Many regions need to meet growing demand for electricity while both increasing the share of generation from renewable sources and maintaining security of supply. The Nordics’ experience of promoting regional integration to support these aims offers some potential lessons. This article looks to highlight them.
We’ll delve into the development of a common market in the Nordics (Norway, Sweden, Finland and Denmark) and explore the opportunities and challenges this model presents for other regions facing similar obstacles today.
Regional power trading on Nord Pool
The evolution of the Nordic electricity market began in the 1990s when Norway liberalised its electricity market, creating the foundation for cross-border electricity trading. Norway’s success led to the gradual inclusion of other Nordic countries—Sweden, Finland, and Denmark—which saw the potential benefits of an integrated electricity market.
In 1996, these countries formally established Nord Pool, Europe’s first multinational power exchange. This market integration allowed for the seamless trade of electricity across borders and marked the start of a region-wide cooperation that aimed to enhance energy security, optimise the use of renewable energy and create competitive electricity pricing. The market subsequently grew to also encompass the Baltics.
Nord Pool operates on a transparent and efficient model that revolves around both day-ahead and intraday markets. Here’s how the system works:
- Day-Ahead Market: In the day-ahead market, electricity producers and buyers submit bids for electricity delivery for the following day. The price is set by matching supply with demand, ensuring cost-effective generation and production planning. The design also supports efficient international trade in power, with low-cost markets supplying power, where possible, to consumers in other countries.
- Intraday Market: The intraday market allows participants to adjust the day-ahead solution to account for new information on supply or demand, ensuring a balance between electricity generation and consumption throughout the day. This helps to address the challenge posed by harder-to-predict sources of renewable generation like wind and solar energy.
This setup allows countries to balance electricity supply and demand more efficiently across borders, improving energy security and optimising resource use. Market integration has provided a stable framework for the expansion of cross-border transmission infrastructure between the countries, and supported the EU’s policy target for all Member States to have cross-border transmission capacity equal to at least 15% of generation. Ultimately, these investments in transmission infrastructure underpin integration, enabling more power to be traded across country borders.
Wider benefits of regional integration
To better reflect regional variations and better optimise the use of regional hydropower reservoirs, the Nordic market introduced sub-national bidding zones. These zones enabled the market framework to differentiate between areas where water reserves were tight or abundant, but more generally allow it to handle localised gluts or shortfalls in generation effectively. The borders between these bidding zones also help to highlight key bottlenecks in the transmission network. Differences in prices between zones support the optimal use of hydropower reservoirs and provide signals to promote generation and encourage efficiency where power is scarce. They also make clear where transmission investment is needed to relieve persistent over- or undersupply.
Regional integration has also helped facilitate the integration of a range of generation technologies, including intermittent renewable sources of generation, by helping to balance out localised gluts or generation shortfalls. As wind output varies in Sweden, hydropower generation in Norway can be ramped up or down as needed. Similarly, the efficiency of baseload nuclear capacity in Sweden and Finland can be maximised by making use of more flexible generation in other regions. The combination of intermittent RES, flexible hydropower and baseload nuclear power generation contribute to a diversified and therefore resilient system. In times of excess supply, electricity can also be exported to other regions. During shortages, e.g. very dry years or low-wind periods, it can be imported. This reduces the need for each country to maintain costly backup capacity, thereby lowering overall electricity system costs and minimising disruptions to consumers. The result is a more efficient and resilient electricity system that benefits all of the participating countries.
The greater scale of the market also promotes greater liquidity and competition in the day-ahead and intraday markets, helping to keep power prices down.
Key success factors for the integration of the Nordic power market
The success of cross-border power trading in Scandinavia can largely be attributed to the high degree of regional cooperation. The almost 30-year-long integration of power markets has led to aligned energy policies and common standards developed across several organisations. Regional cooperation is supported by NordREG—the coordination body of Nordic regulators—common grid planning exercises by TSOs and the harmonising of institutional frameworks between governments. At the end of the day, this benefits all participants in the power market.
The common power market has also expanded to cover real-time balancing markets, via the Nordic Balancing Model, and reserve markets have become increasingly standardised and integrated both in the Nordics and across the EU. These developments are likely to further support the integration of a growing share of intermittent renewable energy sources alongside the rapid growth in electricity demand. The region will need to continue investing in grid modernisation, energy storage solutions and European integration to ensure its continued success. Enhanced digitalisation will also be needed to preserve the efficiency and reliability that the Nordic market is known for.
Lessons to be learned for other regions looking to replicate Nordic successes
Things are rarely as simple as copying and pasting solutions from one context to another. However, the Nordic experience does suggest some common issues that any region pursuing a similar approach will need to tackle:
- Building the necessary interconnections and upgrading grid infrastructure requires significant time and investment. However, if it can be done, the greater connection of markets can deliver clear benefits, e.g. improved resilience, a more efficient power system and a more efficient means to reach decarbonisation objectives.
- Successful cross-border power trading requires strong political will and cooperation. This entails a commitment to long-term regional energy cooperation, e.g. thinking about common regional grid planning and the ability to occasionally set aside short-term national interests to realise lasting mutual benefits.
- Regional trading benefits from transparent and trusted marketplaces. In the Nordics, all market actors have access to the same information about prices, supply and demand. This openness fosters trust in the system and encourages more participants to engage in cross-border trading, which increases market liquidity.
Looking at what has worked in the Nordics may provide a useful template for other regions that want to use the greater integration of power markets as a means to meet the challenges of the energy transition.
