Abstract
This paper gives an overview of the current practice for congestion management, transmission pricing, and area price hedging in the Nordic region. Transmission congestion in the Nordic region is managed by using the area price model and counter trade. Whenever there is congestion, two or more area prices are introduced within Norway, two in Denmark, and one each in Sweden and Finland. Transmission congestion risks can be significant for the Nordic market players. Therefore Nord Pool, the Nordic power exchange, introduced contracts for differences (CFDs) that are forward price differential products, on November 17, 2000. The payoff of these products depends on the respective area prices and the system price (the unconstrained price) in the settlement period. In this paper, we describe how contracts for differences work, and how they can be used for hedging and speculation.
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