Competitive Nordic Electricity Markets: welfare effects of the common market

Juha Honkatukia
ETLA (The research Institute of the Finnish Economy)

Pekka Sulamaa
ETLA (The research Institute of the Finnish Economy)

Finland, Norway and Sweden have all adopted fully competitive markets in electricity sales and generation. Other European countries (except the UK) have progressed in their electricity markets deregulation at a slower pace. A first step towards deregulated European electricity market was reached in 20.2.1999 when the EU electricity market directive became legally enforceable. The directive requires 26 % of the EU electricity market to be opened for competition as of this date.

In this paper, the Nordic competitive market is analysed by combining two modelling approaches: a partial equilibrium electricity model and a Computable General Equilibrium (CGE) model. The former allows taking firm-specific strategic behaviour into account, while the latter captures the interactions between the electricity sector and the rest of the economy. Honkatukia (1998) showed that changes in the Nordic power supply capacity had repercussions on Finnish welfare by affecting the price level. In his CGE model, supply and demand were flexible in Finland, whereas generation costs and capacities were fixed in Norway and Sweden. Here, the partial equilibrium model includes Swedish-Norwegian supplies at a firm-specific level, allowing us to solve equilibrium price levels for Finland and the combined Swedish-Norwegian (Nordpool) price area. This allows us to link the partial equilibrium model to the CGE model and calculate the welfare effects of the electricity market reform.

Policy simulations include an analysis of the Swedish nuclear phase-out policy, dry year simulation for the Nordpool, and sensitivity analysis with respect to the electricity values.