European Commission DG Competition Antitrust registry B149 BRUSSELS Belgium Deres ref./your ref.: Vår ref./our ref.: Dato/date.: 5/78 Oslo, 27 October 26 742/HOW/SL Congestion management Dansk Energi`s complaint regarding Swedish TSO practice Reference is made to the complaint from Dansk Energi (DE) of 2 July regarding the practice of the Swedish transmission system operator, Svenska Kraftnät (SvK). The Norwegian Electricity Industry Association (EBL) organizes approximately 26 companies representing 99% of the total generation in Norway. Our distribution members account for 92% of the total number of customers connected to the networks in Norway. DEs main concern relates to the management of available transfer capacity, ATC, on the interconnection across Øresund. A consequence of SvK s behaviour has been an unacceptable price risk for traders and consumers on the Danish side of the border. Many have faced significant losses due to this. The behaviour of SvK also reduces trade capacity on interconnections between Norway and Sweden. EBL therefore has a legitimate interest in supporting the Danish complaint regarding SvK`s practice. In order to resolve congestions, market based systems should be applied either by the use of price areas or counter trade i.e. paying producers and/or consumers to increase or decrease their production or consumption. SvK has a proclaimed goal to maintain one price area in Sweden. This necessitates counter trade to handle internal congestions and will, if applied, result in additional costs for SvK. In order to avoid potential congestions within Sweden and limit or avoid costs related to the congestion management, SvK reduces exports out of Southern Sweden to a considerable extent by curbing trade capacities (reducing available transfer capacity) on interconnections with bordering countries. In our opinion the behaviour of SvK results in inefficient allocation of the resources and leads to a reduced economic surplus for the Nordic region as a whole. We also claim that this reduces the security of supply both for the Nordic region and for each country. Hence SvK s practice seems not primarily motivated by security of supply reasons, but rather at limiting costs. As claimed by DE, this is not in accordance with relevant EU legislation. This important issue was addressed to SvK by the Norwegian regulator, NVE, in 23, where NVE pointed out the negative impacts of resolving internal congestions by reducing trade capacities. The issue has also been addressed by the Nordic Council of Ministers, NCM, in 1
order to create common rules for congestion management. Despite these efforts, it seems to be difficult to reach a common understanding and practice in line with EU policy. Please find enclosed a more detailed description of the consequences of SvK s behaviour. Yours sincerely Norwegian Electricity Industry Association - EBL Steinar Bysveen Managing director Copy: DG TREN 2
The Nordic region description The Nordic countries have established a common power market that is unique in the world, and recognised as such by the EU. A presumption for this market is that each country benefits from a free flow of electricity and a continuous effort to reduce obstacles for cross border trade. The benefit for the countries in the Nordic region is that each country may depend on the market to efficiently distribute available power resources in deficit situations, without national interference to protect domestic supply. This will fully exploit the combination of the different power resources in the region; hydro, nuclear, coal and wind, and optimise the use of these resources. It has been a political objective to develop the Nordic power market in such a way that the Nordic region can function as one region instead of four separate regions, and provide an optimal economic solution to the power needs for the region. Open borders enable a full utilisation of interconnecting hydropower and thermal power systems. Hydro water wet Hydro water dry Hydro water thermal/ nuclear Fig. 1 A visualisation of the interaction between the predominantly hydro system in Norway and the hydro/thermal based system in the rest of the Nordic region. In dry years, the lower level of precipitation in Norway is offset by import from other countries. In wet years, the increased precipitation results in export to the other countries thermal/ wind thermal/ nuclear 165 8. 13 5.8.1 25 11.3 Fig. 2 Wet year: This figure shows net export/import between the Nordic countries and out of the region in 25, in TWh. 25 was a rather wet year and Norway exported power to Sweden and Denmark. Sweden exported to Denmark, Finland and Germany. 4.2 6.9 9.8 2.7 165 8.9 13 6.1.3 25 11.1 Fig. 3 Dry year: The figure shows net export/import between the Nordic countries and out of the region in 24, in TWh. 24 was on the dry side and Norway imported power both from Sweden and Denmark. Sweden exported to Denmark and imported from Finland and Germany/Poland. 2.3 1.4 2. 2.2 2
The present situation Congestion appears to a certain extent on interconnectors in the Nordic region. The extent to which there is congestion varies with precipitation (most notably in Norway, which is almost 1 % hydro based and to some extent Sweden), wind, maintenance work on interconnections, and the underlying prices of input to the thermal system. Today the countries surrounding Sweden experience strong congestions on the interconnectors with Southern Sweden, i.e. the export out of Sweden is limited. The use of price areas is one way to deal with congestions another is counter trade, whereby producers and consumers in the various areas are paid to increase or decrease generation and/or consumption to relieve the physical congestion between areas. Sweden has imposed the principle of one price for the whole country. This has several implications. Firstly, it does not give the right operational price signals for existing production facilities or for allocation of new generation capacity. If SvK introduced price areas, this would give correct operational signals for generators to start up existing plants and better incentives for allocation of new capacity in areas with a supply deficit. Secondly, SvK imposes substantial restrictions on cross border connections, specifically on import/export cables in Southern Sweden. Southern Sweden south of cut 4 (fig.4 below) has substantial consumption and limited generation, and import/export connections to Denmark, Germany and Poland. Cut 4 represents a congestion for power flows from Mid and Northern Sweden, where most of the Swedish generation takes place, to Southern Sweden and Sealand. Fig. 4 Price areas in the Nordic region and relevant cuts in Sweden. NO2 NO1 DKW DKE 165 SE SW 13 Cut 2 Cut 4 FI West coast corridor Norway is divided into two price areas, as is Denmark. Finland and Sweden have only one price area for each country. The two relevant cuts in Sweden are cut 2 in Mid Sweden and cut 4 in the south. The majority of the generation takes place in the north of cut 2 (mainly hydro power), whereas the majority of the consumption is in the south of cut 2, with the highest deficit south of cut 4. During the winter months, SvK imposes extensive restrictions on exports out of Sweden. As a TSO, SvK is entrusted with the mandate to ensure security of supply and to ensure the technical security of the system. SvK claims that this is the reason for the imposed restrictions on exports. The effect of such export restrictions is a significant reduction in SVKs need for counter trade, volumes and costs. More importantly, it is highly questionable whether the practice of reducing export capacity actually ensures the security of supply in Sweden. When imports are needed, e.g. during cold winter periods, a combination of price areas (instead of counter trade) and unchanged export capacities would better ensure maximum utilisation of the import capacity to the 3
Nordic region, and in particular to Sweden south of cut 4, from Poland and Germany. However this would lead to higher prices in Sweden south of cut 4 than in the rest of Sweden, and higher prices in Sealand (Denmark West). A further consequence of the Swedish practice is that the most expensive production facilities in Sweden south of cut 4 frequently are not activated. While these production facilities still may be cheaper than marginal resources in neighbouring countries, the effect is a lower economic surplus for the region as a whole. Also, this may in fact threaten the local security of supply, despite Swedish claims of security of supply being the main reason for this practice: Swedish producers south of cut 4 will hesitate in making the most expensive production facilities ready and available to the market, both on a short term (e.g. day ahead), in the medium term (e.g. for the winter season), and in fact also in the long-term (i.e. reduced investments in peaking capacity), which not surprisingly maintains to be a major concern for Svenska Kraftnät. The consequence of forcing more expensive units in the neighbouring countries into the market, thereby creating higher than optimal prices in these countries, also has a negative impact on the Swedish security of supply: Norwegian hydro reservoirs will be increasingly drained at an early phase of the winter season. This will reduce the ability to assist Sweden later in the winter season, which could be very important in case of e.g. a sudden closure of one or more nuclear reactors. This might be profitable for Norwegian producers, but was hardly the intention of the Swedish practice of cutting export capacity. Further more, it is uncertain whether or not SvK will reduce export capacities from Sweden to Norway when a deficit in Norway occurs due to high drainage of reservoirs. This can threaten the security of supply in Norway and lead to very high prices. Restricting the flow on borders reduces the need for counter trade, but discriminates foreign producers rights to compete in the Swedish market. The practice also reduces the Swedish producers opportunities and rewards in the market. On an overall level the solution to a deficit of power production is threefold; to increase generation, reduce consumption or increase import/trade. It is crucial for the future success of the common Nordic electricity market that trade is allowed to take place between the countries; even if that implies export of own power which will in the short run - increase domestic prices. From a welfare point of view the best use of common resources is to use the units that at any given time have the lowest marginal cost. Imposing import or export restrictions distorts the merit order and results in an economic loss for the region as a whole and increased prices for end-users. In the short term range there are economic losses. In the long term perspective each country may have to increase focus on self sufficiency by building domestic production with the aim to be self-supporting in any given situation, replacing potential imports that may be restricted. This implies huge investments, especially for countries highly dependant on a fluctuating power source, such as Norway. Examples The following is a description of some examples of restrictions on borders in the Nordic region (in addition to what has been presented in the complaint from DE). 4
Sweden has occasionally physical constraints between two or three areas, with one cut in Mid-Sweden and one in south of Sweden as visualised in figure 4. Surplus power capacity in Sweden is concentrated in the north, while the deficit is in the south. West coast corridor/hasle The transmission lines on the Swedish west coast represent at times a congestion point in the system. This happens when power flows north along the western coast of Sweden from the southern parts of Sweden. In such cases SvK imposes restrictions on the export into Norway at Hasle just north of the West coast corridor. This discriminates Norwegian consumers vs Swedish consumers, as it results in higher prices in Norway than if the flow was left uninterrupted. Below is an example during a week in April-May in 26. Cap and price diff. SE>NO1 28.4.-7.5.6 Cap SE>NO1 Pricediff. NO1-SE 25 5 13 Available cap. MW 2 15 1 Max capacity 4 3 2 1 Price diff. NO1 - SE NO2 NO1 SW FI 5 DKW -1 DKE Fig. 5 The figure shows available capacity from Sweden to NO1 and price difference some days in April and May 26. The prices in NO1 are up to 4 EUR higher than in Sweden in periods when the capacity is reduced from ca. 2 MW down to 5 MW. The figure reads as follows: a positive price difference (right y-axis) means that the price in NO1 is higher than the Swedish price, and in a functioning market the flow should then go to South Norway. The flow reads on the left y-axis. The figure shows that there is indeed flow from Sweden to South Norway, but also that the capacity has been restricted down to various levels while there are still substantial price differences. As long as there still are price differences above zero, the flow should be up to the max capacity to even out prices. The flow from SE to NO1 was restricted in more than 6 % of the hours in April 26 and in 55 % of the hours in May 26. South of cut 4 is the region with high consumption and limited production. This area has electrical connections to West Denmark and East Denmark (the Öresund connection), Germany (Baltic Cable) and Poland (Swepol). SvK generally restricts exports on the cables out of Southern Sweden. 5
Baltic Cable - BC DE has presented data on the Öresund connection. In addition, we would like to present some data related to restrictions on Baltic Cable (BC). A typical pattern of the physical flow on BC during a week is shown below in figure 6. (This figure is not meant to be an example of restrictions, but rather to give a description of how the Baltic Cable (along with other cables) functions as a leveller between two different systems a mainly hydro based and a thermal based system. Flow north weekends Flow north nights Flow south weekdays Swe price Ger price +: flow should go north acc. to prices - : flow should go south acc. to prices Fig. 6 A typical pattern of physical flow on BC north during nights and weekends, south during weekdays. The Nordic region functions as a swing producer for Europe. The flow is governed by the price difference between Swedish and German spot prices. SvK has increasingly imposed restrictions on BC, especially during the winter season. During the winter of 25, the flow on BC was restricted 85 % of the total hours. While the transmission capacity on BC is 6 MW, the average available capacity during the winter of 25 turned out to be 34 MW. The situation during the first three months in 26 turned out even worse: the flow on the cable was restricted in 95 per cent of the total hours, with an average available capacity of 173 MW. Needless to say, this resulted in substantial loss of revenues and lost imports to Sweden. As Swedish nuclear production facilities later on ran into severe security problems, the lost import caused higher domestic prices and lower security of supply for Sweden in the medium term perspective. Thus, it is clear that the claimed objective of ensuring security of supply in fact reduce security of supply for both Sweden and the Nordic region as a whole at least in a medium and long-term perspective. Below in fig. 7 is a representative winter week in March 26, which shows an example of the restrictions on the flow from Sweden to Germany. The yellow line and the right axis show the Swedish price minus German price. When the price difference is below zero, the flow should go from Sweden to Germany. The dark bars along with the left axis show the capacity in MW in this direction (Sweden to Germany) made available to the transmitters by the 6
TSOs. The technical maximum capacity is 6 MW. The figure shows that the capacity is consistently restricted when the price difference predicts flow from Sweden to Germany. Available cap. and price diff. SE>GER 6.3.-12.3.6 Available cap. MW Price diff. EUR/MWh Available cap. MW 7 6 5 4 3 2 1 Max capacity 6 4 2-2 -4-6 -8 Price diff. EUR/MWh NO2 NO1 DKW SW 13 FI -1 DKE Fig. 7 Capacity restrictions on Baltic Cable and price difference between Sweden and Germany during 6 12 March 26, hourly values. The export restrictions lead to lower prices in Sweden and higher prices in Germany and lead to a redistribution of income from Swedish producers and German consumers to Swedish consumers and German producers. The net economic effect is a loss of welfare. Figure 8 shows another example of flow on BC during the period 3 16 July 26. 8 -CAPACITY.EXT.SE_DE.MWH.H.H EXCHANGE._.SE_DE.MWH.H.H CAPACITY.EXT.DE_SE.MWH.H.H PRICE.REF.SE.EUR.MWH.H-PRICE.EEX 6 6 4 4 2 2-2 -2-4 -4-6 -6-8 -8 3 4 5 6 7 8 9 1 11 12 13 14 15 16 Jul 26-1 Fig. 8 Capacity restrictions on Baltic Cable and price difference between Sweden and Germany during 3 16 July 26, hourly values. 7
The slashed line shows the TSO given capacity from Germany to Sweden. The blue bars show actual flows in each direction. Former Swedish TSO practice for controlling these restrictions has been to reduce the flow from Sweden to Norway. SvK has however introduced a new practice were they reduce available transfer capacity pro rata on all cables into Southern Sweden. Both the former and the new approach leads to a reduced utilization of the cables into Southern Sweden, it distorts the prices both in Sweden and Norway, and reduces system security by reducing imports to the Nordic system. By using market splitting (price areas) a better allocation of available resources would be achieved. This would lead to reduced prices in the southern price area in Sweden due to increased imports from Germany,and reduced prices in Southern Norway due to increased exports from Sweden to Norway. In the long run continuous disruptions of available transfer capacity, that on the outset are governed by the market, will induce a loss of fundamental trust in the system and in turn result in an increasingly national focus rather than an increased focus on developing a pan European electricity market. Legal framework DE s complaint contains a thorough presentation of the legal framework relevant for the case, summarised in the following. Cross border flows between countries are governed by the following legal framework: The general principles are found in the EC Treaty regarding the internal market; against discrimination on the grounds of nationality, in article 12 and for free movement of goods in articles 28 and 29. Specific EC legislation pertaining to cross border exchanges is found in Regulation EC No 1228/23 on conditions for access to the network for cross border exchanges in electricity (the CBT Regulation), and in the Guidelines to the Regulation EC No 1228/23, as well as the proposed amendment to the Regulation EC No 1228/23. In the latter proposed amendment, subsection 1.7 it is stated that Specifically, TSOs may not limit interconnection capacity in order to solve congestion inside their own control area, except for the above mentioned reasons and reasons of operational security. Directive 23/54/EC concerning common rules for the internal market in electricity, articles 9 and 11(2) are relevant, stating that the TSO shall ensure non-discrimination between system users. The Nordic TSOs are entrusted to operate the high voltage grids in and between each country, to ensure security of supply, and to enhance competition and non-discrimination. DE s complaint states that it is not within the TSO s mandate to pursue economic goals such as seeking means to limit its own counter purchase costs, in order to maintain a low domestic price and discriminate against foreign consumers. 8