Market Participants will be Able to Hedge Risks between Price Areas Starting from 2014

According to the agreement between Estonian and Latvian TSOs Elering and Augstprieguma tīkls (AST), the explicit allocation mechanism will be used for part of transmission capacity on the Estonian and Latvian border starting next year and allowing market participants to further hedge the price risks between price areas.

The agreement has been reached between the TSOs and needs the approval of regulators to come into effect.

At the auction, Elering and AST will provide 50-150 MW of transmission capacity for each hour of the following month. The sale condition is that the bought capacity will need to be sold back to the TSOs who in turn will pay the market participants a fee for the repurchased transmission capacity, equivalent to the price difference between the NPS Estonian and Latvian price area in the corresponding period. Therefore, when using the capacity allocation mechanism, the price risk of a market participant active in two price areas will never be bigger than the price of the acquired transmission capacity.

The TSOs will give the transmission capacity repurchased from market participants to NPS to be allocated in the day-ahead market. Therefore the implemented distribution mechanism will not diminish the total transmission capacity volume given to the market by NPS.

The solution offered by Elering and AST is based on the EU regulation according to which market participants need to have a possibility to hedge price risks in case of structural congestion between two price areas. “With the final handover of the second Estonian-Finnish interconnection EstLink 2 to the market’s disposal in 2014, a structural congestion is expected to emerge on the Estonian-Latvian border. The implemented capacity allocation mechanism will enable the market participants to further hedge price risks between different areas. At the same time, it is a temporary solution until more effective risk hedging financial instruments will hopefully be introduced in Latvia and Lithuania,” Taavi Veskimägi CEO of Elering, noted.

Discussions with Nasdaq OMX for the latter to introduce a financial instrument allowing a price hedge in the market starting in the summer of next year, are ongoing. This, however, implies the prior implementation of the financial instrument Electricity Price Area Differential (EPAD) in Latvia and Lithuania, similar to the situation in Estonia.

In addition, trilateral discussions between the Baltic TSOs are continuing regarding the agreement on common trading rules for electricity from third countries.

The first transmission capacity auction will take place on December 13th when January’s transmission capacity as well the capacity sold for 2014, 50 MW for each hour, will be put up for sale.