A modell of socially optimal hydro reservoir usage - yelding socially optimal outcomes in nordic electricity markets

An extensive electricity transmission network facilitates electricity trading between Finland, Sweden, Norway and Denmark. Currently most of the area's power generation is traded at NordPool, where the trading volumes have steadily increased since the early 1990's, when the exchange was founded. The Nordic electricity is expected to follow the current trend and further integrate with the other European electricity markets. Hydro power is the source for roughly a half of the supply in the Nordic electricity market and most of the hydro is generated in Norway. The dominating role of hydro power distinguishes the Nordic electricity market from most of the other market places. Production of hydro power varies mainly due to hydro reservoirs and demand for electricity. Hydro reservoirs are affected by water inflows that differ each year. The hydro reservoirs explain remarkably the behaviour of the Nordic electricity markets. Therefore among others, Kauppi and Liski (2008) have developed a model that analyzes the behaviour of the markets using hydro reservoirs as explanatory factors. Their model includes, for example, welfare loss due to socially suboptimal hydro reservoir usage, socially optimal electricity price, hydro reservoir storage and thermal reservoir storage; that are referred as outcomes. However, the model does not explain the real market condition but rather an ideal situation. In the model the market is controlled by one agent, i.e. one agent controls all the power generation reserves; it is referred to as a socially optimal strategy. Article by Kauppi and Liski (2008) includes an assumption where an individual agent has a certain fraction of market power, e.g. 20 % or 30 %. In order to maintain the focus of this thesis, this part of their paper is omitted. The goal of this thesis is two-fold. Firstly we expand the results from the socially optimal strategy for years 2006-08, as the earlier study finishes in 2005. The second objective is to improve on the methods from the previous study. This thesis results several outcomes (SPOT-price and welfare loss, etc.) due to socially optimal actions. Welfare loss is interesting as it describes the inefficiency of the market. SPOT-price is an important output for the market participants as it often has an effect on end users' electricity bills. Another function is to modify and try to improve the model by means of using more accurate input data, e.g. by considering pollution trade rights effect on input data. After modifications to the model, new welfare losses are calculated and compared with the same results before the modifications. The hydro reservoir has the higher explanatory significance in the model followed by thermal power. In Nordic markets, thermal power reserves are mostly nuclear power and other thermal sources (coal, natural gas, oil, peat). It can be argued that hydro and thermal reservoirs determine electricity supply. Roughly speaking, the model takes into account electricity demand and supply, and several parameters related to them (water inflow, oil price, etc.), yielding finally the socially optimal outcomes. The author of this thesis is not aware of any similar model being tested before. There have been some other studies that are close to the Kauppi and Liski (2008) model, but those have a somewhat different focus. For example, a specific feature in the model is the focus on long-run capacity usage that differs from the previous studies on short-run market power. The closest study to the model is from California's wholesale electricity markets that, however, uses different methodology. Work is constructed as follows.

Calm or storm? : Wind power actors perceptions of Finnish wind power and its future

Wind power has grown fast internationally. It can reduce the environmental impact of energy production and increase energy security. Finland has turbine industry but wind electricity production has been slow, and nationally set capacity targets have not been met. I explored social factors that have affected the slow development of wind power in Finland by studying the perceptions of Finnish national level wind power actors. By that I refer to people who affect the development of wind power sector, such as officials, politicians, and representatives of wind industries and various organisations. The material consisted of interviews, a questionnaire, and written sources. The perceptions of wind power, its future, and methods to promote it were divided. They were studied through discourse analysis, content analysis, and scenario construction. Definition struggles affect views of the significance and potential of wind power in Finland, and also affect investments in wind power and wind power policy choices. Views of the future were demonstrated through scenarios. The views included scenarios of fast growth, but in the most pessimistic views, wind power was not thought to be competitive without support measures even in 2025, and the wind power capacity was correspondingly low. In such a scenario, policy tool choices were expected to remain similar to ones in use at the time of the interviews. So far, the development in Finland has followed closely this pessimistic scenario. Despite the scepticism about wind electricity production, wind turbine industry was seen as a credible industry. For many wind power actors as well as for the Finnish wind power policy, the turbine industry is a significant motive to promote wind power. Domestic electricity production and the export turbine industry are linked in discourse through so-called home market argumentation. Finnish policy tools have included subsidies, research and development funding, and information policies. The criteria used to evaluate policy measures were both process-oriented and value-based. Feed-in tariffs and green certificates that are common elsewhere have not been taken to use in Finland. Some interviewees considered such tools unsuitable for free electricity markets and for the Finnish policy style, dictatorial, and being against western values. Other interviewees supported their use because of their effectiveness. The current Finnish policy tools are not sufficiently effective to increase wind power production significantly. Marginalisation of wind power in discourses, pessimistic views of the future, and the view that the small consumer demand for wind electricity represents the political views of citizens towards promoting wind power, make it more difficult to take stronger policy measures to use. Wind power has not yet significantly contributed to the ecological modernisation of the energy sector in Finland, but the situation may change as the need to reduce emissions from energy production continues.