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Capacity adequacy in the Nordic electricity market

image of Capacity adequacy in the Nordic electricity market

An increasing share of intermittent renewable generation and reduced profitability of conventional power generation has led to a growing concern for capacity adequacy in the Nordic electricity market (Nord Pool market area). It does not make sense to assess capacity adequacy for each country separately in the Nord Pool market area as it is highly integrated in terms of both interconnector capacity and market integration. Capacity challenges are rarely isolated to one country or bidding zone. This report analyses what market solutions may be used to manage capacity adequacy in the Nord Pool market area, and how an efficient transition to adequate market solutions could be achieved. The main analysis reveals several measures that would strengthen price formation and cost recovery in the Nord Pool market area, although in general, the market is already highly liquid and well-functioning.

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Summary of recommendations

Capacity adequacy is not only about the market’s ability to handle shortages when shortages occur, but rather about the market’s ability to ensure that capacity shortages do not occur too often, and at unacceptably high costs to consumers and the society. For the market to serve that purpose, the regulatory framework and the market design must enable the proper market dynamics. This implies making room for price signals to increase in times of shortages, and make sure that price signals reach market participants. If proper price signals do not reach market participants, the market participants cannot be expected to react adequately, be it in terms of short-term responses to shortage situations or in terms of long-term investments decisions. Thus, capacity adequacy is to a large extent about getting prices right.

English

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