parties behave in accordance with
■
the objectives of the Energy Act and regulations issued
pursuant to the act
■
NPS’ rulebook
• Regulations regarding Insider trading and Market
manipulation
■ The Financial Supervisory Authority of Norway also requires
the establishment of an internal market surveillance by Nord
Pool ASA
 NPS’ Market Surveillance cooperates with Nord Pool
ASA’s Market Surveillance in a joint function.
■ Tasks:
19
■
Monitor trading activity
■
Investigate possible breaches
■
Report to supervisory authorities
NPS’ Market Surveillance (2)
■ Regulations given in the Norwegian Competition
Act regarding misuse of dominant position also
applies.
■ NVE and the Norwegian Competition Authority is
monitoring the Norwegian generators bidding at
NPS
20
■
the actual market price is compared to an expected
price calculated by a model that simulates an
efficient utilisation of reservoir-water
■
Differences that can not be explained as pricetaker behaviour should be investigated by looking
at the different participants bidding on the market
place
Market surveillance reporting
Kredittilsynet
NVE
(Financial Supervisory
Autorithy)
(Energy Regulator)
Formal
reporting
Various
authorities
Nord Pool Nord Pool
ASA
Spot AS
Market surveillance
21
Information
flow
Competition
Competition
Authorities
Competition
Authorities
Competition
Authorities
Authority
Overview
■
■
22
Nord Pool Spot
■
History and organisation
■
The role of the power exchange
Regulation of Nord Pool Spot
■
The Market place license
■
Renewal of the Market place licence from 2010
■
Market surveillance
■
Cooperation
■
Supervisory Authorities
■
Nordic cooperation – NordREG
Cooperation between three authorities
23
Legislation
The Energy Act
The Competition
Act
Financial
Supervision Act
Ministry
Ministry of
Petroleum and
Energy
Ministry of
Government
Administration
and Reform
Ministry of Finance
Directorate
Norwegian Water
Resources and
Energy
Directorate
(NVE)
Norwegian
Competition
Authority
Norwegian Financial
Supervisory
Authority
Sector
Energy Sector:
Energy Market
Retail market
Wholesale
market
Transmission
Distribution
Generation
All relevant
competition
sectors
All relevant financial
sectors
Cooperation with other Supervisory
Authorities
■ NVE, The Competition Authority and The Financial
supervisory Authority have entered into a supervisory
cooperation.
■ All three authorities govern different regulations, however
they share the goal of “an efficient power market”
■ Within this cooperation the authorities wish to:
■
Address common issues regarding development of
regulations
■
Exchange information and experiences
■
Cooperate on common projects
■
Coordinate the supervision of particular incidents or
activities
■ In addition, bilateral cooperation arrangements handling
cases
24
Close Nordic co-operation about Nord
Pool Spot
■ In the Nordic countries NVE
cooperates with the national Energy
Market Authorities
■
EMV (Finland)
■
EI (Sweden)
■
DERA (Denmark)
■ Through the supervisory cooperation,
other relevant Nordic authorities are
involved
Annual 12 parties meeting
(4 countries with each 3 authorities)
25
■ NordREG (cooperation of Nordic energy market
regulators)
■
Regular meetings to discuss issues related to Nord
Pool Spot AS
■
Any new (national) rule that has effect on price
setting on Nord Pool Spot AS shall be approved by
NVE as the responsible authority
■
Guidelines for information exchange and
consultation in connection with NVE’s exercise of
authority over Nord Pool Spot
• The guidelines came into force 1 Feb 2002
26
The Nordic perspective and
cooperation
■ Guidelines for information exchange and consultation in
connection with NVE’s exercise of authority over Nord Pool
Spot AS:
27
■
NVE will notify or consult the regulators in Denmark,
Finland and Sweden at an early date and in the most
appropriate manner
■
The regulators in Denmark, Finland and Sweden may
propose and bring up issues related to the regulation of
Nord Pool Spot AS
■
In order to maintain an efficient exercise of authority, in
matters of consultation the NVE can establish a
reasonable delay for a response
■
Individual regulators will cover their own expenses
related to the collaboration in accordance with these
guidelines.
■
In consultation with the other regulators, the NVE can
Thank you for your attention!
Anne Dønnem
Norwegian Water and Energy Directorate
Tel: + 47 2295 9806
www.nve.no
...where market surveillance
is an official requirement
Regulation of market surveillance in the
■ Exchange Act:
■
Ensure to provide:
■
Integrity and independence of the employees
■
Resources to conduct effective surveillance
■ Duty to:
29
■
Monitor trading activity
■
Investigate possible breaches
■
Report to supervisory authorities
Regulated markets...
Physical market:
■ Energy Act (Norway)
■ Licence as market place and to organise cross border
transmission
■ Rulebook for Nord Pool Spot AS
Financial market:
■ Exchange Act (Norway)
■ Securities Trading Act (Norway)
■ Licences as commodity derivatives exchange and
clearing house
■ Rulebooks for Nord Pool ASA and Nord Pool Clearing
30
ASA
NordREG Guidelines co-operation
1. In order to produce an efficient regulation of the power market and in order
31
to establish mutual information exchange, the NVE wishes to contribute to
close collaboration between the Nordic regulators within the electricity
sector.
2. These guidelines deal with issues that are related to the NVE’s exercise of
authority over Nord Pool Spot AS and that can be considered to be of
importance or interest for the power market in the Nordic countries.
3. To the best of its ability and as far as it is possible, the NVE will notify or
consult the regulators in Denmark, Finland and Sweden at an early date and
in the most appropriate manner.
4. Depending on the type of issue and the time available for exercising
authority, the NVE will determine fairly whether there should be
consultation in the matter or whether notification should be provided.
5. The regulators in Denmark, Finland and Sweden may propose and bring up
issues related to the regulation of Nord Pool Spot AS to be considered
jointly by the Nordic regulators within the co- operation established through
these guidelines.
6. In order to maintain an efficient exercise of authority, in matters of
consultation the NVE can establish a reasonable delay for a response.
7. Individual regulators will cover their own expenses related to the
collaboration in accordance with these guidelines.
8. In consultation with the other regulators, the NVE can make changes to
these guidelines.
9. These guidelines are in force as of 2002.01.02.
10. These guidelines can be declared null and void.
How to avoid market manipulation?
■ Price sensitivity
■
The key to avoid abuse of market
power
■ Efficient market design
■
Allow prices to reflect the underlying
properties of the physical power
system
■ Market surveillance
32
Price sensitivity
■ Price sensitivity is necessary to avoid market manipulation
■
Inelastic consumers allow suppliers to manipulate prices
■ End users must be exposed to high prices to trigger price
responsiveness
33
Efficient market design –
More price areas to mitigate market
manipulation!
■ More bidding areas allow
prices to reflect network
constraints and
geographical scarcities
■
Reduce possibilities of
manipulation
■ Market players causing
congestions should pay a
price reflecting the true cost
of congestion
34
Market surveillance
■ Co-operation with Norwegian competition
authorities
■
The competition authorities use a model to identify
possible incidents of market manipulation
■
Regular meetings with NVE to discuss findings
• Are there natural explanations to the incidents?
■
35
The competition authorities are responsible for
further investigations and actions if necessary.