ESPOO 2006 VTT RESEARCH NOTES 2341 During 1995–2005 the Nordic energy system has experienced two major V T changes, the opening of the electricity market for competition and T R PPrroodduuccttiioonn ccaappaacciittyy aanndd ccoonnssuummppttiioonn cchhaannggeess aass iinnddeexx emissions trading within the EU. The European Union’s emissions trading E sseerriieess iinn NNoorrddiicc ppoowweerr ssyysstteemm S E scheme (EU ETS) that began operating at the beginning of 2005 has A R 113300 weakened the competitiveness of Finnish electricity production and raised C H electricity prices. Most electricity producers have accumulated large profits N 112200 thanks to higher prices. The payers have been nearly all electricity users. O T E Tanhdis trhepe ofrutn sctutidoineas ltihtye oefff ethctes poof wemeri smsiaornkse ttr.ading on the electricity market S 23 =100=100 111100 4 55 1 9999 110000 11 x, x, ee E dd le InIn 9900 c t r ic it 8800 y a n d 7700 e 11999955 11999966 11999977 11999988 11999999 22000000 22000011 22000022 22000033 22000044 m is s TToottaall ccoonnssuummppttiioonn MMaaxxiimmuumm ssyysstteemm llooaadd IInnssttaalllleedd ccaappaacciittyy io n a llo w a n c e m Mikko Kara a r k e t s f r Electricity and emission allowance o m F in n markets from Finnish viewpoint is h v ie w p Study o in t. S t y d y Tätä julkaisua myy Denna publikation säljs av This publication is available from VTT VTT VTT PL 1000 PB 1000 P.O. Box 1000 02044 VTT 02044 VTT FI 02044 VTT, Finland Puh. 020 722 4404 Tel. 020 722 4404 Phone internat.+35820 722 4404 Faksi 020 722 4374 Fax 020 722 4374 Fax +358 20 722 4374 ISBN 951–38–6795–1 (soft back ed.) ISBN 951–38–6796–X (URL: http://www.vtt.fi/inf/pdf/) ISSN 1235–0605 (soft back ed.) ISSN 1455–0865 (URL: http://www.vtt.fi/inf/pdf/) VTT TIEDOTTEITA (cid:150) RESEARCH NOTES 2341 Electricity and emission allowance markets from Finnish viewpoint Study Executive Director Mikko Kara ISBN 951(cid:150)38(cid:150)6795(cid:150)1 (soft back ed.) ISSN 1235(cid:150)0605 (soft back ed.) ISBN 951(cid:150)38(cid:150)6796(cid:150)X (URL: http://www.vtt.fi/publications/index.jsp) ISSN 1455(cid:150)0865 (URL: http://www.vtt.fi/publications/index.jsp) Copyright ' VTT 2006 JULKAISIJA (cid:150) UTGIVARE (cid:150) PUBLISHER VTT, Vuorimiehentie 3, PL 1000, 02044 VTT puh. vaihde 020 722 111, faksi 020 722 4374 VTT, Bergsmansv(cid:228)gen 3, PB 1000, 02044 VTT tel. v(cid:228)xel 020 722 111, fax 020 722 4374 VTT Technical Research Centre of Finland, Vuorimiehentie 3, P.O.Box 1000, FI-02044 VTT, Finland phone internat. +358 20 722 111, fax +358 20 722 4374 VTT, Vuorimiehentie 3, PL 1000, 02044 VTT puh. vaihde 020 722 111, faksi 020 722 7090 VTT, Bergsmansv(cid:228)gen 3, PB 1000, 02044 VTT tel. v(cid:228)xel 020 722 111, fax 020 722 7090 VTT Technical Research Centre of Finland, Vuorimiehentie 3, P.O. Box 1000, FI-02044 VTT, Finland phone internat. +358 20 722 111, fax +358 20 722 7090 Valopaino Oy, Helsinki 2006 Kara, Mikko. Electricity and emission allowance markets from Finnish viewpoint. Study. Espoo 2006. VTT Tiedotteita (cid:150) Research Notes 2341. 105 p. Keywords electric power, emission allowances, emissions trade, import, export, transmission, taxes, Nordic Countries, electricity markets, self sufficiency Abstract During 1995(cid:150)2005 the Nordic energy system has experienced two major changes, the opening of the electricity market for competition and emissions trading within the EU. The European Union(cid:146)s emissions trading scheme (EU ETS) that began operating at the beginning of 2005 has weakened the competitiveness of Finnish electricity production and raised electricity prices. Most electricity producers have accumulated large profits thanks to higher prices. The payers have been nearly all electricity users. This report studies the effects of emissions trading on the electricity market and the functionality of the power market. Very little investment has been made in power production capacity in the Nordic countries over the past ten years. Considerable increases have mainly been made in Danish wind power capacity. Simultaneously, the total consumption of electricity and maximum system load have increased more than installed capacity has grown. In the next few years the power and energy balances may be threatened. In previous years, Finland has often been separated as its own market price area on the Nordic power exchange. The formation of price areas has been affected by the limited capacity in transmission interconnectors, network reparation work and the operating method of the Swedish national system operator, Svenska Kraftn(cid:228)t (transferring domestic bottlenecks to the borders). This study reviews the scale of price differences and the effect on market activities. On the common Nordic electricity market, Finnish coal and peat condensing power capacity is mainly used during poor precipitation years. These plants were once built for base load production. Carbon dioxide emissions trading has further weakened the competitiveness of these plants. The biggest problem for the Nordic power exchange, Nord Pool, is regarded to be that market concentration in electricity production is high. Market concentration decreases the investment willingness of existing players as new power production capacity would lower electricity prices. There are also high barriers for market entry. 3 Due to emissions trading and the good precipitation situation in the Nordic countries, a record level of electricity was imported to Finland in 2005, approximately one-fifth of electricity consumption. Approximately two-thirds of the imports came from Russia. This study makes several improvement suggestions that would affect market activities. These include clearer financing principles for building new transmission lines, increased Nordic cooperation in power exchange surveillance and restraining the growth in electricity imports. The study also suggests that players who gain windfall profits should be obliged to maintain otherwise possibly unproductive condensing power plants in reserve. 4 Preface The European energy system has experienced two significant changes over a short period of time, the gradual opening of EU(cid:146)s electricity markets and EU(cid:146)s carbon dioxide emissions trading that was introduced at the beginning of 2005. The energy sector is now heavily influenced by the carbon dioxide emissions trading that is determined for three to five years at a time. These periods can be compared to operational lifetimes of energy sector investments, which usually amount to dozens of years. The European national economies are developing towards post-industrial societies where the share of heavy industry in GDP is decreasing. The increasing effect that emissions trading has on energy prices accelerates this development. In Finland, the share of electricity consumption to GDP is high, because the energy intensive export industry is an important part of its economy. Even though the economic structure in Finland has changed, it has only become recently visible that GDP development is partly withdrawing from the development of electricity consumption. Finland is a small market area where the chances of internal flexibility are extremely limited. Energy use is highly efficient in Finland, for instance, in terms of average energy production fuel economy we are among the best in Europe. Due to these factors, EU(cid:146)s emissions trading is exceptionally significant for Finland and its effects should be monitored closely. This study assesses the functionality of the electricity markets and emissions trading from Finland(cid:146)s viewpoint. There have been public suggestions that the additional profits, so-called windfall profits, that electrical companies gain from emissions trading, should be taxed by the state. This study also assesses whether cutting any additional profits would be justified to rectify the distortion caused by emissions trading and to direct development towards the aim of emissions trading and climate policy. This study was carried out as an assignment by the Ministry of Trade and Industry. The executor has widely interviewed different parties during the study. The material for the report has been produced by Senior Research Scientist Veikko Kekkonen, Technology Manager Satu Helynen, Research Scientist Tiina Koljonen, Research Scientist Bettina Lemstr(cid:246)m and Senior Research Scientist Sanna Syri from VTT. Research Scientist Maija Ruska acted as the technical secretary of the executor. Finland is facing a rather challenging situation in terms of developing its energy system and its social impacts. We hope that this and the previous study (M. Kara, The Impact of EU CO Emissions trading on Nordic Electricity Market. A Proposal for Finnish 2 Strategy, 2005) will provide ideas for further development of the electricity and 5 emission markets. We thank all of the parties involved, who through interviews and providing information have helped this study along. After completing his extremely challenging work, the executor delivers the study to the Minister of Trade and Industry. Espoo, 20 December 2005 Mikko Kara 6 Contents Abstract..............................................................................................................................3 Preface...............................................................................................................................5 1. Introduction..................................................................................................................9 2. Energy infrastructure.................................................................................................11 2.1 Electricity production.......................................................................................11 2.1.1 Power plants.........................................................................................11 2.1.2 Changes in the ownership structure of production capacity................13 2.1.3 Development of power plant capacity..................................................14 2.1.4 Changes in electricity production structures........................................17 2.1.5 Power and energy balances in the near future......................................21 2.1.6 Investments in electricity production...................................................22 2.2 Electricity transmission....................................................................................25 2.2.1 The Nordic electrical power network...................................................25 2.2.2 Sufficiency of transmission capacity...................................................27 2.3 Electricity import and export............................................................................34 3. State subsidy and taxation systems in the Nordic countries......................................38 3.1 Finland..............................................................................................................38 3.1.1 Taxes....................................................................................................38 3.1.2 Support systems...................................................................................40 3.1.3 Changes to the energy taxation system in the near future....................40 3.2 Sweden.............................................................................................................41 3.2.1 Taxes....................................................................................................41 3.2.2 Support systems...................................................................................42 3.3 Denmark...........................................................................................................43 3.4 Norway.............................................................................................................44 4. Electricity and emission allowance markets..............................................................46 4.1 Electricity market.............................................................................................48 4.1.1 Players in the electricity market...........................................................49 4.1.2 The Nordic power exchange................................................................53 4.1.3 Finland(cid:146)s area prices............................................................................58 4.1.4 Retail markets.......................................................................................64 4.1.5 Functionality of the electricity markets................................................67 4.2 Emissions trading.............................................................................................70 4.2.1 Emission allowance markets................................................................70 7 4.2.2 Effect on electricity and fuel prices.....................................................77 4.2.3 View on windfall profits......................................................................82 5. Self-sufficiency..........................................................................................................84 5.1 Effects on the competitiveness of indigenous energy......................................84 5.2 Risks related to energy imports........................................................................87 5.3 Effects on security of supply............................................................................89 6. Conclusions................................................................................................................91 References.....................................................................................................................102 8