Do energy markets provide adequate incentives for investment in generating capacity? — A case study in Nordic electricity market

Abstract

This article provides an insight into the profitability of a peak load generator in the Nordic electricity market as a way to evaluate the market's capacity to provide adequate incentives to stimulate investment in generating capacity. We base this analysis on the Nordic electricity market during the very tight period of the winter 2002–2003 triggered by an extreme drought, which should represent one of the most favorable market conditions to remunerate a peaking unit. The result shows that the missing money? problem exists in the Nordic wholesale electricity market. Tracing the sources of the revenue gap, we find that the Nordic countries' peak load arrangement might be a major reason for the depression of price in the real time market and consequently in the spot market. After having studied the peak-load reserve arrangement, the real-time market design, as well as Nordic system operators' inclination in terms of market development, we propose some market design remedies which could help reinforce the consistency of market rules and the credibility of market prices.