Tuomas_Harju-60x60 Posted by Tuomas Harju, 31.3.2016

Cross-border power transmission has significant monetary value for the Nordic region – especially for Finland. Nevertheless, national energy policies – like electricity self-sufficiency – have dominated the discussion over the regional benefits, which we have actually witnessed. From an economical point of view, it makes no sense to strive towards national policies when power generation is as diversified and efficient as it is in the Nordic region. To demonstrate this and to see what the actual welfare benefit of the Nordic power market and other imports has been, we modelled Finland as if there were no inter-connections to neighbouring countries.

The goal was to build a very simplified model that assumes perfect information about the market and in which hydro and wind generation are taken as given. However, the information was limited so that investment decisions were made with knowledge of only a few upcoming years of fuel and CO2 price development. Also investments were made in the model only if sufficient returns could be made. In practice, this means that the price was determined so that plants are profitable and no oversupply exists in the market. The year 2000 was chosen as the starting year in the model, after which we allowed the model to build new capacity when it was needed. The capacity additions were driven by commodity prices and the relative marginal cost of different technologies.

Image1_electricity_mix

Figure 1: Modelled electricity mix with realised 2015 figures

Quite interestingly, the results reflect the development of past trends in the energy sector. During the first years, gas price was very competitive compared to coal and, therefore, the model initially builds a relatively large number of gas plants to satisfy the demand. However, the competitiveness of gas has since crashed, even in terms of marginal cost, and thus, basically, all gas investments are replaced with coal plants, with the gas going unused. This is highly reflective of the current market fundaments in which fuel costs clearly favour coal generation over gas. In the Nordic power market, the price is largely set by hydropower. In the disconnected Finland model, however, the price is mainly set by coal condense plants (gas condense at the beginning of the period), since the cheap Norwegian and Swedish hydro is not available.

With above mentioned assumptions, the model resulted in higher price in Finland of some 16 €/MWh on average over the 2000-2015 horizon. In terms of system inefficiency, this totals, cumulatively, a difference of over 20 billion € between the national and Nordic power market. If nuclear had been built, the price difference would have decreased, but only by some 2 to 4 €/MWh, as the fossil condense sets the price. It should be noted, however, that the Nordic system price has been under pressure due to the oversupply of past years, which has a natural increasing effect on the price difference. Nevertheless, the benefits of Nordic integration are clear.

Image2_cost_difference

Figure 2: Cost difference between national and regional Nordic power market

Admittedly, national self-sufficiency in generation capacity would in some sense increase the security of supply in Finland, but the question is: at what price?  The higher power price and increasing dependence on imported fossil fuels would be significant disadvantages. Despite the prevailing populism in public discussion, we should determine whether we actually favour nationalism over the Nordic region and European market – rigid and costly over agile and efficient.

Tuomas Harju
Market Analyst, Fortum

 

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