Electricity Market Impacts of Low-carbon Energy Transition in the Nordic-Baltic Region

Abstract

The EU aims to be climate-neutral by 2050. Achieving net-zero greenhouse gas emissions needs action in all economic sectors including electricity markets. Electricity market is experiencing a rapid transition to renewable energy especially in the Nordic countries. Although the growing amount of renewables paves the path for climate change mitigation, their effect on market efficiency needs to be studied. Furthermore, in an interconnected multi-national electricity market, local energy policies in one country can affect the other countries. This dissertation examines these possible effects. This dissertation analyses market power potential in the Iranian electricity market as well as in Finland and in the Baltic countries. A new Lerner index is proposed for the pay-as-bid auction. Lerner index and HHI are employed for Finland and the Baltic countries. In addition, the impacts of local energy policies in Finland and Sweden on the neighboring countries are studied in this dissertation. Finland has implemented legislation to phase out coal by 2029. In Sweden, there is an ongoing debate regarding nuclear power. Different scenarios are proposed in this dissertation to analyze the effect of these policies on average electricity prices, CO2 emissions, electricity system cost and electricity trade in Finland, Sweden and the Baltic countries. For this purpose, the models Enerallt and REX are employed to model short-term and long-term future with low CO2 emissions. In the short-term, coal and peat in Finland are replaced with biomass while for 2050, a growing amount of wind power is employed. International transmission expansion is also considered in scenarios for 2050. The results indicate that in Iran market power potential increases during off-peak hours. In Finland, HHI and Lerner index values show that increasing wind power in the electricity market mostly results in less market power potential. However, for the Baltic countries despite the significant entrance of wind power in electricity market, they have a highly concentrated market. Results from analyzing the effects of local policies in interconnected markets on the neighboring countries show that national-level policies have impact on wider regions. In the short-term, phasing out coal in Finland may lead to increased electricity import from the wider Nordic market area and even outside it, mostly from regions with carbon-intensive generation. With this policy, among the studied countries only Finland will face a decrease in CO2 emissions in the region, while the rest of the countries will see a small increase. However, the long-term transition to very low CO2 emissions from the electricity production can benefit the Baltic countries. International transmission expansion by 2050 can provide the Baltic countries with an opportunity to have electricity sufficiency and export more electricity. Achieving this needs significant new investments in wind power capacity.

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