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- 06 May 2022
Regulation And Competition
Owing to a series of major reforms that started in the mid-1990s and commitments as a member of the EU, Finland has been among the front runners in electricity market liberalisation. As with all the other Nordic countries, Finland has liberalised its electricity market, opening electricity trading and electricity production to competition and - together with Denmark, Sweden and Norway - is now part of the regional Nordic electricity market. Its electricity sector should, therefore, be analysed in this broader context.
Norway was the first Nordic country to start the liberalisation of its electricity market, with the approval of the Energy Act in 1990, which introduced regulated third-party access. Sweden and Finland opened up in the mid-1990s, followed by Denmark in early 1998. The liberalisation was followed by integration, leading to the creation of the Nordic market, often cited as a model for an integrated regional market. The establishment of Nord Pool, the Nordic electricity exchange, was an important part of this integration and has led to the establishment of a common Nordic wholesale electricity market. Transmission constraints permitting, electricity generation in the Nordic market is dispatched according to a single market-clearing price.
The Nordic power market model is not limited to the creation of a common wholesale exchange. With a view to easing exchanges among participants, the Nordic power system includes common grid planning: criteria for transmission system planning, rules for system operation and minimum technical requirements for connecting power plants to the grid. To ensure the Nordic power system is operated as a single regional market, it includes continuous exchange of real-time operational data, coordinated planning of outages in the transmission grid, as well as implicit auctions of cross-border capacity between Nordic countries. This provides several different services, including managing credit clearing for financial transactions and operating an emissions trading market for EU Emission Trading System credits.
The Nordic governments also aim to establish a common retail market, with free choice of supplier. The original target for this major step was set for 2010, but at the time of writing, retail markets for electricity remain national. However, the Nordic transmission system operators have already agreed on harmonising principles for balancing management, and the Nordic energy regulators are working on harmonising the data exchange and metering systems to form a common Nordic balance settlement system.
Sustainable Energy Policies
Finland is party to the Kyoto Protocol and committed to the EU burden-sharing 2020 agreement, which aims to reduce carbon emissions and increase the share of renewables in the energy mix. Finland’s post-2020 commitments are in line with the Paris Agreement and the EU’s Nationally Determined Contribution. The EU collectively aimed to reduce greenhouse gas emissions by at least 40% by 2030, compared with 1990 levels. In Q121, a new legally binding target was increased to 55%.
The country is relatively well placed with respect to carbon emissions due to its strong reliance on hydropower and nuclear generation. Feed-in tariffs have been an integral part of the energy sector in the Nordic region and will continue to support renewables expansion.
The Finnish government is also keen to shut down any coal-fired power generation still operating; the government announced in 2018 that it will ban the use of coal in the energy sector by 2029.
In 2020, all EU member states were required to submit their National Energy and Climate Plan (NECP) for the 2021-2030 period. The NECP focuses on the market's targets for increasing renewable power generation, improving interconnections to neighbouring EU member states and reducing overall emissions. Within these plans Finland will aim to achieve a 50% share of energy from renewables sources while increasing investments in both the power and transmission systems. Finland has set a target of overall greenhouse gas emissions reduction of 40% by 2030, comparable to 2005 levels.
The Nordic electricity exchange has led to the establishment of a common Nordic wholesale electricity market, with wholesale electricity prices depending strongly on the availability of hydropower, the cheapest and most abundant source for large-scale generation. Nord Pool is subject to price splitting during times when transmission capacity is constrained. Market conditions in each of these countries play a significant role in determining prices. Nonetheless, the effect of domestic supply and demand dynamics cannot be disregarded when it comes to retail prices.
Denmark has some of the highest retail electricity prices in the EU due to high taxes, as well as specific transmission and distribution grid charges and the Public Service Obligation (fees charged by EU member nations for services rendered in the region). Finland and Sweden have comparatively low electricity prices owing to their direct access to hydro and nuclear generation, but prices have risen in recent years owing to droughts and rising prices of fossil fuels. The additional costs generated by the introduction of carbon allowances have been especially pronounced for carbon-fired generation, the most popular thermal source in the region.