Real-Time Pricing in the Nordic Power Markets

In this paper we study the potential effects of Real-Time Pricing (RTP) of electricity on the need for long-run capacities in the Nordic Power markets. A characteristic of the Nordic Power market is the large variety of production technologies, of which hydro and nuclear power are capacity constrained. We analyze the impact of RTP on: the need for total, peak and midmerit capacities; total demand; prices; peak demand hours; and economic welfare. We have also studied whether the results of RTP are sensitive to the simultaneous implementation of tradable emission permits. We find that RTP diminishes the need for total capacity even with inelastic demand. Our results show that even with modest assumptions related to RTP participation, the annual midmerit and peaker capacity efficiency savings amount to 97million Euros, which are around 6% of their total annual investment costs. The price of the peak demand hour clearly diminishes as the share of the RTP customers increases or demand becomes more price elastic. We compare RTP and tradable emission permits as two separate instruments in reaching energy use efficiencies and show how these two instruments must be seen as complementary and not as substitutable instruments. We show how RTP and tradable emission permits have a positive correlation in promoting market access of renewable energy sources. We find that welfare effects of the implementation of RTP are positive.