A study of the liquidity in the Nordic EPAD market: What are the reasons for the EPAD contracts current state of liquidity and what is needed to stimulate the market for an increase in the liquidity? & Why is a liquid hedging market on exchange important for the Nordic net-zero transitioning process?

Abstract

The complexity of the power market creates intricate liquidity challenges when offering needed solutions to market participants. The Electricity Price Area Differential (EPAD) product is such a solution. It allows you to hedge against area price risks related to constraints in the transmission grid. The power market is highly regulated, politically affected, expensive to restructure, as well being affected by a wide arrange of fundamental drivers. This makes it challenging to resolve liquidity issues for the EPAD products. The purpose of the study is to investigate these liquidity challenges, understand why it happens, how the liquidity can be increased, and connect the importance of a well-functioning liquid power market to the net zero transition process. The thesis includes various measures of investigation in the dependencies and the behaviour of the area-system spread, ex-post risk premium, the open interest, descriptive analysis, as well as qualitative analysis such as interviews. The main results and conclusion reflect the current state of liquidity, suggestions for improvements, and the limitations of the study.