Estonia’s joining of Nord Pool Spot power exchange
In April 2010, Estonia and the other Baltic States joined the Nord Pool Spot (NPS) power exchange.[1] This was part of the European Commission’s plan to connect the Baltic energy markets to the Nordic countries, Germany and the United Kingdom in order to ensure an efficient common market for electricity trading.[2]In practice, trading via Nord Pool Spot takes place on two markets – the Elspot day-ahead market and the Elbas intra-day market.
On the Elspot market, energy is traded for the following day and prices and quantities are fixed for the next 24-hour period. Market participants place orders on an hourly basis via an online system where electricity producers make offers in their production area and electricity purchasers make bids in areas where they wish to resell electricity. When the Elspot market closes at 15:00 Estonian time, trading opens on the Elbas intra-day market. The aim of Elbas is to ensure market balance and cope with unexpected last-minute changes, such as an increase in demand due to extreme weather conditions or reduced production due to the temporary closure of a power plantt.[3]Pricing of electricity sold on Nord Pool exchange
As is typical of a market economy, the electricity prices on the power exchange are calculated based on supply and demand – namely, upon achieving a balance between the two, with all suppliers being paid a uniform price (the uniform-price auction model). To the dismay of politicians, consumers and the majority of entrepreneurs, this uniform price is the highest price offered by the last bidder (whose electricity is needed to fully satisfy demand every hour of the day). A few weeks ago, the market price reached 4,000 EUR/MWh: the maximum price allowed according to the Nord Pool rules[4]. Media coverage gave the impression that someone actually made the market an offer at this high price. According to Nord Pool’s subsequent explanations, this was not the case: as the market could not cover demand at that specific point in time, the power exchange’s technical price cap was automatically applied instead. Considering the record-breaking exchange prices of electricity, there are increasing demands to revise this (unfair) pricing model, which is viewed as generating excessive profits for producers[5] or to take even more drastic measures. As a result, we come to an unavoidable question: why do market participants who offer to sell at a lower price also get the price offered by the highest bidder of the day? In other words, if 10 producers are needed to satisfy demand and nine of them offer electricity at a price in the neighbourhood of 10 to 50 EUR/MWh, but the last one does so at a price of 500 EUR/MWh, then all producers can sell electricity at that price i.e. 500 EUR/MWh. Unfortunately, both the state and the exchange have failed to provide a convincing answer to this key question, having simply responded with assurances that “this is the best model”.Last bidder’s uniform-price model
Two main price models are used in the organization of power exchanges: uniform-price auctions; and pay-as-bid auctions. Nord Pool uses the uniform pricing model described above, which differs from the pay-as-bid model, wherein each producer is paid the asked-for price. The price offered in the Nord Pool auction must be based on the marginal pricing principle: the variable costs of the producer incurred in generating electricity, i.e. without taking into account, for example, the investment cost of building a power plant. There are a number of reasons why the uniform-price auction model was chosen:- A price based on variable costs ensures a simple bidding structure and equal opportunities for both large and small producers to participate on the market.
- In the case of pay-as-bid auctions, producers attempt to estimate the maximum market price. In the long run this would lead to an increase in prices compared to the uniform-price auction model.
- It ultimately ensures the fairest price from a socio-economic point of view.
