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How Finland Became Europe's Most Unstable Power Market?

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by Hale Okkonen
The image shows a green field with large solar panels in the foreground, angled toward the sun, symbolizing renewable energy. Behind the solar panels, several wind turbines are spinning against a clear blue sky. Overlaid on the image are faint, transparent financial graphs, similar to stock market data, creating a visual representation of the intersection between renewable energy production and financial markets.

FINLAND’S POWER MARKET HAS EXPERIENCED A SIGNIFICANT INCREASE IN VOLATILITY

During the last years, Finland has become one of Europe’s most volatile power markets. The rapid growth of renewable energy, especially wind power, combined with frequent negative prices, has made Finland an unpredictable market for both generators and users. This article explores the causes behind this instability, the growing role of negative prices, and the strategies the industry players are using to manage these challenges.

 

MORE VOLATILE THAN EVER

In 2023 Finland experienced 467 hours of negative prices, which is a significant growth from previous years (SKM Market Predictor). Now that negative prices have become a regular in Finland’s power market, it has become one of the most unpredictable markets in Europe. 

One of the main causes of this unpredictability is the high wind power production. This often leads to overcapacity and negative prices when supply exceeds demand.

Also, the significant growth of solar power plays a major role. Despite growing more slowly compared to other European countries, solar power in Finland has grown thanks to decreasing installation costs. However, this expansion brings challenges, particularly during sunny summer months, when high solar output creates spikes of overcapacity. Finland benefits from long daylight hours, enhancing solar efficiency, but the simultaneous expansion of solar power in neighboring countries increases the risk of overcapacity and market volatility.

Even though renewable energy sources are crucial to Finland’s energy transition, they come with challenges. As we’ve seen, in some cases, excess electricity has even become a ‘waste product’ during the hours of negative prices, forcing producers to pay to offload their surplus power.

The image displays a table titled "Hours of Negative Prices," which compares the number of hours with negative electricity prices across several regions, including Finland, SE3 (Sweden), NO2 (Norway), Germany, and the Netherlands, from 2013 to 2023. Finland, SE3, and NO2 had zero hours of negative prices until around 2020, but in 2023, Finland had 467 hours of negative prices, SE3 had 429, and NO2 had 174. Germany and the Netherlands show more consistent occurrences of negative prices over the years. Data is sourced from SKM Market Predictor.

DEMAND FLEXIBILITY MIGHT REDUCE PRICE SWINGS

In Finland, the limited flexibility in consumption patterns is also worth a mention. The market tends to react to daily prices only after they are published, which prevents real-time demand adjustments that could help stabilize prices. This reactive approach escalates price swings, as consumption does not align with fluctuating production levels. By improving consumption flexibility, Finland could reduce the volatility caused by mismatches between supply and demand.

 

 

CAPACITY MECHANISM IN THE NORDICS: RISK OR OPPORTUNITY

Some European countries have implemented capacity mechanisms to ensure electricity supply during peak demand or shortages, but the Nordic electricity market doesn’t have a similar system.

Capacity mechanisms, which are used in some EU countries, are set up to ensure that electricity production capacity is available when needed, for example during consumption peaks. 

In the Nordic region, the unavailability of this mechanism may cause more frequent price swings. This forces producers and consumers to manage the financial risks of an unpredictable market.

However, there’s much debate going on around capacity mechanisms. The European Commission has expressed concerns about national capacity mechanisms, stating that they could interfere with the proper functioning of electricity markets and free price formation. Additionally, the involvement of state capital in running market mechanisms brings up concerns. Despite this, the Finnish government, led by Petteri Orpo, has set a goal to establish a capacity mechanism in Finland during the upcoming term. 

 

THE 15-MINUTE MARKET: INCREASING PRESSURE ON MARKET PARTICIPANTS IN THE NORDICS

At the moment the day-ahead trading is limited to hourly periods, but the upcoming shift to a 15-minute imbalance settlement period in the day-ahead market will add the complexity of forecasting for market participants, making it even more challenging to predict supply and demand accurately. 

However, this change is expected to boost market liquidity and improve price signals, supporting more frequent adjustments and better management of renewable energy imbalances.

 

IMPACT ON INVESTMENT AND TRADING STRATEGIES

STABILIZING RISK THROUGH FIXED CONTRACTS AND VPPAs

As market participants need to handle the increasing uncertainty, many are forced to rethink their hedging strategies. Long-term physical fixed-price contracts, along with financial hedging,  are crucial in reducing dependence on the spot market and lowering the risk of extreme price fluctuations.

However, base load hedging strategies don’t fit too well with intermittent production, such as renewables. New types of hedging products are needed to address the unique characteristics of renewable energy production. 

One emerging solution is the use of VPPAs (Virtual Power Procurement Agreements), where physical energy is sold on the spot market, but producers lock in energy prices for a future period through bilateral financial contracts. 

THE RISE OF OTC MARKETS

Given the growing volatility, over-the-counter (OTC) markets are also becoming more attractive. Laurent Cheval, head of Nordic trading at Vattenfall, observed that “the OTC market could gain market share” as companies seek more flexibility in managing risk. Cheval also pointed out that OTC trading offers an alternative to high-margin calls and unpredictable price swings in exchange-based markets.

However, he also warned that the shift toward OTC trading could reduce transparency and liquidity in the long run, posing additional challenges for market participants.

This is where organized OTC marketplaces play a critical role. These platforms facilitate OTC trading by providing price transparency, helping parties to find reliable trading partners and avoid high collateral costs. Additionally they preserve the flexibility of bilateral agreements while simultaneously improving liquidity and reducing the risks traditionally seen in OTC trading. 

STORAGE SOLUTIONS: SHORT-TERM RELIEF BUT LONG-TERM CHALLENGES

Both producers and off-takers have already begun investing in flexible storage solutions, such as batteries, to mitigate the impact of price volatility. These solutions can help smooth out demand and supply imbalances. This reduces the immediate strain on the grid and helps manage short-term fluctuations. 

However, their capacity remains limited, and they are not sufficient to fully address the longer-term challenges posed by ongoing market volatility. This means that while batteries are an important tool, other long-term solutions, such as grid improvements and advanced demand-response technologies, will be necessary to create more sustained stability in the market.

 

CONCLUSION

Finland’s power market volatility is unlikely to disappear in the near future. As the energy transition accelerates, renewable energy production will continue to grow, bringing with it more price fluctuations and negative prices. To navigate this increasingly unpredictable market, companies will need to adopt more flexible trading strategies and consider new alternatives like OTC marketplaces and VPPAs.

However, long-term stability will also require improvements in grid infrastructure and the adoption of advanced technologies, ensuring that energy supply can better align with fluctuating demand. Also without sufficient regulatory changes or market innovations, Finland’s power market will remain one of the most volatile in Europe.

 

 

REFERENCES

This article combines insights from industry professionals, market updates, and broader market trends to offer a comprehensive view of the volatility in Finland’s power market. Several experienced energy sector professionals were interviewed for this article, including Pasi Valoranta, Jarkko Avikainen, Mikko Askolin and Jan Landén. 

Additionally, the following articles and sources were used as references:

 

ChatGPT was used to help translate some of the source materials originally written in Finnish.