Since 1991, Nordic countries started electricity market operations, with Nord Pool as the power

exchange. The market design has been proved to be successful after its practical operation for
around 30 years.
Based on your understanding, explain why the existing electricity market design is suitable for
the market operation of Nordic power systems.

Introduction
From 1991 to 2000, the electricity markets in Denmark, Finland, Norway, and Sweden decided to
deregulate their market for power trading. During this tenure, the markets were opened up for
competition in generation and retailing. Gradually, by the year 2000, these four national markets
completed their integration as a single Nordic electricity market.

Background
From 1971 to 1993, the Norwegian power generation was coordinated through a market known as
"Samkjringen." Every week, "Samkjringen" determines the daily or part-day power price. This price was
used to determine how much power was produced in Norway and how much was exchanged with other
nations. In 1990, the Norwegian Parliament passed a new Energy Law, which took effect in 1991. In
Norway, this law established market-based principles for energy production and consumption. Norway
was the second country to de-regulate the electricity market after England and Wales in 1989. In 1993,
"Samkjringen" and "Statnett SF" amalgamated to form Statnett Marked AS, a new company. From 1993
until 1996, "Statnett Marked AS" managed the new Norwegian power market. The Swedish grid firm
"Svenske Kraftnat" was founded in 1996. The Swedish grid company "Svenske Kraftnat" purchased 50%
of "Statnett Marked AS" in 1996 and joined the power exchange area. "Statnett Marked AS" was
renamed to Nord Pool ASA at the same time. Finland, western Denmark, and eastern Denmark joined
the power exchange region in 1998, 1999, and 2000, respectively. The Nordic electricity market is
voluntary, and a large portion of the physical power and financial agreements are exchanged bilaterally.

Motivation for introducing Nordic Power Market

The formation of the Nordic electricity market was inspired by various electricity market reforms in the
European continent and the belief that competition would benefit the customers. It aimed to achieve the
below targets:

 Make use of a variety of production and consumption resources

 Build on long-term cooperation in the electrical market, which reduces risk
 Improved market efficiency
 Increased liquidity and improved price formation
 A larger market will attract more investors
 Increased competition
 Improved cost-effectiveness
 Access to a larger manufacturing base
 A politically stable system provides more long-term predictability for investors

Need for Nordic Power Market

Fig.1 shows the electricity consumption pattern of Nordic countries from 1990 to 2020. The pattern
shows that the energy consumption in Denmark remains steady without a high increase or decrease. For
Finland, the energy consumption has increased over years and decreased after the 2010s which is now
steady. For Norway, consumption is being increased since 1990 and is still increasing gradually. On the
other hand, in Sweden energy consumption has decreased gradually since 2010. It is evident that during
the introduction of the Nordic electricity market, there were no surges in demand with normal market
behavior.
 160

140

120

100
Denmark
TWh

80 Finland
Norway
60 Sweden

40

20

0
1990 1995 2000 2005 2010 2015 2020
Fig. 1 Electricity consumption in Nordic Countries

Fig. 2 shows the import-export pattern of Nordic countries. It is evident from the figure that the trade
has increased substantially after the setting up of Nordic electricity markets.

60

40
Sum of Exports - Sweden

20 Sum of Exports - Norway

Sum of Exports - Finland

0 Sum of Exports - Denmark

1990 1995 2000 2005 2010 2015 2020 Sum of Imports - Sweden
-20 Sum of Imports - Norway

Sum of Imports - Finland

-40 Sum of Imports - Denmark

-60

-80

Fig. 2 Import and Export of Nordic Countries

Fig. 3 shows the electricity generation by source in Nordic countries for the year 2020. It also includes
the percentage share of renewable energy sources (RES) in the electricity mix. The high dependence on
RES proves the need for a common market which results in the ease of trade for the participating
countries to maintain a reliable electricity supply.
 160

140 69 % RES
99 % RES
120

100
TWh

80 52 % RES
60

40 89 % RES

20

0
Denmark Finland Norway Sweden
Coal Oil Natural gas Biofuels Waste Hydro Solar PV Wind Nuclear Other sources
Fig. 3 Electricity generation by source in Nordic Countries (2020)

Handling Market Shock

In general, it can be said that the Nordic electricity market has been a success and was handled relatively
well over the past years. The market was able to withstand and overcome market surges as opposed to
other markets (e.g., the California power market).

As the Nordic electricity supply highly depends on hydropower, hydropower has a considerable impact
on the Nordic market. This was proved by the Nordic supply shock during 2002-2003. At the beginning
of the year 2002, the hydro reservoirs were quite full, and the supply was in abundance in Norway,
Finland, and Sweden. Expected continued water inflow and to make space for the incoming water, the
authorities increased power production and exported hydropower to other countries. Unexpectedly the
water inflow reduced drastically during autumn, with winter nearing its peak the supply remained high.

This very rare event shook the Nordic market. As a result of the hydrological conditions, spot prices
began to rise in the fall of 2002 and accelerated from the end of November. Spot prices then held at
levels 2 to 3 times normal until early February 2003. At the peak, the average daily price reached NOK
831 per MWh (USD 130), compared with the average spot price of NOK 200 per MWh (USD 31) in 2002.
The decline in hydroelectric power generation was largely offset by increasing thermal power
generation. Nordic oil-, gas-, and coal-fired power generation in the second half of 2002 was about 9
TWh higher than the generation in the same period last year. Nuclear power generation was about the
same as in the previous winter. Net electricity imports to the Nordic countries also increased steadily
from the summer of 2002. In the first half of 2003, net imports were about 9.5 TWh higher than in the
first half of the previous year. Russia in particular was an important source of imports when the
hydropower was insufficient to meet demand.

In Denmark, Finland, and Sweden, however, price increases for end consumers were much smaller. This
was because these countries used annual fixed-price contracts to a much greater extent (especially in
Denmark and Finland). Rising retail prices and massive media exposure led to a significant reduction in
electricity consumption in the winter months, particularly in Norway (nearly 7% reduction in the
residential sector, 5% for energy-intensive industry and electric boilers when compared with the
previous year). From spring onwards, there was finally a gradual normalization of prices and volumes.

In summary, electricity consumption in Scandinavia increased slightly by 0.7% from July 2002 to June
 2003 compared with the previous 12-month period. Consumption growth was highest in Finland, while
Denmark and Sweden showed a slight increase and Norway a decrease. Although there were heated
discussions in the critical months of January and February 2003, especially among Norwegian politicians,
about whether to intervene, nothing of the sort happened. In general, then, the Nordic electricity market
seemed to function as intended, without any intervention by the authorities, neither the government
nor the competition authorities.

Factors leading to the Successful operation of the Nordic market

Below are the requirements for the successful operation of the Nordic market.
1. Market structure
2. Assignment of market power
3. Political support
4. Role of the power industry

1. Market structure
o The Nordic power market includes a large share of hydropower. Hydropower plants hold varied
advantages when compared to other power plants including fossil-fired plants. This includes low
operating costs, low startup costs, and low start-up time. This makes it a viable option for
Nordpool trading.
o The market is designed efficiently by avoiding price controls and other regulations that could
raise transaction costs or financial risks for generators, industrial users, and merchants.
o The founding of Nord Pool operates as a common power exchange (a spot market) as well as
electrical forward markets. As a result, rather than adding to the number of rivals in a market,
generators can participate in both the spot and forward markets. Increased competition leads to
increased output and lower market prices.
o Transparent operation and strict market rules also aided in the success of the operation

2. Assignment of market power

o The power in the Nordic electricity market was diluted. It was distributed to the players in the
market. Thus, the Nordic electricity market is close to a single market in which the combined
market share of the four major producers is less than 50 percent.

3. Political support
o The political support for the restricting was evident during the market shock that occurred from
2002-to 2003. Despite reduced employment in the power industry due to increased competition
or supply and demand shocks leading to high electricity prices, the politicians didn’t blame the
market structure. On the other hand, they stated that electricity prices were high because
hydropower was unusually scarce and that no regulation could have changed the situation for
the better.

5. Role of the power industry

o The power industries supported the market structure instead of being faced with relatively high
competition and stress during market operations.

Possible threats to Nordic market operations

Belo ware the major threats that the market can face
1. Foreign attacks
2. Accumulation of market power
3. Allocating transmission capacities
 4. Dependence on hydropower

1. Foreign attacks
o The inclusion of many actors or players can make the system susceptible to foreign agents that
can intrude into the system. This may result in cyber-attacks or another malfunctioning of the
market operation. To prevents this, the market system has to be secured (e.g., cyber security,
etc.,)

2. Accumulation of market power

o Care should be taken against the accumulation of market power by the major players in the
system. The power residing in particular companies should be prohibited.

3. Allocating transmission capacities

o The Nordic market has worked well due to the possibility of trade between the participants. The
infrastructure is a vital part of this system. Investment in transmission lines is costly. The system
management should take care of the proper allocation of transmission lines among the
participating members.

4. Dependence on hydropower
o The Nordic market is heavily dependent on hydropower. It may emerge as a threat to the system
in the future, particularly in the view of changing climate /climate change scenarios.

Conclusion
Even after 30 years of operation, the Nordic power market is working as expected and can overcome the
market shocks until now. The report explains why the existing electricity market design is suitable for the
market operation of Nordic power systems.

References
[1] Amundsen, Eirik S., and Lars Bergman. “Why Has the Nordic Electricity Market Worked so Well?”
Utilities Policy 14, no. 3 (September 1, 2006): 148–57. https://doi.org/10.1016/j.jup.2006.01.001.
[2] Bye, Professor Torstein. “Functioning of the Nordic Power Market An Overview and Evaluation of
Studies and Reports,” n.d., 40.
[3] Jin Zhong, “Power System Economic and Market Operations”