Real-Time Pricing in the Nordic Power Markets

Abstract

In this paper we study the potential effects of Real Time Pricing (RTP) of electricity to the need of long-run capacities in the Nordic power markets. A characteristic of the Nordic power market is the large variety of production technologies of which hydro and nuclear power are capacity constrained. We analyze the impact of RTP on the need for total, peak and midmerit capacities, on total demand, on the prices, on the peak demand hours and also on the welfare. We have also studied whether the results of RTP are sensitive to the simultaneous implementation of tradable emission permits. We find that RTP diminishes the need for total capacity even with inelastic demand. Also the price of the peak demand hour clearly diminishes as the share of the RTP customers increases or demand becomes more price elastic. We find that welfare effects of the implementation of RTP are positive. The results are sensitive whether we analyze the market with or without emission trade.

Keywords: Real Time Pricing, Nordic Power Markets, capacity investments

JEL Classification: C63, D24, L94, Q41