Area price differences in the Nordic electricity spot market

This thesis examines the power price differences between Finland and Sweden in the Nordic electricity spot market (Nord Pool). Three research questions are posed: 1) what have been the explaining factors of the area price differences, 2) what have been the historic probabilities and sizes of the area price differences, and 3) what have been the quantitative effects of different factors to the area price differences. A regression model is laid out to explain the area price differences. The chosen factors seek to capture the main sources of change in the Finnish-Swedish power balances. The factors include temperature difference, transmission capacity and nuclear outages, Russo-Estonian exchange, and the clean dark spread. All the factors turn out to be highly statistically significant. For instance, the drastic increase in the area price differences from fall 2011 onwards could be primarily attributed to changes in the temperature difference and the clean dark spread of which the latter reflected the exceptionally wet circumstances. The residuals of the regression are autocorrelated which may be a reflection of the autocorrelation in the factors themselves. This suggests the specification should be modified in order to make consecutive observations more independent of each other. Due to the high amount of regional factors affecting the state of the market the possibility of omitted variables cannot be ruled out either