Electricity market needs fixing –what can we do?

Electricity Market Day 5 April 2016

Asta Sihvonen-Punkka, Senior Vice President, Fingrid Oyj

Power adequacy and flexibility need to be

ensured

Extensive subsidies to renewable electricity

A lot of electricity atlow price to the market

The wholesale price for electricity has collapsed

Thermal power is being shut down,

no preconditions for investments

The share of variable production increases,more flexibility needed

as well

What has happened to the electricity market?

Average price for system price futures

Average system price

Price level for market-based investments

Generation capacity in Nordics

Thermal power WindThe peak balance without import

Fingrid has reviewed two alternatives

Market = The Nordic market

model version 2.0

• Strong and volatile price signals, these must have political acceptance

• Efficient, in average lower prices• Independent actors, distributed decision making,

room for innovation• Market-based investments, the market is responsible for

power adequacy

Centrally controlled electricity system

• The prices are more stable but in average higher than in the Market alternative

• Concentrated decision-making• Risk of too high security of supply

Fine-tuning is not enough to fix the electricity market – the subsidy policy

needs to be changed in the whole Baltic Sea region!

Centrally conrolled electricity system

Market

Option: Market

Precondition is the change of subsidy policy

The Market option requires an increase in flexibility bothin the market and in the power system

The importance of real-time market will increase beside the day-ahead market

The role of market actors in balancing the electricity system will grow

We develop the regulating power market to increase flexibilityin the electricity market

• More information to the actors on the market situation andthe activated bids

• Reviewing the entry barriers (size limits, metering requirements)• Aim is to enable larger market attendance

• In scarcity situations the pricing of electricity on the basis of the value of harm caused by electricity shortage

• Removal/raise of the price ceiling

We increase market

transparency

We remove entry barriers

We strengthenprice signals

Allocation of system reserve costs

Development of balancing model

Imbalance settlement period

• The pricing of imbalance energy to support the balancing of the power system

• Hedging possibilities against price variations

• Analysis of the 15 min. imbalance settlement period and implementation options

• The solutions and their implementation

• Allocation of costs according to "polluter pays" principle

• Now socialised in transmission grid tariff and

We develop the pricing of balancing energy to support the balancing of the power system

Regional solution

Sharper pricing model for strategic

reservesDay-ahead market Flexibility in the

retail market

Strengthening price signalsRaising the ceiling for maximum price

As flexibility in generation reduces, flexibility sought

in consumption

Pricing towards"polluter pays"

Developing the transmission capacity calculation

Economic incentives, technical preconditions, transition into business

Important to use price signals and flexibilitythroughout the whole market

Support schemes pull out markets – this leads to a centrally controlled electricity system

• We would give up the principle of "energy-only" – capacity would be separately valuated

• This would mean more central planning and decision making than what we have nowadays

• A TSO would prepare a long-term power balance forecast. The forecast would be used to steer investments in new capacity.

• A TSO would steer the power system• This would imply less volatile but higher electricity

prices• The result would be a decrease in incentives for demand

response and innovation • The degree of freedom and risks for market actors

would decrease – the risk for society would increase

Centrally controlled electricity system

Investments

Capacity

Demand

Subsidies

Fingrid prepares a discussion paper on themarket development

Finalising the discussion paper

- workshop plannedin autumn

Drafting the document

– launch for commentsin May

Involving stakeholders

- time to comment untilthe end of August

Electricity market at a crossroads – which road to take?

• Choice between market and large scale subsidies• At least regional solutions needed

• Market is the road to secure and cost-efficient low-carbonenergy system

• The role of market actors in balancing the power system increases

• Regulating market, pricing of balancing energy, price signals inday-ahead market, model for strategic reserves and the potentialfor flexibility in the retail market are recognised development areas

The first step is the choices on energy

policy

Market is the most cost-efficient solution

Fingrid creates preconditions for

flexibility

Fingrid Delivers. Responsibly.