Do energy markets provide adequate incentives for investment in generating capacity? — A case study in Nordic electricity market

This article provides an insight into the profitability of a peak load generator in the Nordic electricity market as a way to evaluate the market\´s capacity to provide adequate incentives to stimulate investment in generating capacity. We base this analysis on the Nordic electricity market during the very tight period of the winter 2002-2003 triggered by an extreme drought, which should represent one of the most favorable market conditions to remunerate a peaking unit. The result shows that the "missing money" problem exists in the Nordic wholesale electricity market. Tracing the sources of the revenue gap, we find that the Nordic countries\´ peak load arrangement might be a major reason for the depression of price in the real time market and consequently in the spot market. After having studied the peak-load reserve arrangement, the real-time market design, as well as Nordic system operators\´ inclination in terms of market development, we propose some market design remedies which could help reinforce the consistency of market rules and the credibility of market prices.