Current Flowbased implementation plan - a risk for a well-functioning Nordic power market

The implementation of flow based market coupling should improve the Nordic power market as a whole taking into account the implications to all physical and financial markets.

The target of the European Union is to have a competitive internal electricity market that is fully integrated and where power flows freely across Europe leading to lower electricity prices to European citizens. In order to achieve this, European legislation aims to increase cross-border trading possibilities, coordination and harmonization of market rules. According to the EU legislation, also transmission capacity calculation should be performed in a coordinated manner, either applying the flow based approach or coordinated net transfer capacity approach. Flow based approach aims to better take into account real physical flows and interdependencies of flows in different parts of the system, whereas coordinated net transfer capacity approach is more similar to the currently applied net transfer capacity approach where cross-zonal capacities are given for each bidding zone border.

Nordic transmission system operators (TSOs) decided to propose flow based capacity calculation approach which in theory is more efficient alternative but it comes with some caveats regarding for example transparency and explicability of the market results. The precondition for the implementation was that TSOs should be able to show the efficiency of flow based also in practice. So far TSOs have been able to show minor benefits of moving to flow based only concentrating on the day-ahead market without looking into the impacts on all other markets, e.g. intraday market where market participants can balance their positions closer to real time and financial markets where market participants hedge their production or consumption years in advance. Furthermore, Nordic TSOs have recently proposed to decrease the amount of testing of the new method by removing the so-called simulation period before implementation and also proposed to delete the firm requirement to show the benefits of flow based before introducing it. 

Fortum together with Vattenfall and Energiföretagen have become increasingly worried that the transmission system operators’ flow based implementation project is going to the wrong direction. As cross-border markets are fundamental and well-working in the Nordics we are concerned that this major change – in fact, the biggest change since the 1990s – would be implemented without proven significant benefits or robustness.  As a result of this, we have written a common paper which has been delivered to the Nordic regulators and transmission system operators.

You can find the letter here.