The Nord Pool power market model has proved to be highly beneficial, leading to its adoption in various parts of the world.   

“As pioneers of, and ambassadors for, the cross-border power market model, we at Nord Pool are actively promoting its advantages across the world. For instance, we have on-going projects in China, a serviced power exchange in Georgia and a collaboration with the World Bank in Central Asia,” says Martin Hergot Festøy, Senior Consultant at Nord Pool Consulting. 

The concept of integration 

“At its core, the European integrated power market is about connecting multiple countries to facilitate the flow of electricity from areas with a surplus to those with a deficit,” Martin states. 

The system ensures that power moves from regions with lower prices to those with higher prices, thereby balancing supply and demand across borders. 

Socioeconomic benefits 

“One of the primary advantages of this integrated market is the socioeconomic benefit it brings. By importing electricity from surplus areas, countries can reduce the need for expensive local production.” 

This system also promotes the use of renewable energy, reducing environmental impacts, and ensures that countries can rely on their neighbours during high demand periods, enhancing overall energy security. These benefits collectively contribute to economic growth and improved social welfare across Europe. 

Mutual benefits 

A crucial aspect of this market model is the mutual benefit derived from trade. Martin highlights how trade is inherently beneficial for both parties involved.  

“Trade is, by its very definition, something that both sides should benefit from,” he notes.  

This principle ensures that no country should feel disadvantaged by the exchange, fostering a spirit of cooperation and mutual gain. 

Electricity trading allows countries to access cheaper electricity from neighbours, especially during peak demand or costly local production periods. Countries can rely on their neighbours for additional supply, reducing blackout risks. In addition, balancing supply and demand across a larger area stabilises electricity prices.  

The Nordics – where it all began 

Power market integration began in the Nordic countries, initiated by Nord Pool, where complementary resources made the system particularly effective. Norway, with its abundant hydropower, Finland with its thermal resources and Denmark with its ample wind energy, created a balanced and efficient energy network - a “win-win situation,” where each country leverages its strengths for the collective good. 

Transmission capacity 

“Transmission capacity plays a crucial role in the European integrated power market”, the Nord Pool Consultant states.   

Producers do not choose to sell their electricity to specific countries or bidding zones. Instead, they sell within their own area and power flows to where it is needed, based on available capacity and market algorithms.  

“If I am a producer in one bidding zone, I don’t choose to sell my electricity to a specific country or bidding zone. In essence, I sell to all of them.” 

Implicit vs. explicit capacity 

The market operates on the principle of implicit capacity, where transmission capacity is not directly traded by producers. Instead, the market algorithm determines the flow of electricity based on supply and demand across the entire network. This contrasts with the older system of explicit capacity, where traders would buy specific transmission capacities.  

“Historically, explicit trading often led to inefficiencies, such as power flowing in the wrong direction – from deficit areas to surplus areas.” 

Mr Festøy highlights a significant improvement with the introduction of implicit auctioning, using the example of the Norway-Netherlands interconnector.  

“When it first started in 2011, we had explicit trading on it. Some days up to 5000 MW flowed in the wrong direction, from a deficit area to a surplus area. After we started implicit auctioning, power flow in the wrong direction on that cable has been near zero. Now, imagine that scaled up to encompass all of Europe’s interconnectors.” 

Day-ahead and Intraday markets 

“The European power market includes both day-ahead and intraday trading platforms. The day-ahead market involves a single auction that closes at 12:00 the day before the delivery day, while the intraday market allows continuous trading up to the point of delivery.”  

This system ensures that, as more information, such as weather conditions and demand forecast, becomes available closer to delivery time, the market can adjust accordingly. Festøy describes the intraday market as “continuous, just like stock trading,” enabling power to flow efficiently all the way from Finland to Portugal. 

Increasing trade 

The volume of trades in the intraday market has surged, particularly with the rise of intermittent renewable energy sources. Martin points out that the number of trades in the European intraday market has skyrocketed from 3.5 million in Q3 2018 to 45 million in the last quarter of 2023.  

“This increase reflects the growing importance of flexible and responsive trading mechanisms in managing Europe’s diverse energy landscape.” 

The benefits of integration 

The integration of the European power market has proved to be highly beneficial. According to Mr Festøy, the European Union estimated that in 2021 alone, the total benefit of market coupling was €34 billion.  

“This significant saving was achieved by more efficiently using power market resources and coupling them together.” 

He emphasises that this integration is not only about financial gains but also about securing a stable supply of electricity.  

“The European integrated power market leverages advanced trading algorithms and transmission capacity management to ensure efficient and equitable distribution of electricity across the continent.” 

By moving from explicit to implicit capacity trading and embracing continuous intraday markets, the system has significantly improved its ability to respond to real-time conditions and optimise energy flows. As Martin aptly puts it; “It’s one big optimisation for the whole of Europe.” 

 

by Irene Zeier
Communications Director

[email protected]