"FTR or the Financial Transmission Right will allow market participants to manage price risk between the two areas," the TSO's press representative Elo Ellermaa told ERR.

Elering's electricity market handbook (link in Estonian) reveals that the FTR is a financial instrument that can be used to fix the regional price difference.

In order to offer fixed-price packages, sellers first want to fix the price at which they buy electricity from the market. While the market price cannot be locked down, it is possible to use fixed futures on separate commodity markets (such as Nasdaq Commodities).

However, Estonia lacks a liquid electricity futures market. The closest futures marketplace is in Finland, whereas electricity futures contracts can only be based on the price of electricity in Finland, which is good enough for Estonian electricity sellers only as long as the price is the same in both regions. The prices have been different on an increasing number of hours in recent years, which has caused electricity sellers' risks to spike. This is where FTRs step in as they allow the price difference risk to be fixed. The instrument allows traders to fix the price of electricity they buy and offer the consumer fixed-price packages in turn.

Ellermaa said that such a risk management instrument has been in use between Estonia and Latvia since 2014.

"As regional price differences have grown, Elering and [Finnish counterpart] Fingrid have developed an FTR between Estonia and Finland," Ellermaa said. "While the FTR will not equalize the price of electricity, it allows market participants to manage their risk. An electricity wholesale market participant who has bought an FTR at auction will be compensated for the price difference by Elering," she remarked.

"It is important to point out that because FTRs are sold at auction and bids are based on how big the participants believe the price difference could be, a functional market means that the price of FTRs will be similar to the actual price difference. In other words, neither traders nor Elering will gain or lose anything in the long run. It allows sellers to make sure the price difference will not prove more costly than the FTR price. If we add the effect of Nasdaq Commodities futures, Estonian electricity sellers will be able to offer fixed-price packages without taking on too much risk," Ellermaa said.

The 2023 and January 2023 FTRs will come up for auction in December. The full auction schedule is set to be published on November 7.

Marilin Tilkson, deputy head of the Competition Authority's energy markets department, said that market participants will learn of the auctions, the volumes on offer and other details at the same time. She added that the auctions will be held this year.

Elering will use the so-called overload fee that TSOs are paid for price differences between regions to fund the instrument.

--

Follow ERR News on Facebook and Twitter and never miss an update!