The power market

All generating companies supply electricity to the transmission or distribution network. Once delivery has been made, it is no longer possible to separate supplies from different generators. When a consumer turns on the electricity, it is impossible to say where the power was generated. The electricity price is primarily determined by supply and demand in the Nordic power market.

The Nordic countries’ power systems are connected, and the countries’ systems are mutually dependant. The power price is determined in the market, based on generation, transmission and consumption conditions in the Nordic region, and thus the price will vary over time. The power price also reflects possible congestions in transmission capacity between the areas, but the price is equal in all areas of the Nordic region if there are no such congestions . Inflow to hydropower plants is of great importance for the determination of the power price, since hydropower represents such a large share of the Norwegian and Nordic power supply. In Norway, consumption is slightly higher than the power production in years with normal precipitation and temperature conditions, and this means we are dependant on imports from abroad. In years with low inflow, the need for power imports is even higher. Temperature and weather conditions influence demand in the Nordic region and Europe on short term, which also affects the power prices. Especially periods with cold temperatures and high demand can result in higher power prices.

Wholesale market
The power market is often divided into wholesale and end-user markets (retail market). The wholesale market embraces generators, suppliers, big industrial enterprises and other large undertakings. Electricity is traded bilaterally between different market players and in the markets organised by the Nordic power exchange, Nord Pool. Currently, a number of companies trade standard bilateral contracts, but a growing proportion of contracts are traded in Nord Pool’s markets. About 400 players currently trade in one or more of Nord Pool’s markets, and traded volume in the physical market totalled 251 TWh in 2006. The value of the physical trading volume increased by around 127 percent from 2005, and amounted to more than EUR 12 billion in 2006.

Nord Pool’s products are divided into three principal categories: the physical market, the financial market and clearing services. See www.nordpool.com for more information.

For a power producer, the amount of electricity sold directly to clients at any time need not correspond to the amount generated. To maximise income, generators dispose the water in the reservoirs on the basis of the spot price at any given time and future price expectations. To ensure that output corresponds to sales commitments, generators can buy and sell power in the market, Nord Pool for instance.

End-user market
Anyone who buys electricity for his or her own consumption is an end-user. Small end-users normally buy power from an electricity supply company. Larger end-users, such as industrial enterprises, often buy directly in the wholesale market.

The total electricity invoice has several components: electricity price, transmission tariff, consumption tax (electricity tax), VAT and a levy on the transmission tariff earmarked for the Energy Fund. All end-users must pay a transmission tariff to the local grid company to which they are connected. The consumption tax is imposed on electricity that is consumed in Norway. In 2007, the consumption tax is 10.23 øre/kWh, and since 2004 it is paid together with the distribution tariff. The Energy Fund levy is 1 øre/kWh.

More information about transmission and distribution tariffs on NVE’s web pages.

Prices for private households were relatively stable from 1985 to 2002. However, the cold winter in 1995-1996, combined with low inflow in 1996, resulted in a sharp rise in wholesale prices, which in turn led to an increase in household prices from 1996 to 1997. Precipitation was above normal for every year in the period 1997-2000 , with relatively high hydropower output. This was reflected in a general decline in prices over the whole period. Inflow to the reservoirs declined substantially in the autumn of 2002, which resulted in a significant increase in household prices for many in the beginning of 2003. A normalised reservoir situation resulted in declining prices later that year. Also in last half of 2006, lower inflow led to higher prices in both the spot market and the end-user market. However, precipitation above normal in the period from November to January, resulted in falling prices in first quarter of 2007. The figure below shows the development in average prices for households from 1985 to 2005.

All end-users are free to choose electricity supplier and contract type. The most common contracts for households have prices that vary according to market conditions. In the first quarter of 2006, 57.8 percent of households had contracts with variable price, which means that the power suppliers can change the price according to the market conditions, given that they announce this two weeks in advance. 25.4 percent of the households had Elspot-based contracts, for example a contract that charges the Elspot price plus a fixed mark-up. The remaining household customers had various types of fixed-price contracts. A fixed price, for example for one year, means that the power supplier cannot alter the price during the contract period, even if market prices change. As at the first quarter of 2006, 16.8 percent of household customers had this type of contract.

International power trading
Norway was traditionally a net exporter of power. However, in the late 1990s consumption of electricity rose faster than the power supply, as hydropower development has been limited in recent times. Thus, Norway has on average been a net importer since. In certain years, however, high precipitation and inflow to reservoirs mean that the hydropower utilities can help exports to exceed imports. As an example, the Norwegian net power exports totalled 9.7 TWh in 2002, while we had a net import situation in the following year that amounted to 7.8 TWh. In 2005, the net export was around 12.2 TWh. The figure below shows imports and exports of power by Norway from 1970 to 2005.

International power trading is determined by generating and consumption patterns in each country, in addition to the capacity on the interconnectors and the conditions for its use. The motive for power trading is the opportunities it offers countries to derive mutual benefit from differences in national generating systems. Exchanging power is important for Norway because it reduces the country’s vulnerability to variations in precipitation and inflow and makes use of the regulatory capacity of hydro-power. The opportunity of exchanging power moderate Norway’s need to maintain a large domestic reserve capacity as an insurance against dry years, and is important to ensure the security of supply.

Norway has interconnectors towards Sweden, Denmark, Finland and Russia, as shown in the map below. The transmission capacities towards Finland and Russia are low, and the connection with Russia is used only for imports to Norway. The highest transmission capacity from Norway goes towards Sweden, at about 3 600 MW, while the capacity in the other direction is somewhat lower. Capacity between Norway and Denmark is about 1 000 MW. The specified transmission capacity on the interconnectors is what the system operators consider to be realistic for large parts of the year. However, estimates indicate that, were this capacity to be fully utilised, it would be theoretically possible to exchange almost 20 TWh per year between Norway and neighbouring countries. A new interconnector between the Netherlands and Norway is planned to be put into force at the end of 2007.

 

(published August 30, 2007)

 

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