Why protectionist energy policies produce rotten tomatoes

Explaining electricity market coupling and price formation is every energy nerd’s dream – hugely complex and wonderfully enjoyable to unpick and explain. So, where better place to start than talking about the price of tomatoes? Bear with me, I will explain. Tomatoes produced in Spain are the cheapest as they are produced locally. Spanish tomatoes in Sweden have a higher price due to transportation, handling, storage and distribution costs.

Now imagine a situation where, thanks to a great harvest, there is a bumper crop, a surplus. Spanish farmers have a natural limit on how many can be stored while the excess is left to rot. The growers would then be motivated to export more tomatoes to prevent them from going to waste. Swedish consumers, on the other hand, would benefit from these extra and cheaper goods.

Understanding electricity market coupling is more or less the same. Power produced at any given moment needs to be equal to consumption to balance the system. Balancing is crucial to maintain the nominal frequency, which ensures safe operation and avoids outages. 

The electricity market determines the traded power price, while the power system facilitates the real-time production, consumption and flow. Efforts are ongoing to align market outcomes as closely as possible with the way electrons flow in the grid. Another important link between markets and the power system can help us understand regional price differences. If there is enough transmission capacity between two regions with different generation types, electricity prices will be the same. When the lines are fully used but demand still can’t be met, prices will differ. Revenues from price differences between market areas go to TSOs, which are responsible for balancing the system, in the form of congestion income. This revenue helps them build infrastructure to facilitate more flows – fewer rotten tomatoes.

Most negative price hours in Europe

Statistical data on day-ahead electricity market prices show that some of the Nordic countries have faced the highest occurrence of negative prices in recent years. Does this indicate a surplus of production (rotten tomatoes)? And if so, wouldn’t producers in these regions be incentivised to supply their neighbours, where price spikes occur?  

Historically, the Nordic region has exported to its European neighbours due to the availability of cheaper hydropower. This trend has persisted for years but now we see the direction of flows reversing based on seasonal patterns. The reason for this is the large investments in renewables in Europe as a whole. In 2024, Germany and surrounding countries added a total of 30 GW of solar and 13 GW of wind capacity. 

As a result of the green boom in neighbouring countries, Nordic hydropower has acted as a storage solution for the continent. Afternoon solar peaks in neighbouring countries have led to imports to the Nordics, resulting in low hydropower use, as shown in the fuel mix chart below.

In the evening, however, hydropower is used to support the evening demand peaks when solar generation declines. This helps maintain a healthy hydropower balance, with wider beneficial implications, as part of the profits go to social causes. Moreover, Norway’s NO3 and NO4 bidding zones also imported significantly more in 2024 than in 2023. 

At this point, most people see the benefit of power market coupling and so do the Nordic TSOs. They launched a new method of cross-border transmission capacity calculation and allocation three months ago, called flow-based market coupling. This system aligns the markets more closely with the physics of the underlying power system. It results in more power flowing from lower-priced zones to higher-priced zones, following the market principle that surplus power naturally flows from low-price to high-price areas where interconnectors are available. However, as the surplus is exported, it causes prices to rise in the areas from which the power is being sent. This is a result of supply-demand dynamics.

Limiting power exports?

In Norway, for example, there has been controversy surrounding interconnectors because exporting surplus power is driving up domestic prices. Operating a market so closely tied to the power system, while simplifying the system’s components, inevitably leads to rising costs each year, which are ultimately borne by taxpayers. Despite these concerns, the TSOs have proceeded with the new capacity calculations, as required by EU law. 

The Norwegian TSO, Statnett, has been criticised by the Finnish energy regulator for reducing the capacities made available to the market, however. Statnett claims this is for internal security reasons but it could lead to a lack of transparency if this value was not originally agreed upon by the regional TSOs. Following Statnett’s lead, the Swedish TSO, Svenska Kraftnat, has also announced plans to do the same, which could result in inefficient market outcomes.

When hearing about such non-transparent ways of reducing available capacity, one wonders if it is a tactic to keep prices lower in domestic markets. Norwegian politicians are also taking a step back from the scheme with a proposal to discontinue permits for transmission lines to the rest of Europe. The Centre party has threatened to withdraw support from its Labour coalition partner if it does not oppose the EU’s clean energy package, which would allow for stronger market coupling and the construction of more transmission lines. 

Any weakening of the infrastructure to move power around results in more rotten tomatoes. Maybe even piles and piles of them. But let’s not forget that there can also be situations when the Nordic region has a production deficit and needs to import. What happens then? It could lead to regular price spikes or, in extreme cases, blackouts. If we have physical infrastructure in place, it will work in both directions when needed. If the expected industrial demand growth in the Nordic region over the next five to 10 years happens, we need to ask: where will the supply come from? If a lack of market coupling lowers prices and slows investment in generation, and there isn’t enough infrastructure to import from neighbouring countries, will this industrial growth still happen? 

We need to make joint efforts to combat climate change by improving interconnections and looking at the bigger picture. Some days, the Nordics might end up with a lot of rotten tomatoes but it also won’t be short in times of scarcity. After all, a friend in need is a friend indeed. 

It wasn’t that long ago that the EU produced all sorts of surpluses. Remember the days of the butter mountains and milk lakes? The energy market would be wise not to follow a similar path. No one benefits from a swamp of rotten tomatoes.

This article originally appeared as a column on montelnews.com