Electricity Market Design and the Impactof Supply and Demand Shocks:Experiences from the Nord Pool System

Lars Bergman


During the 1990?s the electricity markets in Norway, Sweden, Finland and Denmark werederegulated and integrated into a single Nordic market for electricity. A common power exchange,Nord Pool, was established and an essentially common design of the wholesale electricity market,?the Nord Pool system?, was implemented. Important market design features are full market openingand point-of-connection transmission tariffs. The annual consumption of electricity in the area isclose to 400 TWh per annum, which is comparable to the largest national electricity markets inEurope. Hydropower accounts for around ? of total generation, while the corresponding figure fornuclear power is ?.

The purpose of this paper is to explore to what extent recently experienced supply anddemand shocks have revealed serious design deficiencies in the Nord Pool system. The major supplyshock was an unusually low level of precipitation in the autumn of 2002, leading to very low levelsof hydropower generation in the winter 2003. The major demand shock came in the winter of 2001,when peak loads reached unprecedented levels. The main conclusions of the analysis are that thenew market institutions handled the large variations in hydropower supply quite efficiently, whilethe provision of peak capacity is an emerging problem unless new market institutions are established.

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