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UK-Nord Pool Collaboration is a Step Towards EU Energy Integration

May 1, 2009 - Datamonitor

Nord Pool, Norway's leading power-hub, aims to launch a new power trading platform in the UK to pass on volume and price transparency efficiencies to market participants. This key development in UK power trading highlights the evolutionary nature of competitive markets and is a significant step closer to a single EU market.

Having been chosen for the task in November 2008 by the British Futures & Options Association, the US-Nordic led consortium of Nasdaq OMX/Nord Pool has revealed that it intends to launch a power exchange in the UK on September 28. The exchange, called N2EX, will initially provide day-ahead, weekend, week-ahead and intra-day trading auctions. Nord Pool also hopes to feature as a Market Index Data Provider (MIDP), while derivatives contracts may be added to N2EX at a later date, contingent on the speed and efficiency at which its clearing and settlement services work on prompt products.

Although Elexon, the company that manages the UK's electricity balancing and settlements code, has come out in support of these plans, Swedish power generator Vattenfall has questioned the possible changes and the way that imbalance charges are currently calculated. It has argued that N2EX would be in direct competition with the existing Anglo-Dutch energy exchange, APX, which would ultimately harm the development of a single and robust UK spot market index and therefore should be open to significant regulatory scrutiny before being created. This is on the basis that N2EX would run parallel with the APX, taking away liquidity and scale efficiencies.

Nord Pool, currently operating (arguably) the world's most liquid, transparent and therefore most competitive power market in the Nordic region, has been operating spot markets since 1991. The rationale for adopting its expertise and services in the UK is obvious, given its commitment and proven experience in managing power markets across various nations in northern Europe.

The plan is that data on both the physical and financial markets will be made available once the exchange becomes operational, with Nord Pool's potential appointment as an MIDP subject to it "demonstrating that it is capable of providing MIDP services and meeting commercial and contractual needs", according to an Elexon spokesperson. Although no definite decision will be made until due diligence takes place, the signals look to be in favor of N2EX and the creation of a more efficient competitor to the APX energy exchange.

From an independent perspective, the proposed changes make sense. Nord Pool is a recognized and established source in power and carbon trading, providing end-to-end exchange services. In a market where competition, efficiency and transparency are highly regarded, it seems sensible to apply these values to balancing methodologies and encourage structural market improvements.

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