Electricity and emission allowance markets from Finnish viewpoint: Study

During 1995-2005 the Nordic energy system has experienced two major changes, the opening of the electricity market for competition and emissions trading within the EU. The European Union's emissions trading scheme (EU ETS) that began operating at the beginning of 2005 has weakened the competitiveness of Finnish electricity production and raised electricity prices. Most electricity producers have accumulated large profits thanks to higher prices. The payers have been nearly all electricity users. This report studies the effects of emissions trading on the electricity market and the functionality of the power market. Very little investment has been made in power production capacity in the Nordic countries over the past ten years. Considerable increases have mainly been made in Danish wind power capacity. Simultaneously, the total consumption of electricity and maximum system load have increased more than installed capacity has grown. In the next few years the power and energy balances may be threatened. In previous years, Finland has often been separated as its own market price area on the Nordic power exchange. The formation of price areas has been affected by the limited capacity in transmission interconnectors, network reparation work and the operating method of the Swedish national system operator, Svenska Kraftnät (transferring domestic bottlenecks to the borders). This study reviews the scale of price differences and the effect on market activities. On the common Nordic electricity market, Finnish coal and peat condensing power capacity is mainly used during poor precipitation years. These plants were once built for base load production. Carbon dioxide emissions trading has further weakened the competitiveness of these plants. The biggest problem for the Nordic power exchange, Nord Pool, is regarded to be that market concentration in electricity production is high. Market concentration decreases the investment willingness of existing players as new power production capacity would lower electricity prices. There are also high barriers for market entry. Due to emissions trading and the good precipitation situation in the Nordic countries, a record level of electricity was imported to Finland in 2005, approximately one-fifth of electricity consumption. Approximately two-thirds of the imports came from Russia. This study makes several improvement suggestions that would affect market activities. These include clearer financing principles for building new transmission lines, increased Nordic cooperation in power exchange surveillance and restraining the growth in electricity imports. The study also suggests that players who gain windfall profits should be obliged to maintain otherwise possibly unproductive condensing power plants in reserve.