The Journal of Energy Markets (73–92) Volume 3/Number 1, Spring 2010 Modeling Nord Pool’s NO1 area price Anders Løland Norwegian Computing Center, PO Box 114 Blindern, NO-0314 Oslo, Norway; email: anders.loland@nr.no Xeni K. Dimakos Norwegian Computing Center, PO Box 114 Blindern, NO-0314 Oslo, Norway; email: xeni.dimakos@vox.no The Nordic electricity spot power market (Nord Pool) is divided into several price areas. The NO1 area (southern Norway) is of particular interest. It is dominated by hydropower and has experienced large deviations from the system price. Using historical data (prices, reservoir levels and transmission congestion data), we statistically investigate the historical contributors to this price spread. The water reservoir level, followed by the Elspot capacity and Elspot net capacity utilization, are found to be the most important explanatory variables. As expected, lower capacity and more flow coincide with higher price spreads. 1 INTRODUCTION The Nordic electricity spot power market (Nord Pool) is divided into several price areas (Benth et al (2008); Kristiansen (2004a); Uhlen et al (2004); Weron (2006)). The system price is common to all Nordic countries, while the price areas result from capacity constraints. In theory, if an overall market balance can be achieved without the need to use all available capacity between neighboring areas, the prices are equal in all areas. The price in southern Norway, also known as the NO1 (Oslo) area, was quite close to the system price until 2007. During 2007, the NO1 price fell below 20% of the system price. Understanding and managing the risk of such substantial price variations is of crucial importance to consumers, producers and market players in the NO1 area and neighboring areas, as well as transmission system operators, which, in this case, is Statnett. Statnett defines the price areas in Norway. Nord Pool area prices have not been looked at extensively in the literature. Kris- tiansen (2004b) investigates the hedging of the difference between the system and The data was supplied by Norsk Hydro and Statnett. This work was carried out from the (sfi) 2 Statis- tics for Innovation Centre. We thank Guy-Roger Abessolo Ondo and Rønnaug Sægrov Mysterud for useful discussions and Ola Haug for helpful suggestions. 73 © 2010 Incisive Media. Copying or distributing in print or electronic forms without written permission of Incisive Media is prohibited.