The Nordic Electricity Market: An Empirical Analysis of Security through Trade

Abstract: With the expansion of renewable energies, policy makers face the decision of investing into back-up generation capacity or into an expansion of the transmission capacity. As electricity is a homogeneous good, it is unique in the way that it is likely to be subject of two-way trade, within a time period, as short as a day. This feature is usually not covered in generic two-way trade models. Using the model developed by Antweiler (2016a), this thesis analyses the drivers behind the extensive two-way trade in the Nordic electricity market. While the model was developed to fit the U.S. and Canadian market, its application to the Nordics is a first step towards modelling the Nordic electricity trade. Furthermore, the model also assesses the value of a potential extension of the transmission capacity. By utilising monthly trade data in the period from November 2011 to September 2017 across the Nordic countries, it finds that a higher load ratio is correlated with a higher export: the opposite effect of the findings on the North American market. A comparison between self-sufficient jurisdictions and a fully integrated market further shows the potential size of possible reductions in back-up capacity following from an expansion in transmission capacity.