Abstract
The world’s first multinational electricity market was formed with the creation of the Nordic power exchange, Nord Pool. We analyze the incentives to undertake transmission network investment in the context of the liberalized Nordic electricity market. Welfare-improving investment in a multinational electricity market requires accounting for the cross-border effects of capacity expansion. We propose methods to increase voluntary cooperation on international infrastructure projects, with an aim to increase aggregate efficiency and achieve equitable distribution of the gains from market integration.
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Notes
- 1.
- 2.
Restructuring of the Norwegian electricity market did not involve privatization, unlike in the UK. See, for instance, Armstrong et al. (1994) for an overview of regulatory reform in the UK.
- 3.
This historical account of Swedish liberalization is taken from Högselius and Kaijser (2007).
- 4.
See Pienau and Hämäläinen (2000) for an account of Finnish electricity market deregulation.
- 5.
Trading data are from the Nord Pool Annual Report 2017, which can be accessed at www.nordpoolgroup.com. Production data are from www.nordpoolgroup.com/Market-data1/#/nordic/table.
- 6.
The transmission grid of the fifth Nordic country, Iceland, is physically disconnected from all other countries’ transmission networks. Iceland operates its own market.
- 7.
Virtual (convergence) bidding (Jha and Wolak 2015) therefore is currently not allowed on Nord Pool.
- 8.
Nord Pool’s clearing procedure implies that the supply and demand functions generally have well-defined and nonzero point elasticities, unlike in electricity markets that feature supply and demand step functions.
- 9.
Notice the difference in capacity utilization between solar/wind and nuclear power.
- 10.
Data from 2009 and onward are currently unavailable from ENTSO-E.
- 11.
In the terminology of Nordel (2008), a “market failure” characterizes a situation in which the day-ahead wholesale market fails to clear. A “system failure” occurs when there is insufficient physical capacity to cover demand at the delivery hour without curtailment of consumption.
- 12.
- 13.
The plan can be found, for instance, at www.svk.se/siteassets/om-oss/rapporter/2017/nordic-grid-development-plan-2017-eng.pdf.
- 14.
- 15.
Domestic transmission investment may also have third-party effects, but the network owner can unilaterally decide on such investments. Tohidi and Hesamzadeh (2014) discuss such domestic transmission investment in a network with multiple network owners.
- 16.
Nilssen and Sørgard (1998) consider merger formation games along these lines.
- 17.
To see that such compensation is feasible, let \( T_{i} = \tilde{v}_{i} - V_{i} \left( {x^{*} } \right) \), i = D, N. Sweden’s net surplus then equals \( V_{S} \left( {x^{*} } \right) + T_{S} - \tilde{v}_{S} = V_{S} \left( {x^{*} } \right) - T_{D} - T_{N} - \tilde{v}_{S} = V_{D} \left( {x^{*} } \right) \) + \( V_{N} \left( {x^{*} } \right) + V_{S} \left( {x^{*} } \right) - V_{D} (\tilde{x}) - V_{N} (\tilde{x}) - V_{S} (\tilde{x}) > 0 \).
- 18.
Could not Denmark and Norway game such rules by initially proposing a very large project just to extract a large compensation payment from Sweden? No, because a large project would not pose a credible threat point. If Sweden issued its veto right in the joint negotiations, then it would be in Denmark and Norway’s joint best interest to renegotiate their initial bilateral agreement to \( (\tilde{x},\tilde{T}_{D} ,\tilde{T}_{N} ) \). Hence, \( (\tilde{x},\tilde{T}_{D} ,\tilde{T}_{N} ) \) is the only credible threat point, and all parties should rationally foresee it.
- 19.
Merchant transmission is analyzed in detail by Joskow and Tirole (2005).
- 20.
Merchant ownership was not in conflict with Swedish law in this particular case because the connection began operating in 1994.
- 21.
The analysis in this section builds on Tangerås (2018).
- 22.
Nordel was dissolved in 2009 when the Nordic countries joined ENTSO-E, the European organization for cooperation of transmission system operators for electricity.
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We thank Alexandra Allard for research assistance and the Swedish Energy Agency for financial support.
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Persson, L., Tangerås, T.P. (2020). Transmission Network Investment Across National Borders: The Liberalized Nordic Electricity Market. In: Hesamzadeh, M.R., Rosellón, J., Vogelsang, I. (eds) Transmission Network Investment in Liberalized Power Markets. Lecture Notes in Energy, vol 79. Springer, Cham. https://doi.org/10.1007/978-3-030-47929-9_19
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