The Nordic electricity markets are integrated with other European markets through interconnectors with Germany, the Netherlands, the United Kingdom, Poland and the Baltic states, so political decisions affecting neighbouring markets – on capacity mechanisms, renewable energy support schemes, interconnector development and trading rules – can directly affect Nordic electricity prices and trade flows, which in turn can affect electricity producers, consumers and transmission system operators (TSOs).

The direction of regulatory development in these countries remains highly uncertain. In Germany, for example, questions around dispatchable capacity support and grid expansion remain unresolved; the United Kingdom is working through market integration after Brexit; and Poland is managing a complex phase-out of coal use. It matters for Nordic policymakers, regulators and market participants to understand how these developments could affect the Nordic electricity market.

The study's methodological approach

The study first assesses the political and regulatory situation in Germany, the United Kingdom, the Netherlands, Poland and the Baltic states, identifying the main uncertainties and political developments most relevant to the Nordic countries. The researchers link country-specific developments to broader regulatory trends that matter across several markets. Using the THEMA fundamental market model, a sensitivity analysis was then carried out to quantify how alternative outcomes of these regulatory trends would affect Nordic electricity prices, trading patterns and welfare. The analysis focuses on 2035 – far enough into the future for the relevant market developments to materialise, yet close enough to support meaningful policy guidance.

Regulatory developments analysed

The study assesses four regulatory trends:

1. Capacity mechanisms and the build-out of dispatchable capacity. Germany and Poland plan to increase dispatchable gas capacity through capacity mechanisms, but the outcome remains uncertain. We assess scenarios ranging from delays in implementing these plans to accelerated build-out driven by security-of-supply concerns.
   
   
2. Renewable generation and battery storage. The continental countries have ambitious targets for offshore wind, solar power and batteries, although the actual build-out trajectories remain highly uncertain. We assess the price and market impact of these targets being met – or not being met.
   
   
3. Interconnector availability and trade restrictions. New transmission projects such as EstLink3, Bornholm and Kriegers Flak are under consideration, while internal grid constraints could limit effective interconnector capacity. We assess the impact of project delays and reduced availability. In addition, the future EU-UK trade relationship remains uncertain, and broader protectionist pressure cannot be ruled out. We assess the impact of CBAM on electricity trade between the UK and the EU, as well as the effect of general trade charges on Nordic and European interconnectors.
   
   
4. Bidding zone splitting. Splitting Germany's bidding zone is being discussed as a solution to internal congestion and high redispatch costs. We assess the potential impact on Nordic prices, while noting that such a split currently appears unlikely.

Key findings

The analysis and simulations show that developments in neighbouring markets can materially affect prices in the Nordic countries, and thereby consumers, producers and TSOs. This affects average price levels, price volatility and peak prices alike. Although the Nordic market is not fully connected to neighbouring markets, developments elsewhere still matter.

The actual impact varies considerably depending on which parameters change, and by how much.

Some of the key observations:

1. A shortfall in dispatchable capacity in neighbouring markets would increase not only the number of price spikes in those markets, but also in Nordic bidding zones. For example, if Germany fails to meet its targets for dispatchable gas capacity (as currently set out in the government's Kraftwerksstrategie), the frequency of day-ahead price spikes in Nordic zones could increase, particularly in those Nordic zones directly connected to continental Europe.

2.     If European countries were to meet their ambitious offshore wind targets without a corresponding rise in demand, day-ahead prices in Europe and the Nordic countries could fall considerably. This effect is less pronounced for alternative development paths in solar power and battery capacity. If Germany, the United Kingdom and the Netherlands were to meet their offshore wind development targets without a corresponding increase in demand, electricity prices in north-west Europe would fall significantly, and Nordic electricity prices could fall by more than 50% compared with the baseline scenario.

3. Ambitious plans to expand solar power and battery capacity have a smaller effect on Nordic prices, although the impact can still be considerable, particularly under scenarios involving large-scale solar capacity expansion.

4. Policies that reduce interconnector availability could result in a net welfare loss for the Nordic region. If trade between the Nordic region and the rest of Europe is restricted, Nordic prices will fall. This would benefit consumers – who would pay less – and disadvantage energy producers – whose revenues would fall. However, the Nordic region as a whole produces more than it consumes. Sweden in particular has a substantial energy surplus. As a result, the total simulated losses to energy producers exceed the gains to consumers arising from the changed trading terms. The outcome is a net welfare loss for the Nordic region.

5. Trade restrictions in the form of transmission tariffs or surcharges would reduce cross-border flows and congestion revenues. Such charges or surcharges could significantly affect trade flows and congestion revenues. While the impact on baseload prices is relatively limited, the effect on electricity flows and congestion revenues can be considerable, depending on the level of the charge and the countries to which such measures apply.

6. Bidding zones in Germany could lower prices in the Nordic countries. Splitting Germany's bidding zone could significantly reduce electricity prices in northern Germany. This would also lead to a price decrease in the Nordic countries, given the link between the Nordic market and northern Germany. However, the price decrease in the Nordic countries would be less pronounced than in northern Germany.

These findings highlight the interdependence of European electricity markets: the extent to which Germany implements its stated capacity expansion plans directly affects the Nordic countries' peak-price risk; rapid offshore wind development would substantially reshape price formation in the Nordic countries; and restrictions on interconnector availability or cross-border trade would affect prices, trade flows and welfare. In short, developments in neighbouring markets matter, and Nordic policymakers and market participants need to be aware of these interdependencies when making decisions.

Nordic Energy Research I www.norden.org/publications I pub@norden.org