Copyright Houmoller Consulting © Jan. 3, 2013 Anders Plejdrup Houmøller 1 Introduction In Appendix 1, youll find slides giving examples of how the closing/settlement

Copyright Houmoller Consulting ©Anders Plejdrup Houmøller 1Jan. 3, 2013

Introduction In Appendix 1, you’ll find slides giving examples of how

the closing/settlement prices for financial contracts can change during the contracts’ trading period.

In appendix 2, you’ll find a list of the terms and acronyms used in this presentation.

Concerning the documents referred to in this presentation: At houmollerconsulting.dk, you can download the

documents from the sub-page Facts and findings. This PowerPoint presentation is animated

It’s recommended to run the animation when viewing the presentation.

On most computers, you can start the animation by pressing F5. Now the presentation moves one step forward, when you

press Page Down. It moves one step backward, when you press Page Up.

Copyright Houmoller Consulting ©Anders Plejdrup Houmøller 2Jan. 3, 2013

Forward prices and spot prices – 1

This PowerPoint presentation compares the spot prices and the prices of the financial forward contracts The comparison is made for the German Phelix spot

price, the Nordic System price and the spot prices for the price zones of Southern Sweden (SE4), Western Denmark (DK1) and Eastern Denmark (DK2).

In this presentation, for Southern Sweden, Western Denmark and Eastern Denmark, the ”forward price” is the price of the System Price contract plus the price of the CfD contract: (Forward price) = (System Price) + (CfD price).

Copyright Houmoller Consulting ©

Conclusion from the analysis:price hedging is expensive for consumersAs can be seen: compared with the spot

prices, the forward prices have a strong tendency to overshootHence, in the choice between spot and

forward, on the average you get the highest prices by choosing forward.

Consequently, on the average, price hedging is expensive for consumers (and profitable for producers).

The concept “price hedging” is explained in appendix 2.

Jan. 3, 2013 3Anders Plejdrup Houmøller

Copyright Houmoller Consulting © 4

Correlation between forward prices and spot prices

Note that high liquidity for a forward contract does not imply strong correlation between the contract’s prices and the corresponding spot prices.

Probably, the Nordic System Price contracts are Europe’s most liquid financial electricity contractsAt the same time, the prices of the System Price

contracts have low correlation to the spot prices.

Jan. 3, 2013 Anders Plejdrup Houmøller

Copyright Houmoller Consulting © 5Jan. 3, 2013

Forward prices and spot prices – 2

For each of the slides no. 8-11: For each year, “the year’s forward price” is the

average of the daily closing/settlement prices during the reference periodThe reference period is the trading days during

the last quarter, where the contract was traded. Example for the Nordic System Price contract for

2012 (ENOYR-12):The “forward price” is the average of the daily

closing prices during the period from 3 October to 28 December 2011• As can be seen from slide no. 18, this gives a

forward price of 42.24 EUR/MWh.

Anders Plejdrup Houmøller

Copyright Houmoller Consulting © 6Jan. 3, 2013

Forward prices and spot prices – 3 For each of the slides no. 9-11 (Nordic prices):

For each of the years 2002-2012, the year’s average spot price is compared with the year’s forward price.

For each slide, this gives 11 points indicating how well the forward’s price forecasted the spot price.

For the slide no. 8 (German prices): The same method. However, for Germany its the 10

years 2003-2012. The mean of the numerical difference |spot–forward|

illustrates the average distance between the forward curve and the spot curve.

The mean of the difference (spot–forward) shows how far the spot curve on the average lies below the forward curve.



The price zone of Southern Sweden (SE4)The year 2012

The price zone SE4 was launched 1 November 2011For the year 2012, the average SE4 spot price

turned out to be 34.21 EUR/MWh.The forward price was 52.10 EUR/MWhHence, the difference

(spot - forward) was -17.89 EUR/MWh• For 2012, among the five forward contracts

investigated in this analysis, this is the record difference.

Jan. 3, 2013 Anders Plejdrup Houmøller 7


Germany: forward prices and spot prices

03 04 05 06 07 08 09 10 11 12

The 10 years 2003-2012

The year’sforward price

The year’saverage

spot price

Correlation(spot,forward) = 0.53

Average of (spot - forward) = -3.2 EUR/MWh

Average of |spot – forward| = 8.8 EUR/MWh20

25

30

35

40

45

50

55

60

65EUR/MWh

Source: EEX 8


Western Denmark: forward prices and spot pricesThe 11 years 2002-2012

02 03 04 05 06 07 08 09 10 11 1220

25

30

35

40

45

50

55

60EUR/MWh


The year’saverage

spot price



Average of |spot – forward| = 6.5 EUR/MWh

Sources: Nasdaq OMX and Nord Pool Spot 9


Eastern Denmark: forward prices and spot pricesThe 11 years 2002-2012EUR/MWh

20

25

30

35

40

45

50

55

60

02 03 04 05 06 07 08 09 10 11 12


The year’saverage

spot price






Nordic System Price: forward prices and spot pricesThe 11 years 2002-2012EUR/MWh

20

25

30

35

40

45

50

55

60

02 03 04 05 06 07 08 09 10 11 12


The year’saverage

spot price





Copyright Houmoller Consulting ©Jan. 3, 2013 12

Appendix 1Closing/settlement pricesVariation during the last year of thefinancial contract’s trading period



Closing/Settlement Prices Please refer to appendix 2: at the end of each trading day, both

Nasdaq OMX and EEX set a closing/settlement price for each of their financial contacts.

As examples of how the closing/settlement prices vary:

The slides no. 14-18 show the daily closing/settlement prices for five forwards.

For each forward, the daily closing/settlement price is shown during the last year, where the forward was traded.

The five forwards hedged against the 2012 spot price for respectively

Germany.

Western Denmark (DK1).

Eastern Denmark (DK2).

Southern Sweden (SE4).

The Nordic System Price.

“Reference period” is the trading days during the last quarter, where the contract was traded.


Germany – the year 2012

0

10

20

30

40

50

60

EUR/MWhForward prices and the year’s average spot price

Trading days in 2011 DecJan

Settlement price per day in 2011 forCal-12

Reference period

Reference period’s average forward price: 54.16 EUR/MWh

The average German spot price for 2012turned out to be 42.60 EUR/MWh

Source: EEX 14


Western Denmark (DK1) – the year 2012

0

10

20

30

40

50

60EUR/MWh

Sources: Nasdaq OMX and Nord Pool SpotTrading days in 2011 DecJan

Reference period

Forward prices and the year’s average spot price

The average DK1 spot price for 2012turned out to be 36.33 EUR/MWh

Closing price per day in 2011 forENOYR-12 + SYARHYR-12


15


Eastern Denmark (DK2) – the year 2012

0

10

20

30

40

50

60EUR/MWh

Sources: Nasdaq OMX and Nord Pool Spot



Reference period

Closing price per day in 2011 forENOYR-12 + SYCHPYR-12


The average DK2 spot price for 2012turned out to be 37.56 EUR/MWh

16


Southern Sweden (SE4) – the year 2012

0

10

20

30

40

50

60

EUR/MWh




Closing price per day in 2011 forENOYR-12 + SYMALYR-12

The average SE4 spot price for 2012turned out to be 34.21 EUR/MWh

Reference period


17


Nordic System Price – the year 2012

0

10

20

30

40

50

EUR/MWh




Reference period

Closing price per day in 2011 forENOYR-12

The average System Price for 2012turned out to be 31.20 EUR/MWh


18

Copyright Houmoller Consulting ©Jan. 3, 2013 19

Appendix 2Terminology and acronyms



Terminology and acronyms – 1As used in this presentation

Cal-12 the ticker symbol of the EEX financial contract, which hedged against the German spot price during the year 2012.

CfD Contract for Difference. A financial contract, which hedges against the risk there is a difference between the System Price and the spot price of a given Nordic price zone.

Example: the underlying reference for the CfD for DK1 is this difference

(DK1 spot price) - (System Price). Closing price At Nasdaq OMX, for each financial contract, a

closing price is set at the end of every trading day. In effect, at the end of the trading day, the closing price is the financial market’s forecast of the future spot price.

Nasdaq OMX’ closing price is analogous with EEX’ settlement price.

Example: 42.90 EUR/MWh was the closing price 21 November 2011 for the contract hedging against the System Price during the year 2012 (ENOYR-12).

20

Copyright Houmoller Consulting © 21Jan. 3, 2013 Anders Plejdrup Houmøller


Correlation Given two data sets, the correlation function measures the degree to which the two data sets move in lockstep. Please refer to the next-to-last slide.

DK1 and DK2 The price zones of Western and Eastern Denmark as indicated at the picture.

Eastern Denmark See DK2. EEX European Energy Exchange. Please refer to the web site

eex.de. ENOYR-12 See ticker symbol. Financial contract Short-term for financial forward contract.



Financial forward contract In this document, this is a contract, which can be used to hedge against a spot price. Please refer to the chapters 11-13 of the PDF document “The Liberalized Electricity Market”.

Forward contract Short-term for financial forward contract. Forward price The settlement/closing price of a forward

contract. German spot price See Phelix spot price. Nasdaq OMX An exchange, where the players can trade Nordic

financial contracts (and other contracts). Please refer to the web site nasdaqomx.com/commodities.

Nordic and Nordic area In this document, this refers to the four countries Denmark, Finland, Norway and Sweden.

Nordic System Price See System Price.

22Anders Plejdrup HoumøllerJan. 3, 2013



Phelix spot price The spot price for Germany published by the spot exchange EPEX Spot.

Price hedging As a consumer or producer of electricity in Northern Europe: if you choose to trade at the spot price, you’ll first learn your price for the next day’s consumption/production of electricity after 12 o’clock Central European Time.

However, by using a financial contract, you can fix your electricity price at an earlier point in time. This early fixing of the price is called “price hedging”.

Price zone A geographical area, within which the players can trade electrical energy day-ahead without considering grid bottlenecks.

23Jan. 3, 2013 Anders Plejdrup Houmøller



SE4 The price zone of Southern Sweden as indicated at the picture at slide no. 21.

Settlement price At EEX, for each financial contract, a settlement price is set at the end of every trading day. In effect, at the end of the trading day, the settlement price is the financial market’s forecast of the future spot price.

EEX’s settlement price is analogous with Nasdaq OMX’s closing price.

Southern Sweden See SE4. Spot price Please refer to appendix 2 in the PowerPoint

presentation “Market coupling and spot price calculation” (or the PDF document with the same name).




SYARHYR-12 See ticker symbol. SYCHPYR-12 ticker symbol of the CfD, which hedged against

the difference between the DK2 spot price and the System Price during 2012. CPH indicates CoPenHagen.

SYMALYR-12 ticker symbol of the CfD, which hedged against the difference between the SE4 spot price and the System Price during 2012. MAL indicates MALmø (the biggest town in SE4).

System Price A virtual price. It’s the theoretical, common spot price we would have in the Nordic area, if there were no grid bottlenecks in the area covered by the four countries.

For an overview over the historical numerical values of the System Price, please see the PowerPoint presentation “System Price 1992-2012” (or the PDF document with the same name).




Ticker symbol The name of a financial contract.

Example 1: the ticker symbol of the contract, which hedged against the System Price during the year 2012 was ENOYR-12

• ENO indicates Electricity NOrdic

• YR-12 indicates the year 2012.

Example 2: the ticker symbol of the CfD, which hedged against the difference between the DK1 spot price and the System Price during 2012 was SYARHYR-12

• SY indicates SYstem Price

• ARH indicates AARHus (the biggest town in Western Denmark).

• YR-12 indicates the year 2012. Western Denmark See DK1.



The correlation function

The correlation function measures the correlation between two variables.

If the two variables move in lockstep, the value of the correlation function is 1.A value of 0 means there is no correlation at all.

a

b

In this exampleCorrelation(a,b) = 1as a and b movein lockstep


Thank you for your attention!

28

Anders Plejdrup HoumøllerHoumoller Consulting ApS

Tel. +45 28 11 23 [email protected]

Web houmollerconsulting.dk

Documents

Copyright Houmoller Consulting © Jan. 3, 2013 Anders Plejdrup Houmøller 1 Introduction In Appendix 1, youll find slides giving examples of how the closing/settlement