Costs of insufficient transmission network investments — Case: The Nordic electricity market

Abstract

The Nordic electricity market utilises zonal pricing as its market design. To promote the functioning of the chosen market design, the Nordic transmission system operators have seen the improvement of market uniformity as an important goal in their common grid planning (Nordel's grid plans from 2004 and 2008). Market convergence rate is an often used measure that indicates the hours during which the market actually operates as uniform. However, recent evidence suggests that the targeted market convergence has not been achieved. One reason is that the planned grid investments have not been fully realised. In this paper, we study the impacts of reduced market convergence on the Nordic electricity end-users in 2010. For example, results indicate that the costs of neglecting the grid investments have been approximately 200 and 360 million euros for Finnish and Swedish electricity users, respectively. Similar calculations were also done for Norway and Denmark.