The Nord Pool is an international market place, and it is one of the most transparent power markets in the world. Electronic commerce is playing a very important role in making the market operate effectively.
Electronic commerce is a tool used in the power market, and this article will describe how it has influenced the market. The following questions will be answered: What are the characteristics of the market? How does it work? Who was and who are the role players, and what are the products? A description of the main parts of information flow and technological infrastructure needed is included. I will discuss electronic commerce used in the Nordic power market today, and future needs for transformation into a North European power market.
Because of the large turnover, many role players in the market and the fact that electricity is "fresh goods" (there is no delay between time of production and consumption), electronic commerce in the power market is a very interesting case. The power market in many European countries is being or is soon going to be de-regulated, and this makes it to an interesting case in itself.
In this article I will use the term "electronic commerce" in a broad sense. This means that the term electronic commerce includes information flow and co-operation using computers and networks both before and after a purchase of electricity has taken place.
I have chosen to use the term "role player" when describing different actors participating in the market. Some role players play several roles in real life. A role player is an entity responsible for a set of actions in the market, and it should have a well-defined interface to other role players. A "role" is a specification, which models an external intended behaviour of a role player [10].
I will start by describing the Nordic power market. Than I will discuss how electronic commerce has influenced the market. This paper is based on interviews, official reports and discussions with my colleagues and members of the project "Open Networks as the Future Marketplace" at the Norwegian Computing Center.
Because of limitation in length, I have chosen not to include the following topics in this article: how prices and tariffs are calculated, product details in the different markets and technical details on how electronic commerce is carried out.
Twenty years later, in 1991, production and trade of power in Norway was re-regulated by The Norwegian Energy Act. Power production became commercial activities exposed to competition, but distribution of power is still a monopoly. A few years after the re-regulation, Nord Pool, the Nordic power exchange became a separate company.
Sweden and Finland have done similar de-regulations, and today there is one common market. Border tariffs between Sweden and Finland has during the last years been turned both on and off, but they were removed on March 1 1999. A part of the Danish market will join the Nordic power market in June 1999.
Until the Norwegian re-regulation in 1991, the role players were mainly vertically integrated utilities owning both production utilities and a (local) grid. The consequence for the vertically integrated companies was that its distribution services became a monopoly, and the electricity produced was to be offered in an open market. Vertically integrated utilities were therefore split into two companies; a production utility and a grid utility. Most power is now traded between production utilities and grid utilities or large consumers, or between the production section and grid section of vertically integrated utilities [1]. After the re-regulation, margins have been reduced. This change has lead to co-operation between, and buy-up of small role players.
The Norwegian power market is characterised by some medium size and many small role players. The power market in most other EC countries has a few but large role players. To meet the challenge from the larger competitors there is currently a strong trend towards larger units in Norway too.
Many role players are feeding electricity into the grid, and even more role players are tapping electricity from it. The Norwegian grid is operated and managed by Statnett SF, which is responsible for running it as a monopoly. The Norwegian Water Resources and Energy Administration is responsible for monitoring grid management and operations.
Figure 1, shows a schematic overview of the three levels of the Norwegian grid, the central, regional and local grids. Example of use of the grid: Producer A in Figure 1 is able to sell power to consumer X to a well-defined price in competition with all the other producers.
When a consumer changes production utility a mainly EDI based information flow between grid utilities, old production utility, new production utility and consumer is trigged. Figure 2, shows electricity consumption by sector [5], and it tells us a lot about the difference between role players trading electricity. While there is a limited number of power intensive industry plants, there are approximately two million households [5] in Norway. Power intensive industry has been active in the market for a long time. To date 130 000 end users, including households, in Norway have changed electricity supplier. The corresponding number from Sweden is 30 000. Households trade power directly from an electricity supplier and not from Nord Pool. An electricity supplier is either a trader (buy's electricity for resale) or a production utility.
The actual consumption is measured and the data is sent to the local grid utility for further distribution to the different production utilities. This information flow is mainly based on EDIEL, which is based on EDIFACT and use of X.400. Grid utilities in Norway are obliged at their own cost to install equipment for hourly measuring of consumption when yearly consumption is above 500 000 kWh. Demands on measuring frequencies are regulated, and measuring equipment will be installed at most consumers within a few years. Consumers receive one bill from the local grid utility (transmission costs) and one from the electricity supplier (electricity costs).
One of the most important services to the role players in the market is access to broad spectrum of high quality information regarding the power market. Several companies offer information services today. Some of the important sources of information are Nord Pool, weather forecasts, statistics, changes in ownership and new role players in the market. Information about the weather is important of two main reasons: First, temperatures influences on how much electricity is used for heating and second, the large portion of hydropower utilities in the Nordic countries. These information services are all offered on the Internet.
Statistics from 1998 [8] show that Norwegian role players are most active in the exchange.
Figure 3 shows the traded volume split on country.
The Elspot market can be considered as a combined energy and capacity market (within Norway) where contracts are traded on a daily basis for delivery the next day. In situations of limited capacity in the central grid, the price mechanism in the Elspot market is used for regulating the power transmission. On a daily basis trading orders are received at Nord Pool, and the market price is calculated. Role players must guarantee a specified amount of money, and they have to pay a fee to participate in this market. The monthly average spot price has since 1992 varied between 11,28 NOK/MWh (August 1992) and 328,25 NOK/MWh (September 1996).
Figure 4 show the spot price development since 1993.
Most traders in the Elspot market send their orders/bids on a daily basis using EDI (EDIEL, based on EDIFACT messages transmitted by X.400 or Internet on top of X.25 or ISDN). Bidding on Internet is a supplement to the present EDIEL system, and will gradually replace the use of bidding via fax.
Eltermin is a financial market for price hedging/assurance and risk management when buying or selling electrical power. The purpose of this market is to enable buyers and sellers to predetermine the price of power. Contracts do not result in actual supply of power, but allow price hedging/assurance for a specified volume of power in a specific period. As for the Elspot market role players must guarantee a specified amount of money, and pay a fee to participate.
Traders in the Eltermin market send their orders either by making a telephone call to the Nord Pool helpdesk, or by using electronic commerce. Electronic commerce on the Eltermin market was established in the autumn of 1996, and an average of two thirds of the trade volume is today traded by use of Power Click software. Employees at Nord Pool helpdesk use one version of the software, and approximately 40 other Nordic users use a slightly different version. The number of Power Click users is rising rapidly. Current client-server software is proprietary, and the client accesses the server by using an API (Application Programming Interface). Transmission is done using Frame Relay or ISDN. It is also possible to establish an interface between back office software and the Power Click API.
Since trade in the Eltermin market is like a competition on making the best guess on what the power price will be in the future, it is very important to the financial market that there is a reliable price in the Elspot market. This price must reflect the main turnover in the total market, which is the trade done both bilaterally and by using Nord Pool. The time horizon of the contracts in Eltermin is up to three years ahead.
The following simplified example will illustrate risk handling by combining the two markets. A Factory called "X" produces aluminium, and they know that if the cost of electricity rises above 130 NOK/MWh they will have no profit. The spot price today is let’s say 95,25 NOK/MWh. In the financial market the factory can buy electricity delivered for 3 years to 110 NOK/MWh during the whole period from a trader. In the Eltermin market three contracts lasting one year each is bought. If the actual spot price is above 110 NOK/MWh in the 3 years period, trader A has to pay the difference, and if the price is lower Factory X has to cover the difference. The result for Factory X is that they know that their power price is independent of changes in the Elspot market for the next 3 years, and Factory X will have profit on its aluminium production.
Statnett SF is responsible for running the main grid in Norway, and they are responsible for the regulatory market in Norway. The regulatory market is a tool for maintaining a stable frequency and a continuous balance between production and consumption of power in Norway. Similar markets exist in Sweden and Finland. These markets are meant for a narrow group of role players and not for speculation. I will not go into details on how trade in the regulatory market is done.
When the clearing service is used, buyer and seller both have to pay a fee to Nord Pool. In return Nord Pool takes a risk and guarantees that both buyer and seller will receive a correct settlement.
Nord Pool’s clearing service is very important when it comes to trust in electronic commerce and reduction of risks for each role player. The number of role players is rising and they are located in different countries. This makes the market difficult to follow. When the clearing service was introduced, a larger portion of the total turnover was included in the statistics from Nord Pool. In this way the spot price and prices in the financial market at Nord Pool became better references for the total market.
Information flow regarding clearing of bilateral agreements are carried out by using telephone. So far there is no way of reporting bilateral trade electronically to Nord Pool.
The growth for the Eltermin market and clearing service has been very large. Optimistic viewers believe that within a few years the turnover in the financial market will be 5 times as high as in the Elspot market. Statistics from 1998 [8] show that the turnover in the financial market has reached 1,5 times the Elspot market. The clearing service turnover has an even larger growth than the financial market. There are no statistics of the total Nordic turnover in the financial market, but the turnover traded and/or cleared at Nord Pool is presented in Figure 5.
Bilateral trade not cleared at Nord Pool is not included in the calculations in Figure 5. But according to my interview [20], more that 50 % of the contracts made outside Nord Pool are cleared through the Nord Pool system.
The total consumption in the Nordic countries was in 1998 approximately 350 TWh. In 1998 Elspot and Eltermin represented approximately 20% of total power turnover in the Nordic power market and the value of this 20% was 19,5 billion NOK [8]. A large and quickly rising portion of the remaining 80% of the power trade is cleared at Nord Pool. In a commodity market a share of 20% of the market is according to Nord Pool very good.
At least one of the brokers has an Internet based power exchange accessible to customers [20]. In 1997 there were 16 brokers, in 1999 there are only 9.
1. Any interested role player should be able to participate.
Nord Pool accepts role players and they have to place an economical
guarantee for trading transactions. Brokers can have their own customers
and trade bilateral.
2. All role players of a role should have access to the same infrastructure
suitable for electronic commerce.
Today the infrastructure at Nord Pool is mainly a closed network with
some indirect access points from Internet.
3. There should be mechanisms for authenticating role players.
- Authentication when using Power Click is done by combinations of
network addresses, network facilities, proprietary application interfaces,
usernames and passwords.
- When using EDI authentication is mainly done by address verification.
- When using telephone to Nord Pool’s helpdesk the conversations are
recorded, and authentication is based on personal relations and recognition
of voice.
4. Laws, regulations and sanctions relevant for trading power should
be open available and they should affect all role players of the same role
equally.
On this point there are differences depending on country of origin.
5. Laws and regulations relevant for the use of electronic commerce
should affect all role players of same role equally.
On this point there are differences depending on country of origin.
6. Several different role players must fill the central roles like:
Production utility, seller and buyer.
Today, there seems to be enough role players.
7. There should be services offered which assures settlement for the
individual role player.
A clearing service at Nord Pool is offered to all pre clarified role
players.
8. A seller should be allowed to sell to the same price to any buyer,
independent of buyers geographical location in the grid.
Today, a point tariff system is used and it solves this issue.
9. Objective information of activities in the market and price setting
should be available and all role players should have access to the same
information openly.
Today, there are several openly available information services.
10. A list of all role players accepted to participate in the market
should be openly available.
Nord Pool has a list of its customers open available. If brokers have
similar lists are unclear.
11. There should be competition on clearing services, electronic commerce
software and infrastructure needed to use electronic commerce software.
To date, there is only competition on infrastructure.
The characteristics of open electronic commerce are based on the possibilities, limitations and services in the underlying physical grid, in addition to production and consumption. In the physical power market there are several other characteristics important to an open electronic commerce market. Some of these are:
Some role players delegate activities to other role players. This makes the picture of who is doing what on behalf of whom more unclear. When doing electronic commerce authentication and delegation may cause problems unless there are clear rules to follow. There is a need for clarification on how to handle this in the future.
An average trade pattern during one day has several small peaks and several periods with little activity. During a peak, the activity can be so intense that delay in technology used can hinder your active participation. Within seconds a bid is placed on the market place, someone hits the bid and then it is gone. "Speed is king" in these situations. Any delay in technology used will put you in 3. division as a buyer.
When combining statistics from traded volume and electronic commerce it shows that when turnover volume is rising the percentage of trade transactions done by electronic commerce also rises. I believe that difference in speed to the market place between telephone based trade and electronic commerce trade is the main reason for this. Limitation in number of people at the helpdesk makes use of telephone a bottleneck in peak periods.
Role players trading at the Nord Pool exchange need a set of software solutions. Depending on their role they need:
Another experience is that a small spread leads to a larger portion of electronic commerce (spread is the difference between buy and sell bids, see Figure 6 for explanation). A large spread gives a buyer a lot to gain in negotiations with a seller, and telephone is a better tool. Today there is no way to negotiate when using the electronic commerce solution at Nord Pool. All offers are placed on the basis of "take it or leave it".
So far there have been very few error transactions at Nord Pool. The few that have occurred were solved between buyer, seller and Nord Pool. Introduction of electronic commerce has moved much of the responsibility regarding mistakes. The most error generating activity is punching or "mouse clicking" buy and sell orders into the market place. Nord Pool is becoming less involved in this activity since more and more role players use electronic commerce. Today it is not possible to withdraw an order from the market when it has been placed. One control mechanism is that role players each day receive a list of their transactions from Nord Pool so they can check them.
The power sector has an existing infrastructure, well suitable to do electronic commerce for core business at today’s scale. Having such an infrastructure I did hope to find use of electronic commerce besides core business as well. But there is as good as no indication of cross sector use. Other sectors such as transport and banking have had more success in doing cross sector electronic commerce.
Some role players have trade solutions based on Internet communication. They experienced that the offers in the marketplace had gone even before they where able to make a buy request on them. According to these role players the speed of Internet was too slow. Even if this should be the case it is not fair to compare this Internet based software with Power Click because of large differences in architecture and demands on infrastructure. I believe that a good Internet configuration and/or some changes in design, would make the speed of Internet based solution comparable to Power Click.
It is also important to make sure that role players from different countries are legally allowed to act in the market by using electronic commerce. So far, role players sited in England and the US have not been allowed to trade online on the financial market at Nord Pool due to legal restrictions.
There are some fairly large differences in laws and regulations governing role players from different countries. One example is that Swedish electricity supplier have had success in selling power to Norwegian end users long before Norwegian electricity supplier in practice got access to the Swedish end users. The reason is that Swedish consumer had to install expensive hourly metering if they should change electricity supplier. These rules will be harmonised by November 1999.
When evaluating the Nordic power markets use of electronic commerce, the choice of definition is very important. Depending on the definition of electronic commerce used, the Nordic power market is more or less successful. A broad definition makes it a success. A narrow definition, restricted to the act of establishing an agreement by use of computers connected in networks, makes it less successful.
Only a small percentage of the trade transactions in the Nordic power market are carried out by use of electronic commerce according to a narrow definition. Elspot and Eltermin markets at Nord Pool represents 20% of the turnover, and a part of this 20% is traded electronically. Several brokers also use electronic commerce, but I do not have any statistics concerning this. Approximately 80% of the turnover in the Nordic power market is traded outside Nord Pool; most of this is carried out by use of telephone. I believe that electronic commerce will take over a large percentage of this turnover, but not necessarily all of it.
Using a broader definition the Nordic power market has had large success in its use of electronic commerce. This is because activities related to the action of doing a purchase is done by using network and computers in a large scale.
The effect of open electronic commerce is based on the possibilities, limitations, physical infrastructure for handling exchange of goods, services in the underlying real world and market possibilities. Electronic commerce is a tool which successfully can support the underlying reality and not visa versa. In the case of the Nordic power market electronic commerce is mainly rising the speed of trade transactions and information flow, and increase the ability to integrate back office systems with trading systems.
The laws and regulations relevant for trading power should affect all role players of the same role equally. This is not the case in the Nordic power market today. Both regarding accesses to consumers sited in another country and regarding use of electronic commerce there are differences. Border tariffs between Sweden and Finland has during the last years been turned both on and off, but they were removed on March 1 1999. In an open market use of border tariffs should be avoided.
An interesting observation is that when turnover in the market rises the percentage of transactions carried out by using electronic commerce rises as well. Reasons for this seem to be the need for high speed in access to the bids in the market place, high speed in information flow and that the market is difficult to reach by telephone during peak periods.
Some of the role players at Nord Pool are already cleared both at Nord Pool and at the Oil and Gas exchange in London (IPE). I believe in a development in direction of an energy market handling electricity, gas and oil, accessible by use of one electronic commerce infrastructure and one set of software.
The fastest growing service at Nord Pool is the clearing service. I believe that competition on this will come. An agreement between clearing services (i.e. Nord Pool and IPE) to accept each other’s customers as role players by the same, or very similar rules will be required by the market. The need for good authentication services will rise when more role players from several countries enter the markets. I see no reason for using the clearing service only for power trade. Why not expand the use of clearing service, and offer it outside the Nordic power trade market. This kind of clearing service is needed within electronic commerce especially when trade is done anonymously. I also believe that it is only a matter of time before the use of digital signatures and probably also smart cards will be a natural part of electronic commerce solutions on the Nordic Power market.
Electricity is close to a "basic need" in today's society, so the power sector should keep in mind that its use of electronic commerce makes the sector an even more tempting target for cyber crime. Studies show that eight out of thirteen (61%) of finical role players had in a three year period been exposed to computer or cyber crime
A large number of roles and role players for each role are good arguments for making good models of the activities, information flow and the roles in the market. Open-edi reference model [10] recommend to make one business and one technical model of the market. These models are part of the Open-edi reference model, and there has been a lot of work carried out within ISO/IEC JTC1 SC32 "Data Management and Interchange" and it's working group called WG1 Open-edi [10].
| 1. | Fact sheet 96, The energy sector and water resources in Norway. Ministry of petroleum and energy. Published June 1996. |
| 2. | Faktahefte 97, Energi og vassdragsvirksomheten i Norge. (In Norwegian only). http://odin.dep.no/oed/publ/energi97/ |
| 3. | Deregulation of the Nordic Power Market, Implementation and Experiences, 1991-1997, EFI Sintef Group, ISBN 82-594-1142-3. http://www.energy.sintef.no/produkt/deregulation-tr.html |
| 4. | Guidelines for electronic information exchange in electricity supply (In Norwegian only). Retningslinjer for elektronisk informasjonsutveksling i elforsyningen, Sintef Energiforskning mars 1999, Grethe Tangen. |
| 5. | Energy and power balance towards year 2020. (In Norwegian only). Energi og kraftbalansen mot år 2020, NOU 1998:11. http://odin.dep.no/html/nofovalt/offpub/nou/1998-11/ |
| 6. | Eltermin, The Financial Market, Nord Pool 12. Oct 1998. Http://193.69.80.130/menu1/m1_4.htm |
| 7. | Elspot, The spot market, Nord Pool 12. Oct 1998. http://193.69.80.130/menu1/m1_3.htm |
| 8. | Årsrapport Nord Pool 1998 /Year report from Nord Pool 1998 |
| 9. | Datakriminalitet og mørketall. Utgitt av Næringsliverts sikkerhetsorganisasjon. Computer crime and unofficial numbers. (In Norwegian only). |
| 10. | Open-edi reference model. ISO/IEC JTC1 SC32 WG1 Open-edi. http://www.nr.no/gem/elcom/open-edi/14662e.doc |
| Interviews / Experts contributions | |
| 20 | Skandinavisk Kraftmegling AS, Edvard Lauen and Bengt J. Haugnes. http://www.skm.se/ |
| 21 | Nord Pool, Geir Dvergastein and Morten Johnsrud. http://www.nordpool.com/ |
| 22 | CBF Energimegling, Bengt Eide-Olsen. http://www.cbf.no/ |
| 23 | Enfo, Ole Haugen. http://www.enfo.no/ |