No reason to divide Finland into separate price areas in the electricity market

Fingrid Oyj, the electricity transmission system operator in Finland, does not deem it necessary to divide Finland into different price areas in the electricity market at this point. However, managing Finland´s internal transmission congestions will call for more comprehensive counter trade than thus far, and activity from electricity producers to participate in counter trade.At the request of the Ministry of Employment and the Economy, Fingrid has been examining the possibility of dividing Finland into two price areas or bidding areas for electricity. This was prompted by a request from the Nordic energy ministers to study whether the efficiency of the electricity market and the management of transmission congestions can be improved by dividing the market into more numerous sub-areas than at present. In Finland, the price area analysis concerned the transmission capacity between Southern and Northern Finland, since this capacity is occasionally insufficient for the transmission needs of the market. The restricting part of the grid, so-called bottleneck, is situated at the intersection south of the river Oulujoki. Fingrid takes care of the sufficiency of transmission capacity either by means of counter trade or by restricting the transmissions between Northern Finland and Northern Sweden. In counter trade, Fingrid changes the production of power plants on both sides of the bottleneck, in other words Fingrid pays for production increases in an area with deficit production and for production reductions in an area with surplus production. Transmissions across a bottleneck within a country can also be relieved by reducing the foreign trade of electricity. Division into price areas, in turn, would mean that in a congestion situation Finland would be split into sub-areas at the bottleneck. The price of electricity in an area with surplus production would be lower and the price in an area with deficit production would be higher than the price in the entire country without the transmission restriction. According to the report submitted today, the problems caused by transmission congestions within Finland can be managed through long-term grid investments and counter trade, at least so far. There is hence no need for separate price areas. Fingrid has launched grid investments to intensify electricity transmissions within Finland from the south to the north. Moreover, Fingrid is making preparations for increased counter trade, up to 300 megawatts wherever possible. However, this requires that all available resources which can be regulated can be utilised at market-based terms and transparently and that this does not cause disadvantage to the other efficiency of the electricity market. Fingrid thinks that the foreign trade of electricity should only be restricted in extreme situations. The cross-border transmission capacity between Finland and Sweden is fairly high, which is why the wholesale markets in the two countries have had the same price for 95 to 98 per cent of the time. The market disadvantages of occasional restrictions in cross-border trade can be considered as minor. Moreover, the reinforcements in transmission capacity and added counter trade will reduce the need for restrictions even further.
Small price areas are a challenge to the efficiency of the electricity market From the point of view of theory of economy, price areas are an efficient way to manage transmissions in a transmission system. Price areas make the bottlenecks visible and give the right price signals for balancing demand and supply. In practice, however, the price areas need to be sufficiently large in order to secure efficient competition. If the price area model was introduced in Finland, Finland would be split into the price areas of Southern Finland and Northern Finland. The price area division would not impair competition in Southern Finland very much, but the situation in Northern Finland would be more challenging, especially in the retail market. The disadvantages of the price area division on competition could be reduced if price areas in neighbouring countries could be combined. Fingrid together with Svenska Kraftnät has studied the option of combining price areas in Northern Finland and Northern Sweden, but this is not possible at the moment. A shift-over to the price area division would require functional and system changes especially from the market players. These changes would bring costs, and implementing the changes would take at least two years. Finnish market parties are very critical about dividing Finland into two price areas or bidding areas.
Increased uncertainty in the future Even though Fingrid’s report suggests that it is not necessary to divide Finland into price areas now, the situation may become more critical later if the electricity production structure in Finland alters.
The total wind power capacity will grow rapidly in the 2010s, and its uncertain location and variations in wind power production will make it more difficult to make forecasts. The location and size of potential new nuclear power units will also have an impact on electricity transmissions. Moreover, as electricity transmissions from Russia and Estonia become more market-focused, variations in imports and exports will influence the transmissions, as will grid reinforcements in Southern Sweden and splitting of Sweden into price areas. Fingrid aims to reduce these uncertainties by means of its proactive grid investment programme.
Further information:
Juha Hiekkala, Development Manager, Fingrid Oyj, tel. +358 (0)40 553 9898
Jyrki Uusitalo, Development Manager, tel. +358 (0)40 505 8052