The effect of wind energy production on cross-border electricity pricing: The case of western Denmark in the Nord Pool market

Abstract

The aim of this analysis was to estimate the effect of planned cross-border energy flow and different levels of predicted wind energy share with respect to the three pricing outcomes (higher price, lower price, or equal prices) that can occur between a pair of trading partners in the Nordic day-ahead spot market. The analysis covers a four-year period (2012–2015). Three multinomial logit models were designed, one for trade with each of western Denmark’s (DK1) Nord Pool day-ahead spot market trading partners: eastern Denmark (DK2); southern Norway (NO2); and Stockholm, Sweden (SE3).It was found that both wind energy production and planned energy cross-border flow have a large effect on the probabilities of the pricing outcomes, with greater wind energy production in DK1 linked to lower prices in DK1 and lower wind energy linked to higher prices in DK1, although the effects varied considerably across trading partners. For example, if western Denmark’s wind share of production was less than 33%, on average there was a 253% increase in the probability of DK1 having a higher price than NO2, and, in the SE3 model, this corresponding value was 359.8%, which encourages trading behavior to reduce the price differences. However, the existence of such large price differences suggests that interconnector transmission capacity or trading volume is not enough to balance the price in these circumstances. Overall, the results support the conclusion that increased interconnection can reduce price differences.