The welfare effects of integrating electricity markets - How differences in production technologies affect trade between the United Kingdom and the Nordic countries

University essay from Handelshögskolan i Stockholm/Institutionen för nationalekonomi

Abstract: The European Union aims to create a single European integrated electricity market. At present there are concrete plans to connect the electricity markets of the United Kingdom (UK) and the Nordic countries. Due to differences in electricity generation technologies, the UK has a relatively more expensive electricity market than the Nordics. In this thesis we investigate the welfare effects of electricity trade between these two regions. We run several scenarios with varying capacity of production sources such as wind, nuclear and hydropower in order to analyse how these changes affect trade patterns. A partial equilibrium model is used to determine the effects on prices and on the consequent welfare of consumers and producers in each region. Our results suggest that, in general the Nordic countries export electricity and prices converge. Consequently, consumers in the UK gain while their producers lose. In the Nordic countries the reverse happens. Furthermore,the variability of output of certain production technologies such as wind power and hydropower can at times substantially affect prices, which in turn can lead to swift changes in the direction of trade. Future benefits of trade are hence dependent on future generation mixes as well as factors that can affect generation output such as weather conditions.

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