May 16, 2003 -- Despite drought and the very cold weather which prevailed last winter, the electricity market showed that a market-focused approach can ensure electricity supply also in exceptional conditions.

The energy industry must have the same operating opportunities as any other industry subject to competition, says Harry Viheriävaara, Executive Vice President of the Finnish Energy Industries Federation Finergy.

Harry Viheriävaara, who presented the Winter period 2002 - 2003 report in Finergy's spring seminar of the federation meeting on 15 May, emphasises that the price level in the Nordic electricity market is susceptible to fluctuations especially as a result of changes in hydropower production volumes. The market can offer options through which the various market players can stabilise the price level. This is of particular importance from the viewpoint of customers.

According to the report, the electricity market worked as anticipated, and the electricity production capacity was made available at commercial terms. Almost all usable power plant capacity in Finland was in use during the period of very cold weather. According to Harry Viheriävaara, the crucial factors were coal power plants, whose production volume was raised by plants that had not been used for a length of time, and by increased electricity import capacity from Russia.

Harry Viheriävaara emphasises that from the viewpoint of the market price of electricity, the electricity market worked in accordance with general market principles. When the electricity production capacity was insufficient, the market price rose. However, the prices paid by consumers with small-scale consumption rose slowly and not as high as the market prices.

- The sales prices of electricity followed the trend in the market price. However, small-scale consumers saw the price impacts after a delay, and their prices did not rise up to the market prices in any situation. The public tariffs were clearly below the average level of market prices. For electric utilities, it is important that pricing becomes more flexible, which would call for regulatory changes.

In the extreme situations as those experienced during the cold winter and long drought, it is evident that the electricity market has shortage of electricity. Harry Viheriävaara says that in a situation like this, it cannot be expected that the market players can compete with each other with excess electricity that would be available during situations of higher supply. The price level is ultimately the factor that guides what the buyers and sellers do.

The power system worked technically well. There were no major power plant disorders, but a normal number of individual technical faults occurred. In Sweden, one nuclear power plant was out of use for a length of time on account of a modernisation project. No major transmission system disorders were experienced with the exception of a damage which reduced the transmission capacity on the connection between Denmark and Germany.

Long-term investments

As far as future investment projects are concerned, it is important to remember that electricity production investments have a long-term impact. These investments are also related to the stability of the price level. Authorities can influence the investment opportunities for instance through flexible permit procedures. Customers can also affect investments through long-term contracts.

On the basis of the experiences offered by last winter, attention should also be paid to decentralised fuel supply, sufficient storage of fuels and to ensured fuel transport capacity, says Harry Viheriävaara.

- When several fuels can be used in power plants, we have more flexibility when the market situations change. Weather has an impact on the availability of different fuels, which needs to be taken into account in advance planning. Every electricity producer must take care of the condition of production capacity, Harry Viheriävaara states.

No production option must be ruled out, coal is still needed

According to Harry Viheriävaara, the past winter also indicated that Finland cannot rule out any electricity production option. This also applies to coal - a controlled restriction in the use of coal is currently being examined by a committee of the Finnish Ministry of Trade and Industry.

The increased need for electricity imports in Sweden and Norway entails some problems as far as the climate objectives are concerned. This need is also reflected in the production of power plants firing coal and natural gas in Denmark and Finland. Once emissions trading within the EU commences, this situation will also raise the price of electricity.

Market event information in the Nordic electricity exchange focuses on production and transmission. Experiences show that information about measures relating to the use of electricity and about measures undertaken by authorities should also be provided.

Sufficient electricity for everyone, price increase and voluntary savings worked

The very cold weather last winter and the scant water reservoirs put the power system to the test in terms of fuel supply and electricity production, transmission, distribution and sales. However, the liberalised electricity market managed this situation as anticipated, Harry Viheriävaara states.

- There was sufficient electricity for everyone, no rationing was needed, and voluntary electricity saving recommendations and price flexibility of electricity reduced electricity consumption. The exchange prices of electricity rose to an exceptionally high level.

Poor outlook on the next winter

The drought which began last summer still continues. The Nordic water reservoirs continue to be at the long-term minimum levels. Without an exceptionally rainy summer and autumn, the water reservoirs will likely be below normal also when the winter begins. This deficit will be covered through coal power production and electricity imports from Germany, Russia and Poland. Even now, Finland produces approximately 2,000 megawatts of electricity through coal condensing power.

Winter period 2002 - 2003 report

Finnish Energy Industries Federation Finergy has compiled experiences gained during the past winter period to be used in subsequent operations. Finergy continues to monitor the situation and will report whenever necessary. The Winter period 2002 - 2003 report has been drawn by team Päivi Aaltonen, Markku Jalonen, Juhani Santaholma, Pekka Tiusanen, Jouni Tolonen and Harry Viheriävaara. The team obtained expert assistance from the electricity market parties and Finergy's committees.