Increasing volatility & negative prices: Sweden's flexibility need

Amidst the evolving energy landscape, the growing presence of variable renewable energy sources, increasing interconnections and the ever-shifting patterns of consumer behaviour (influenced by weather conditions) are profoundly reconfiguring dynamics within short-term electricity markets. For reference, short-term markets encompass day-ahead, intraday and various balancing markets. 

Growth in variable renewable energy in Sweden: 

The increase in installed wind power in Sweden is shown in Figure 1 . By the end of 2023, installed wind capacity was 16.4 GW. It is projected to grow to 55 TWh in 2026, contributing to 28% Sweden's power generation. 

Solar has also seen rapid growth in Sweden, with about 1 GW of solar added in 2022 and 1.6 GW in 2023. As of today, the total capacity solar installed in Sweden has surpassed 4 GW. 

Increasing price volatility and negative prices in the short-term markets: 

Because of the difficulty in forecasting wind and solar power production with full certainty, prices have become increasingly volatile and even negative in some hours. This shows that more flexibility is needed on the system.  

Figure 2 shows the monthly volatility - based on hourly data of price difference between day-ahead and imbalance prices from 2020. The increase in volatility is clear to see when compared to 2023 (see figure 3). 

So far this year, the day-ahead price in SE4 has been 11.45 EUR/MWh higher than SE2 on an average. The corresponding price difference was 24.90 EUR/MWh last year and 90.15 EUR/MWh in the extreme year of 2022. 

Figure 4 shows the number of hours with negative Day-Ahead prices in 2024 until 14th May 2024. SE4 has had 137 hours of negative prices so far this year, which ranks as the second-most in Europe, just after the Netherlands (140 hours). The solar boom in this region, alongside better intercoupling with central Europe, who are also facing negative prices, are the main drivers behind this. 

Correlation between prices in Sweden and other Nordic countries: 

Day-ahead prices in SE1 and SE2 are more closely correlated, while SE3 and SE4 are also more correlated as seen in Figure 5. However, this is weakening between SE3 and SE4 due to the increased number of solar installations in the south of Sweden, alongside better interconnection with the central Europe. The correlation between SE2 and SE3 has also been weaker due to the Swedish grid bottleneck.  

High day-ahead prices can also lead to higher imbalance prices -  as observed by the positive correlation between respective bidding zones. However, it is important to note that these prices are only moderately correlated, so this might not always hold. It would depend on the supply and demand dynamics, cross-border capacities as well as the imbalance direction in the system. 

Figure 6 shows the number of hours with up and down regulation activations in each bidding zone with the monthly variations. SE1 and SE2 contribute more to the downward regulation, while SE3 is more often used for upward regulation on a month-to-month comparison. The contribution of SE4 is lowest out of all the bidding zones. 

As long as there is cross-border capacity available, there is a common clearing amongst the Nordic bidding zones. Therefore, several Nordic bidding zones might end up with the same imbalance price. 

SE4 is not always activated, but the fact it is coupled leads to volatile imbalance prices in this area. Figure 7 shows the correlation of imbalance prices in between the zones and that the origin of volatile imbalance prices in Sweden might not always be within the country. 

For example, DK1 and DK2 have high imbalance prices every now and then, while SE3 and SE4 are sometimes coupled following the high prices. Finland also has high imbalance prices from time to time but there is a weaker correlation with Swedish prices. 

Lack of balancing market volumes leading to extreme imbalance prices: 

The imbalance price on 7th April 2024 reached -1005.04 EUR/MWh for 15:00 to 16:00 in several bidding zones in the Nordics including SE1, SE2, SE3, SE4, DK1, DK2, NO1, and NO2. 

In this case, the system was in need for down regulation volumes but had a deficit of those volumes. Out of all the eight bidding zones mentioned, just three of them, SE1, SE3 and NO2 had some remaining down regulation volumes unutilised. 

The last plot, with Sweden-Denmark schedule vs outturn flow, shows how the DA schedule flow indicated that Sweden would export to Denmark. However, in real-time, Sweden imported from Denmark, as overall the system needed to down-regulate and Denmark had exhausted their resources to do so. 

To avoid such extreme down regulation prices, Svenska kraftnät and Energinet had urged flexible power producers to bid more volumes in mFRR market to help in balancing the system. Only 42 MW of wind power was made available for down-regulation when around 6.4 GW of wind was producing in Sweden, suggesting that further incentives may be required.

Measures to prevent extreme imbalance prices: 

Some Nordic TSOs have launched an mFRR capacity market to procure volumes before the Day-ahead market. This is aimed at ensuring that flexible providers would participate in the mFRR energy market. 

Svenska Kraftnät (SVK) launched the national capacity market for manual frequency restoration reserves (mFRR) on October 17th, 2023. 

SVK has increased the volumes procured in the mFRR capacity market to 400 MW in the up market and 600 MW in the down market from Q2 2024. This led to a spike in prices in early April. As this is a new market, there are fewer participants than there are in other more established products, resulting in high prices due to the increased volume procured. 

The prices and volumes in all four bidding zones of Sweden are shown in Figure 9. This covers the mFRR downward capacity market. Figure 10 includes the data for the mFRR upward capacity market from 18th October 2024 to 6th April 2024. 

In general, the period with low hydropower production and high wind production means less flexibility from hydropower. The low production level of hydropower, which remains the dominant capacity (flexibility) reserve, results in higher downward capacity prices. An example is highlighted in Figure 11 for February 24th, 2024, when the mFRR down capacity price reached 200 EUR/MW. 

With time, as SVK increases the volumes procured in this market, it might become an attractive capacity market for the assets that are willing to reserve these volumes for mFRR activations. 

Author's note: further upcoming market market design changes that would further influence Swedish imbalance prices: 

mFRR Energy Activation Market (EAM): this will be an automated way of activating mFRR reserves as opposed to manual activation in today’s world. Due to being based on activation optimisation function, it will lead to more efficient dispatch and better use of resources.  

15 min MTUs: this is expected to reduce the imbalances and thereby the need for expensive balancing actions 

Increase in mFRR capacities procured by the TSO. 

Introduction of aFRR energy market: the imbalance prices will be set by the cost of both mFRR and aFRR activations. 

Modernized Area Control Error (mACE): change from frequency-based balancing for the entire Load frequency control (LFC) block collectively, to ACE based balancing each LFC area (bidding zone) individually. There will be cross border activation of imbalance netting and balancing reserves (aFFR and mFFR).  

Eventually Platform for the International Coordination of Automated Frequency Restoration and Stable System Operation (PICASSO) and Manually Activated Reserves Initiative (MARI): this will lead to better intercoupling with other balancing markets within Europe.