Norway and the European power market

Some key figures

• Norway produces roughly 130 TWh in a normal year, but there are considerable variations due to variation in hydro inflow. In addition, there are local variations.
• 96 % of power production in Norway stems from hydropower.
• A large share of the production capacity is flexible; hydropower storage possibility is 85 TWh.
• In 2015, Norway had a net export of 14.8 TWh. On average, in the last five years, the net export has been 11.3 TWh. However, in 2011, Norway was a net importer (7.6 TWh).
• In the Nord Pool area in 2015, total consumption was 402 TWh, of which 374 TWh was traded in the Day-Ahead market (same area). This means that 93 % of consumption was traded at Nord Pool's day-ahead market.

Trading power between countries – gains from trade

There are differences in the power systems in Northern Europe, stemming from differences in the fundamentals, both on the supply and the demand side. Whereas Norway has a large share of flexible hydropower, Denmark has a large share of wind power. Sweden and Finland have a high share of thermal production.

As a result of the large hydropower capacity, Norway has a considerable surplus of power in periods with good hydrological conditions, e.g. snow melting, periods with high precipitation, etc. During such periods of oversupply, it is typically profitable to export power from Norway to other countries. Countries like Denmark have a high production of power and low prices when it is windy. In such conditions, it is often profitable for other countries to import power from Denmark. By doing so, it is, for example, possible for the Norwegian hydropower producers to save water in the hydro reservoirs for later, when the water has a higher value. The price difference between two countries will decide whether it is profitable for a country to export or not during a given hour. By building interconnections to other countries, it is possible to utilize differences in the power system between countries and increase social welfare for the entire area. This means that interconnections enables the society to achieve the same level of security of supply at a lower cost. However, building interconnectors is costly. It is, therefore, important to only carry out investments that enhance social welfare.

In addition to affecting the level of welfare, it is also important to acknowledge that interconnections have distributional effects. E.g. increased export capacity would, all else equal, increase the wholesale price in the exporting bidding zone.

Water values are important in a hydropower system such as the Norwegian model, and it is complicated to calculate the exact terms, but in simple terms, the water value is the alternative value, if used in a later point in time instead. The fundamentals of power production varies between the countries, as does the demand, i.e. the load curves.

This implies that prices in adjacent countries often fluctuate more within a day than in Norway where we typically have a flatter load curve. In addition, there can be relatively large price variations between seasons, with low Norwegian prices during the Summer. Denmark on the other hand, has relatively small seasonal differences. All else equal, this means that Norway normally exports more during the Summer. These differences are important drivers for investing in interconnector capacities

The Nordic synchronous area

Norway, Sweden, Finland and Eastern Denmark (DK2) have a common synchronous area sharing the same frequency. Hence, what happens in one country will typically impact the entire synchronous area. To be able to deal with this in an efficient manner, the TSOs have over many years developed a close cooperation. One example of this is the common Nordic merit order list for balancing power so called manual frequency restoration reserves (mFRR). The Nordic TSOs also have a common Nordic System Operation Agreement.

Physical power exchange

European legislation is opening the possibility of multiple exchanges competing for customers in the same area. Two power exchanges operate in both the day-ahead and intraday market in Norway, these are Nord Pool and EPEX SPOT. 

Bidding zones in Norway

Norway is currently divided into five bidding zones (NO1-NO5). The division of bidding zones reflects physical structural congestions (transmission constraints) in the grid. No constraints are given to the market (Day-Ahead and intraday) within bidding zones. The relevant TSOs set cross-zonal transmission constraints daily for the next day, between all zones, in both directions. Capacity given to the DAM is physically firm, i.e. guaranteed and upheld by the TSO. A consequence of having multiple bidding zones is that different zones can have different wholesale prices, reflecting the underlying supply and demand given the grid constraints. A system without bidding zones, on the other hand, would have required the TSOs to use more resources on redispatch measures. In turn, this would have resulted in increased costs for system operation and, all else equal, increased grid tariff.

An efficient wholesale market with bidding zones reflecting grid topology will yield efficient price signals for both generators and consumers alike. The wholesale price is an important input both in the short run, e.g. planning of next days’ generation or consumption, and in the long run e.g. for seasonal planning of maintenance as well as for investment purposes e.g. where to build power plants and where to place large consumption units.

The wholesale marked price is also important for the TSO when considering grid reinforcement or investing in new infrastructure. The price differences indicate the marginal benefit of expanding capacity between these zones. Consistently large price differences indicate a large potential welfare gain if the cross-zonal capacity is increased.

The European Day-Ahead market coupling

Norway has had market-based dispatch of generation since1971 when Samkjøringen, a common pool for generators, was established. Over the years, this has developed into a common Nordic market, and today, Norway and the Nordic countries are part of the European market coupling through a single price coupling mechanism called Price Coupling of Regions (PCR). This means that large parts of Europe are coupled through a complex price setting algorithm called EUPHEMIA.

In order to calculate prices and cross-border flows, EUPHEMIA includes cross-zonal transmission constraints given by the TSOs. With this input, EUPHEMIA calculations maximizes social welfare for the entire PCR-area (i.e. let electricity flow to where it has the greatest value). This is carried out after the DAM gate closure time, at 12:00 PM, i.e. 12-36 hours before physical delivery is to take place. Prices and flow are calculated at an hourly basis. Based on the DAM-result, trades are settled and scheduled flows and prices are published to the market. Publication of this is usually at 12.42 PM CET, but can occur later.

It is also possible to trade between bidding zones in the intraday and balancing markets, if capacity is available. At this point in time, a common solution, as in the day-ahead market, does not exist for these markets. However, a common trading platform for intraday (XBID) is currently being developed.