Power market

Restructuring of the power system is essential for the transition to the low-emission society. In-depth understanding of the interaction between technology, physics, actors’ strategies and business models, market mechanisms, regulations, and framework conditions is crucial for successful transformation of the energy system.

THEMA is a leading consultancy with expertise in all parts of the Nordic and European power market. Our projects range from environmental analysis and strategy consulting, through valuation and business development, market design and instrument design, to market analysis and organisational improvement.

Our client base is equally diverse and includes municipalities and grid companies, via trade organisations, power and industrial companies, regulators, and ministries, to international energy companies and the European Commission.

Policy and Regulations 

Decision-makers in the power and energy markets need to understand the purpose of policies and framework conditions, and the authorities need to understand how policies and framework conditions affect the power market.

THEMA is founded on expertise in all aspects of the power market. The energy transition involves increased integration and interaction with other energy markets and sectors such as the transport sector, industry, and the petroleum sector. We assist market actors and authorities in navigating the energy system transition based on an in-depth understanding of the challenges faced by different actors, how markets operate, and what the relevant framework conditions are.

The power market is affected by climate and energy policies

The power markets are undergoing rapid changes driven by climate policy, increased trade and new technology. Climate policy forms the basis for many of the changes we see in the power market, both through a functioning quota market for CO2, extensive investments in renewable energy, the phasing out of fossil power generation and a focus on energy efficiency and electrification. At the same time, the European power market is becoming more closely interconnected through cross-border interconnections and market coupling.

EU’s energy and climate policy impact markets and policy instruments 

The energy sector in Europe is in the midst of a demanding transition process, with EU’s climate and energy policy objectives and instruments evolving and changing at an increasingly rapid pace to account for both new challenges and new opportunities related to technology, markets, and climate change. The formulation and implementation of detailed regulations through network codes and market directives, as well as overarching, comprehensive strategies for increased utilisation of offshore wind and increased production and use of hydrogen, affect the power market, stakeholders, and authorities. 

New technology presents new opportunities and challenges for stakeholders, markets and authorities

Technological development, of both various renewable production technologies and energy storage, is progressing rapidly and changing the characteristics of the energy system. Technological development is also contributing to increasing digitalisation throughout the energy system. The digitisation of the power system extends all the way into people’s homes, increasingly enabling consumers to respond to price signals.

Market Design and Design of Policy Instruments and Regulation

Market players and grid companies making investment and operational decisions, and authorities designing policies and instruments, need to understand how markets work and what affects price formation.

The issues related to the design of market structures, instruments, and grid tariffs are crucial for market prices and costs in the power system. How we design regulations and markets is vital for achieving a socioeconomically efficient energy transition.

Market design must be adapted to the characteristics of the commodity

Electricity is a unique commodity, and markets should be aligned with the physics of the power system. We have extensive knowledge of power trading on exchanges and bilaterally between actors, encompassing both physical and financial markets as well as the end-user market. Additionally, we understand how these various markets are interconnected.

When the characteristics and challenges of the power system change, for example due to the expansion of wind and solar power or new technologies and solutions, market design should be adjusted accordingly. We work on projects that both propose changes to market design and investigate the consequences of proposed changes for both national authorities and the EU.

The market coordinates decisions by producers, consumers and grid companies

Price signals from the market coordinate the decisions of both producers and consumers, and are crucial for the efficient utilisation of existing power production and demand-side flexibility, for investments in new production capacity with the right characteristics and in the right place, for utilisation of grid capacity and investments in the grid, for consumers’ choice of energy solutions, energy efficiency and electrification, and for the establishment of new, green power-intensive industry.

The division of roles between the system operators, who are responsible for operating the grid, and the market, and how the system operators’ instruments should be designed, is also one of our areas of expertise. To always maintain balance in the power system, system operators must ensure balance between production and consumption. Markets contribute partly by providing plans that make it easier to plan system operations, and partly by providing opportunities to activate resources on short notice.

Grid regulation must provide incentives for efficient grid development and operation

The grid companies are natural monopolies subject to regulation necessary to provide the right incentives for efficient operation and development of the grid. How grid costs are distributed through the design of grid tariffs also impacts the effective implementation of the energy transition.

We work extensively on this and other issues related to the operation and development of distribution and transmission grids.

Market Development and Scenarios  

Thorough market analyses are necessary to understand how the energy transition, changes in framework conditions, in the energy markets and in the energy system, affect power prices, the profitability of investments and CO2 emissions.

The energy transition implies that electricity becomes an even more crucial energy carrier in the energy system. Electrification is often the most effective way to reduce emissions in many sectors, and new green industries are often highly electricity intensive. At the same time, the power mix is changing through the phase-out of coal and gas-based production in favour of renewable energy sources such as wind, solar, and hydrogen.

Changes in one part of the power system affect the entire market area

The European power system is closely integrated, and changes in one part of the system influence the development across the entire market area. To understand the implications of these changes, in-depth market expertise and knowledge are required, along with models that capture the complexity and interaction between various factors.

Complexity and uncertainty in the energy markets are increasing

For both producers, investors, and electricity consumers, it is crucial to understand both the uncertainty in the power market and what changes in policy, regulation, or other market conditions mean for electricity prices. Scenario analyses are well-suited to draw a picture of future market developments under various assumptions, and the effects can be quantified using power market models.

Insights from both scenario analyses and modelling provide the basis for authorities to make better decisions regarding regulations and market design, and for market players to make better strategic and operational decisions.

Investments in New Power Generation

Assessments of the profitability of investments in new power generation, both onshore and offshore, require knowledge and understanding of market conditions, price developments, and political framework conditions.

The development of new renewable production capacity in the Nordic region and elsewhere in Northern Europe is crucial to achieve the long-term climate goals. At the same time, increased production based on renewable and weather-dependent energy sources necessitates a more flexible power system.

Framework conditions for wind power vary between countries

One challenge for the development of wind power is that the framework conditions vary greatly from country to country. This becomes even more important when wind power is to be developed on commercial terms. Particularly important are the conditions for connection and use of the grid. For offshore wind power, specific issues arise in relation to market design and grid regulation, particularly for hybrid projects with connections to several countries.

Tax systems for wind power producers also differ and are constantly changing. We have in-depth knowledge of the framework conditions for wind power in countries around the North Sea and the Baltic Sea from projects for Nordic governments, the European Commission, project developers, landowners, and investors.

Depending on where you invest in wind power, you may also be eligible for various support schemes. We maintain an overview of support schemes for wind power production in Europe and also offer price forecasts for guarantees of origin.

For offshore wind, market design and the allocation of grid costs are also important value drivers.

Significant potential for both small- and large-scale solar power

In the EU, solar power is considered one of the most important technologies for the energy transition, and it has significantly altered the market in Germany where subsidies for solar power have been favourable. We see a significant potential for solar power, especially in Southern Europe, but also in the Nordic countries and Norway. Solar power is deployed both by households behind the meter, by installing solar panels on rooftops, and in larger industrial facilities.

The drivers and competitive situations are different for the two types of solar power. For households considering investing in solar power, the alternative is to buy electricity from the grid. Therefore, the opportunity cost is the end-user price of electricity, including grid fees, taxes, and levies. At the same time, there are various support schemes that households can benefit from. For industrial solar parks, both the cost development of solar panels, the regulatory regime, and the earnings potential are significant factors.

Price structure and cannibalisation affect the profitability of wind and solar power

Power production from wind and solar power is intermittent – they must produce when the wind blows and the sun shines. This leads to a phenomenon known as cannibalization: high wind and solar generation result in surplus electricity and lower market prices.

Cannibalization occurs because wind and solar power operators within an area depend on the same weather patterns and must produce simultaneously. As a result, wind power producers receive lower revenue than the average market price.

The value of flexible hydropower is increasing 

Investments in new power generation largely consist of intermittent power in the form of onshore and offshore wind power and solar power. These facilities must produce when the wind blows and the sun shines. This results in both volatile power production and production that does not follow consumption variations.

This provide opportunities for increased revenue from other technologies that are able to produce flexibly. The flexibility of hydropower with storage reservoirs is significant and can be increased through investments in capacity and pumping. The value of flexibility is influenced by both the number of investments made and the markets in which one may participate.

All THEMA’s power price forecasts are delivered with hourly prices and realised power prices for hydro, wind and solar power. Our power price forecasts are considered bankable by organisations such as Swedbank. We also offer comprehensive investment analyses, project financing models and customised valuations of power plants, as well as analyses of power sales agreements. This also applies to analyses of revenue and cost distribution (power sales and congestion revenues) in hybrid offshore wind projects.