Empowered power market

OSLO — It was a learning experience for our study tour group to have arrived here  at a time that America’s NASDAQ OMX Group Inc. just completed its acquisition of Nord Pool’s clearing, international derivatives and consulting subsidiaries. This was announced to us by Knut Rabbe, one of the eight-man board of directors of Nord Pool on Friday in our visit of this power trading house here in the capital city of Norway. The merged markets is now called NASDAQ OMX Commodities.

 The New York-based NASDAQ seeks to establish its niche in the European market with their acquisition of Nord Pool. Rabbe told us NASDAQ OMX acquired 100 percent of Nord Pool’s products, including their latest CO2 (carbon emission) products and other international power contracts. It paid approximately $325 million for the shares.

 The prevailing global financial crisis has not stopped NASDAQ OMX from completing the deal with Nord Pool. Obviously, NASDAQ OMX acquisition of the Nordic power market offers so much opportunities than the so-called “toxic assets” that have plunged Wall Street, the Dow Jones, the Nikkei and other global trading markets to record lows.

 Earlier this year, we gathered from Rabbe that the Lehman Brothers, before it publicly declared its financial troubles, tried but failed to buy into Nord Pool. Largely, Lehman’s entry into Nord Pool was doomed from the start since this Nordic power market does not accept speculators but its membership is strictly limited to power producers and distributors. 

Not too long ago, sometime in 1996, Nord Pool became the first international commodity exchange for trading in electric power. Nordic countries, composed of Norway, Sweden, Denmark and Germany, put up this common resource pool for electricity. Since its establishment, it has helped optimize the use of power and reduce electricity outages and thus allows these four Nordic countries to reap socio-economic gains in the efficient transmission and distribution of energy.

 If one country is unable to satisfy demand from its own output, it can import the necessary power from a neighbor. This common Nordic market for power supply involves primarily electricity generation from hydro-power, nuclear energy, coal and fossil oil-fired thermal plants. Since the generating modes differ and are distributed differently in these four member countries in Nord Pool, the need for additional power will vary from country to country and at different times. This makes possible the sharing of power resources among them.

For example, Rabbe cited Norway, 95 percent of their electricity supply is generated through their hydro-power plants and the rest is through thermal plants run either by coal or fossil fuel. During winter, the generating capacity of their hydro-power plants is lowered by the cold weather that constrains supply of electricity while there are higher demand for heating requirements to keep Norwegians warm. So Norway could import some of their electricity requirements from nearby Germany which has more thermal-fired power plants.

 Like other markets, the Nordic power market is affected by fluctuations in the prices of crude oil, coal and other raw materials priced in US dollars. A lower exchange rate cuts the cost of coal and therefore offers better terms for coal-fired power plants in Germany though hydro-power is cheaper.

 The power market functions in such a way that the cheapest electricity is generated first, with more expensive generating modes phased in as power use increases. This means, in practice, the wholesale market price for electricity is set by the most expensive generating mode.

 Actually, Nord Pool operates like our very own Wholesale Electricity Spot Market (WESM) but is more sophisticated and less-prone to price manipulation. Power is traded in the wholesale market between generators and users (industry) or distribution companies. The consumer market comprises power distributors who sell electricity to consumers. There is no dominant player in the Nord Pool that can influence the price setting nor subsidies for electricity consumers that distort electricity pricing as in the case of WESM. There is equal level playing field for big and small consumers of power.

 The same principle of buying electricity among power plant operators (hydro, geothermal, etc.) in Luzon, Visayas and Mindanao where it is produced cheapest is the ideal situation supposed to be presented to Filipino power consumers at the WESM.

 The Nordic countries created a framework for a common electric power market based on open competition. Thus, Nordic countries are regarded as deregulation leaders in the electric power sector. The price-setting is transparent where the price is determined and fixed by the basic economic principle of demand and supply.

 All available information about offers/bids, volumes and prices is openly published from trading on Nord Pool. But the names of members making offers/bids remain confidential because, as most other commodity markets, players operate under full anonymity in order to keep their positions confidential. However, there is a market surveillance department at the Nord Pool that keeps a close tab on players involved in any deal. Once transactions become suspicious, investigations are immediately initiated and pursued to impose sanctions as warranted.

This was exactly the idea in the establishment of WESM as mandated in our Electric Power Industry Reform Act (EPIRA) when Congress passed this into law in 2001. The WESM is still a young market compared to Nord Pool. So WESM stands a lot of improvements to implement the spirit and intent of the EPIRA that created this market place to help lower the price of electricity in the Philippines.

 The sooner that the government privatizes fully the power industry, as mandated by EPIRA, the better it would make WESM perform its functions to bring down electricity pricing according to the market forces of demand and supply. “A functioning market presupposes and depends on trust. This trust must be held by all participants affected by the business.” This is Nord Pool’s corporate governance principle that has guided its market place, something that WESM could adopt to empower itself to remove the inefficiencies in our own power market system.