Electricity market

An electricity market that functions at its best benefits everyone: a common regional market and strong transmission connections boost competition and ensure that electricity is produced in the most efficient way. Reinforcing the domestic and cross-border transmission systems in Finland will improve the operations of the electricity market. In a strong transmission network, electricity can freely flow to where demand is highest. A disturbance in a transmission link between Finland and Sweden, for example, may cost consumers several million euros a day.

The European Unions climate policy and national energy and climate targets aim to reduce the emissions from electricity production and move towards a low-carbon power system. As a result, the structure of electricity production is changing. Weather-dependent, renewable energy generation has grown considerably in the European electricity market. National support mechanisms targeted at renewable energy have accelerated the change.

In 2016, the energy industry intensively sought new solutions to repair the electricity market. The electricity market has faced major challenges as a consequence of the renewable energy support schemes. The energy surplus of the northern European electricity market can be seen throughout the Baltic Sea area and has artificially pushed down prices. The market price of bulk electricity has plummeted, which has forced production capacity out of the market.

The support schemes in Europe have caused problems in terms of the sufficiency of electric power. Achieving a reliable, cost-effective and low-carbon energy system requires an increasingly market-based approach. In order for the markets to function, the impacts of the support schemes must be reduced and the mechanisms harmonised in the entire Baltic Sea area. The bulk and retail electricity markets must be more closely linked than they currently are, and demand-side management in the retail markets must be introduced to balance the power system.

Growth in renewable electricity production has considerably weakened the profitability of other electricity production, which in turn has led to the removal of flexible generation capacity from the market. While the need for regulating capacity required to ensure variable electricity generation has grown, flexible generation capacity has been simultaneously shut down.

We believe that well-functioning electricity markets will ensure a cost-effective transition to low-carbon electricity system and will ensure sufficiently reliable supply. A prerequisite for a well-functioning electricity market is doing away with market-distorting state support schemes at least regionally, as in common market areas, the impacts of the support schemes cross state boundaries. The emissions trade mechanism is the most cost-effective and technology-neutral tool for promoting a low-carbon energy system.

A low-carbon electricity system demands co-ordination between the wholesale and retail markets. The retail market is required as a source of demand-side management, which will play an important role in balancing the electricity system in future. It lowers electricity consumption during periods of high consumption and price levels, or transfers it to a period with a lower cost. Demand-side management helps keep the electricity system in balance, while at the same time having a positive impact on consumers electricity bills. Electricity market structures and the roles of market operators are still not established in that respect.

The Finnish government published a new energy and climate strategy at the end of the year. The strategy presents a package of policies and measures that concern the electricity markets and the power system. The policies underscore the active role of electricity consumers in the markets, price signals in the real-time markets, and the inter-Nordic retail markets. It also highlights the transition to a smart grid system, which will help lay the groundwork for the rise of electric cars. Electric cars will enhance the systems flexibility and contribute to the transition to a low-carbon electricity system. The strategy states that in order to promote a third alternating current (AC) connection between Finland and Sweden, it is important to get it on the EUs list of key projects in 2017. Fingrids objective is to complete the new connection by 2025. At year-end, the European Commission published a so-called Winter Package that takes a stand on, among other things, issues related to the development of a future electricity market model. Fingrid considers the commissions development proposals for an electricity market model to be headed in the right direction.

Electricity market 2016          2015          2014          
Day-ahead system price €/MWh 26.91 20.98 29.61
Area price Finland, average €/MWh 32.45 29.66 36.02
Congestion income in Nordic countries, €M 276.8 380.3 255.1
Congestion income between Finland and Sweden, €M 74.98 173.5 97.7
Congestion hours between Finland and Sweden % 32.7 47 47.8
Congestion income between Finland and Estonia,
million €M
4.74 8.4 4.8
Congestion hours between Finland and Estonia % 9.7 12 8.2

Nordic price level rose at the end of the year

The average market price of spot electricity on the electricity exchange (system price) was EUR 27 (21) per megawatt hour. The price level in the Nordic electricity markets trended downwards for an extended period during the first half of 2016, but rebounded during the summer. The drivers behind the price increase include the weakened hydrological situation, as well as price hikes in fossil fuels and emission rights.

In 2016, prices on the Finnish wholesale market were higher than they were in other Nordic countries. The overall increase in Nordic prices made the price disparity between Finland and Sweden less pronounced and, as a result, congestion hours between Finland and Sweden decreased significantly during the latter half of the year. In addition to the increased Nordic price level, another reason for the decrease in congestion hours and decreased price disparity was the completion of the NordBalt transmission link between Sweden and Lithuania during the first half of 2016.

Fingrid accrued EUR 37.5 (87) million in congestion income from the cross-border power lines between Finland and Sweden. EUR 29.9 (24.3) million of this was accrued during the first half of 2016 and EUR 7.6 (62.5) million during the second half of the year. In addition, the links between Finland and Estonia generated EUR 2.4 (4) million in congestion income for Fingrid. Congestion income is used to maintain cross-border transmission capacity and for additional investments, as is also required by law.

Imports from Russia increased to 5.9 (3.9) terawatt hours. Despite the increase, electricity imports from Russia to Finland have decreased significantly in recent years, and the hourly import volumes from Russia have varied considerably. In addition to Russias capacity mechanism, the reduction in electricity trade is attributed to increased electricity prices in the country.

Nordic congestion income and congestion income between Finland and Sweden

Continued development in the market and transfer connections

In order to clarify the electricity market debate, in spring we published a discussion paper on the challenges faced by the electricity market and various  solutions to them entitled Electricity market needs fixing – What can we do?, which sparked a lively debate. Our consultation request was responded to by a total of 36 industry operators, associations, research institutions and private citizens. During the second half of the year, we published a summary of the feedback on the paper, as well as our conclusions, in which we outline various routes to a green electricity system based on market terms.

The operating capacity of the electricity market and the sufficiency of electricity supply became national topics due to the bitter cold of January 2016. As the consumption of electricity broke records, the topics of meeting consumption needs and national self-sufficiency in terms of electricity were widely debated.

Roughly half of the cross-border transmission capacity between Finland and Sweden is provided by the Fenno-Skan link, i.e. high-voltage DC connections. Early in the year, we launched several measures to improve the reliability of cross-border transmission capacity. Thanks to the improvements, it was possible to keep interruptions very brief, and the availability of the connections has been clearly better compared to previous years.

We established Fingrid Datahub Oy, a company focused on the transfer of retail market information, on 16 February 2016. The task of the company, our wholly owned subsidiary, is to implement a centralised information exchange system for the electricity markets, i.e. a datahub, in which the exchange of information between retail sellers and transmission system operators is concentrated into a single service. This makes the exchange of information in the retail electricity market more straightforward and efficient. Data exchange among retail markets is needed in managing the various business processes of the electricity markets, such as balance settlement, an end users change of address and a change of seller, for example. The system will facilitate the processing of measurement data, simplify and speed up client agreement events and improve the reliability of the service.

The implementation of European network codes required by the European Union proceeded in Finland. We established a network code forum that is open to all market parties. The forum promotes public debate on all matters related to network codes and aims to gather the views of stakeholders as well as to complement the public hearing processes related to implementing the network codes. The network code forum convened three times during the year under review.

The Finnish, Norwegian and Swedish TSOs continued with the switchover to shared Nordic balance settlement. The jointly owned company eSett Oy, which Fingrid owns one third of, aims to start up operations in spring 2017.

In September, the Ministry of Economic Affairs and Employment set up a working group to look into the opportunities of smart grids in the electricity market. The aim of the working group is to forge a common vision of future smart grids and to propose concrete measures for using smart grids as a means of increasing customers opportunities to participate in the electricity market and contribute to maintaining a secure supply of electricity. The members of the working group broadly represent the stakeholders in the sector, including active participation by Fingrid.

Key events of 2016

Decentralised household consumption on the reserve market for the first time

Balancing power market starts up

Aggregation development projects

Wind energy exceeded the average hourly production of 1,000 megawatts