Cables Strategic options for Sweden Commissioned by Svensk Energi THEMA Report

Transcription

1 Cables Strategic options for Sweden Commissioned by Svensk Energi THEMA Report

2 THEMA Report Cables- Strategic options for Sweden About the project: Project number: MCS Cables from Sweden About this report: Report number: Client: Svensk Energi, (Vattenfall, Statkraft, Jämtkraft, Skellefteå Kraft and Modity) ISBN-number: Project manager Arndt von Schemde Availability Public Project participants: Content Frank Krönert, Marius Holm Rennesund, Vidar Eide Report date June 2013 EXECUTIVE SUMMARY... 3 INTRODUCTION... 5 STRATEGIC BENEFITS OF CABLES FROM SWEDEN... 7 WELFARE-ECONOMIC EFFECTS OF SWEDISH CABLE ALTERNATIVES... 9 Cable from Sweden to Germany... 9 Cable from Sweden to Denmark and the UK (SE-DK-GB cable)...12 Cable from Sweden to Poland...15 Comparing the cable alternatives...19 APPENDIX 1: MAIN ASSUMPTIONS...20 APPENDIX 2: DETAILED RESULTS...21 About THEMA Consulting Group Øvre Vollgate 6, 0158 Oslo 6 Rue d Archimede 17, 1000 Brussel, Belgium NO THEMA Consulting Group is a consulting firm focused on electricity and energy issues, and specializing in market analysis, market design and business strategy

3 THEMA Report Cables- Strategic options for Sweden EXECUTIVE SUMMARY Europe and the Nordic region are drastically transforming their power systems, driven by the dual goals of climate change mitigation and energy security. Electrification of society and the increasing share of renewables will require a substantial and rapid development of national grids as well as interconnections between countries. This study explains the strategic and economic rationale for increased interconnection from Sweden to Denmark and the Continent. Sweden would benefit from new cables along three dimensions: 1) Balancing expected energy surplus midterm, 2) Connecting more closely to Continental power markets, 3) Diversifying/solidifying its supply security. 1) Surplus: Sweden will most likely have a power surplus of 18 TWh by 2025, resulting from the decided subsidy mechanisms for renewables. Norway and Denmark will also be in a strong surplus situation, while Finland is expected to still be in a deficit situation if there are no new nuclear plants beyond Olkiluoto 3, which is currently under construction. Increasing Sweden s interconnection to other countries would help readdress the energy balance, ensuring both export and balancing opportunities (important for intermittent wind capacity). More interconnection will be especially beneficial in years that are either wet or dry and reduce the price risk caused by inflow uncertainty. It should be noted that this inflow risk is particularly high if the normal year already implies a considerable surplus. In this case, wet conditions will add further to the surplus. As a result, without cables, prices will react drastically downwards in order to account for the additional surplus. Just as importantly, increasing trade would stabilize prices in Sweden. Without further interconnection capacity, the increased renewable capacity will push spot prices down with as much as 7 /MWh. The end-tariffs to consumers will increase, as the direct subsidies paid to new renewable generation recoup. This market design and the uncertainty around intermittent capacity distort investment signals for non-subsidized capacity. A stronger interconnection would partly reinstate a sensible investment climate for the non-subsidized capacity needed in the future energy system, but currently mired by political uncertainty and elevated market risk. 2) Flexibility: The European energy market requires increased integration and flexibility in the future. EU s motivation behind a common energy market was at first to promote cost-efficient resource utilization and infrastructure development. However, with the recent push for renewables, both Continental and Nordic power markets risk experiencing strong short-term imbalances due to the intermittent nature of wind and solar. Connecting Sweden more closely to Continental power markets would be beneficial in two ways: Firstly, it would allow trading flexibility across the connection, most likely increasing the value of Swedish assets or infrastructure. Cables would contribute to overall reduced system costs for balancing the system. More flexibility from trading may therefore reduce the need for more expensive investments in measures on the supply-side, demandside or grid flexibility. In this respect, new and direct interconnection may also open for new business opportunities for Swedish power producers in intra-day or reserve markets. Secondly, a cable would allow further build-out of renewables on both sides of the connection, provided they are cost-efficient at given market prices and support mechanisms. As addressed above, it is crucial that the development of renewables, grid, and interconnection is balanced. 3) Diversification: Sweden would just as importantly diversify its supply situation. Sweden is well connected to the Nordic countries, but thus quite reliable on the supply situation in the Nordic market. The Nordic supply balance is highly dependent on inflow and the availability of nuclear generation. Connecting to larger continental markets would be a way to strengthen Sweden s security of supply. This study looks into three cable options: a cable to Germany, a cable to Denmark and a cable to Poland. Depending on the relative importance of the three beneficial dimensions above, one would choose Denmark for offloading surplus and Germany for capturing flexibility. As for Poland, the benefits depend on the capacity developments in Poland. With a surplus of capacity, a cable to Poland would foremost have its value in security of supply. With tighter capacity margins, the benefits would be similar to that of a cable to Germany. An illustration of the findings is given in Figure 1. The results for Poland also underline how strongly dependent the results are on the future development of generation capacity (margins and prices) in the countries that Sweden connects to. Cable to Germany: The high price differential between the markets creates arbitrage potential and increases the value of Swedish power production. It also adds to the security of supply. Overall, such a cable would moderately increase prices in Sweden and the other Nordic countries. If Sweden extends the internal grid as planned, the congestion rent potential would be similar to that of a direct cable from Norway to Germany. Cable to Denmark combined with cable Denmark-Great Britain: The benefits for Sweden of such a solution would lie mostly in two aspects: Increase the value of domestic surplus and add to the security of supply. The - 3

4 THEMA Report Cables- Strategic options for Sweden arbitrage potential would be less than for a cable to Germany. Cable to Poland: We investigated two situations to illustrate the importance of capacity developments in the country Sweden connects with. The first case is a considerable Polish surplus of capacity (e.g. as a result of ill-designed capacity markets). In this case, prices in Poland would be very low. The cable would not increase the value of Swedish domestic resources, but would decrease it, as it would lower Swedish power prices. Sweden would operate as a transit country for power from Poland to other countries, such as Germany. The primary value of such a cable would lie in security of supply considerations, and arbitrage potential. In the second case, we assumed tighter capacity developments in Poland, resulting in similar prices as in Germany. In this case, the benefits of a cable to Poland would be more in line with those of a cable to Germany. The results underline the importance of capacity developments in Poland and other countries for the welfare results. be added together to form the net welfare, as they do not quantify all welfare effects. An illustration of the relative importance along the three outlined dimensions is given in Figure 1. Table 1: Total score along the three beneficial dimensions identified for the different cable alternatives for Sweden 1 Cable to Germany Surplus [EUR mill p.a.] Flexibility [EUR mill p.a.] SoS [EUR mill p.a.] (700 MW) Denmark (700 MW) Poland High Capacity (700 MW) Poland Low Capacity (700 MW) In order to quantify strategic dimensions, we used the following proxy indicators: Surplus handling: The price effect measured by its impact on consumers and producers. Technically speaking, we use the difference between producer surplus and consumer surplus that the cable generates. Flexibility: We use the congestion rent on the cable in question as a proxy for the flexibility value. s in congestion rent on other cables are not included in this measure. Security of Supply: We modelled a dry year with full nuclear outage in Sweden. This is a situation that would only occur occasionally; hence the obtained value of security of supply should not be interpreted as a yearly benefit. The value reported is the cable effect on the difference between consumer and producer surplus that the cable generates. In these cases, cables would bring down prices, not increase them. For this measure, we exclude the congestion rent that such a cable would generate under these circumstances. The indicators above are non-exhaustive. Also, as the real markets are more complex than what can be captured in a numeric model, they are also likely to be conservative. Nevertheless, the measures should give a good indication of the cost and benefits associated with building cables along the three specified dimensions. It is important to stress that the investment costs associated with the different cable projects are not accounted for in our analysis. The welfare results along the three strategic dimensions are given in Table 1. Please note that the three columns cannot Figure 1: Relative score along the three beneficial dimensions identified 1 The effects accounted for in this table should not be summed up to add to a total welfare effect. The effects are rather partial effects along the selected dimensions specified. A proper welfare discussion for each cable can be found in the respective sections for each cable.

5 Export (-) and Import (+) capacity [MW] Introduction Background Europe and the Nordic region are drastically transforming their power systems, driven by the dual goals of climate change mitigation and energy security. Electrification of society and the increasing share of renewables are two distinct trends, visible across Europe and the Nordics. It is likely that the Nordic countries as a whole will build up substantial power surplus in the coming years (cf. Figure 2). The supply is expected to increase substantially, due to nuclear upgrades (Sweden), nuclear new builds (Finland), and an increasing amount of new renewable generation following the introduction of the common Norwegian- Swedish certificate market and other renewable support in Denmark and Finland. The demand side, however, is only expected to grow moderately. This development will put Nordic prices under downward pressure. Figure 2: Power surplus development for Norway, Sweden and Finland capacity and allows more efficient allocation of future investments. Figure 3 illustrates a possible development of transmission capacity investments from the Nordics to countries outside the Nordics, including NordLink and NSN from Norway (both 1400 MW), NordBalt from Sweden (700 MW), Estlink 2 from Finland and potential upgrades to allow exports to Russia, and new grid re-enforcements between Denmark and Germany. Figure 3: New transmission capacity from and to the Nordic countries, reference scenario Norway Sweden Finland Denmark There has, however, been little focus on new transmission cables from Sweden. Only recently Svenska Kraftnät began investigating plans for a new cable to Germany, while Statnett s plans for cables (Norway) are already advanced. Problem statement This study looks into the benefits and strategic implications for Swedish power generation that arise from new transmission lines. Figure 4 Illustration of analysed new cables from Sweden New transmission cables from the Nordics to the Continent and Great Britain are often seen as a means to increase export opportunities and increase the value of Nordic power generation. In addition, these cables could provide the flexibility to the Continent and Great Britain that is required to balance increasing shares of intermittent generation. Moreover, they secure the supply situation as the Nordics are heavily reliant on hydro inflow which can vary greatly from year to year. Nuclear availability provides an additional supply uncertainty that has often triggered high prices in the past. Lastly, adding interconnector capacity between countries allows more efficient usage of existing production - 5

6 This study, carried out for Svensk Energi, Vattenfall, Statkraft, Jämtkraft, Skellefteå Kraft and Modity, addresses the following question: What are the benefits of cables from Sweden along the dimensions of handling the rising surplus, providing flexibility, and increasing the security of supply? The effects and benefits depend strongly on which market area the new transmission cables are built. We have therefore evaluated three different cable options in this report: A new cable to Germany, a new cable to Poland and a new cable to Denmark. In the latter case Denmark realises its plans to build a new cable to Great Britain. We have also investigated a second cable to Lithuania, but observed that market integration between the Baltics and the Nordic region will be quite matured with the current cable plans. Whether or not a second cable to Lithuania is beneficial will then depend on Lithuania s trade with other countries, which is outside the scope of this study. Methodology In order to estimate the welfare effects of cables, we used our power market simulation model The-MA to estimate price effect of cables, congestion rent and the effect for consumers and producers. Furthermore, we tested the robustness of the results by implementing a range of sensitivities. Thus, we not only modelled a reference case, but also tested the results with alternative assumptions. The standard sensitivities include alternative assumptions on fuel prices and CO2 prices, as well as wet and dry year simulations. As for the cable to Germany, we also tested different assumptions on demand and nuclear developments as well as alternative cable cases for cables from Norway. As for the cable to Germany, we assumed a 700 MW cable. The cables to Poland and Denmark also are assumed to be 700 MW. We assumed a 3% loss on all cables, as well as an availability of 97%. Please note that the 700 MW cable to Germany is slightly larger than the cable Svenka Kraftnät currently considers (600 MW). It is uncertain what size the cable will have if it will be built, and the assumption makes the results a bit more comparable without adjusting for size. However, despite all cables having 700 MW, it should be noted due to the different configurations (in case of Denmark cable the additional cable from Denmark to Great Britain), results for the individual cables are not directly comparable, and should not be used to rank alternatives. The cable between Denmark and Great Britain assumed in the Denmark-cable case is assumed to be 1400 MW. In order to differentiate the results, we have also decided to model Poland with two different scenarios for future capacity developments. In the first case, we assume a considerable surplus in 2025 in Poland, resulting in low prices in Poland compared to other European countries. There are considerable plans for new built in Poland, including new nuclear power plants (though some of them may be delayed). In the other case, we assume tighter capacity developments, leading prices in Poland being more like prices in Germany. The scenarios are meant to illustrate and underline the general importance of capacity developments in the market of the trading counterpart. All prices reported in this study are 2013 real prices. It is important to note that this report does not represent a forecast for North-West European power markets in Instead, it only covers one potential future development (with some range covered by sensitivities). Effects for other Nordic countries As the Nordic market is well integrated, new transmission cables will also impact the other Nordic countries. The price effect that the cable creates in Sweden will naturally spill over into the other countries, in particular Norway and Finland, affecting consumers and producers in the same way as they are affected in Sweden. In this respect, discussion around cables should have as much a Nordic focus as they should have a national focus. We therefore also included welfare proxies and effects of cables from Sweden for the other Nordic countries in this report. The variables we are reporting for the Nordic countries are: s in producer surplus, changes in consumer surplus, and changes in total congestion rent. The congestion rent calculations assume a 50/50 split of the income between trading partners and also takes into account how changed prices affect congestion rent on existing interconnectors. Structure of report The report is structured as follows. The Chapter Strategic benefits of cables from Sweden explains the strategic and economic rationale for increase interconnection to the Continent. Chapter Welfare-economic effects of Swedish cable alternatives studies in detail the effects of the various cable options. Most of the findings are presented in form of graphs. Detailed tables on results and assumptions can be found in the appendices

7 Strategic benefits of cables from Sweden Sweden would benefit from a cable to non-nordic countries along three dimensions: 1) Balancing expected energy surplus mid-term, 2) Connecting more closely to Continental power markets, 3) Diversifying/Solidifying its supply security. Sweden to Lithuania. An additional cable could add between 1 and 2 /MWh. However, even in this case of strong new interconnection to the Continent and Great Britain, prices in the Nordics will be lower than on the Continent. This is a robust observation for alternative assumptions on fuel prices and CO2 prices. See appendix for more details. Figure 6: Price effect of RES and Cables ( /MWh) Surplus Sweden will most likely have a power surplus of 18 TWh by 2025, resulting from the decided subsidy mechanisms for renewables. Norway and Denmark are also expected to be in a surplus situation, while Finland will be closer to balance. Increasing Sweden s interconnection to other countries would help readdress the energy balance, ensuring both export and balancing opportunities (important for intermittent wind capacity). This interconnection will be especially beneficial in years that are either wet or dry. Just as importantly, however, more interconnectors would help stabilize prices in Sweden. Without further interconnection capacity, we find that the increased renewable capacity will push spot prices down with as much as with 7 /MWh. More importantly, without new cables, this price effect may be even more severe in wet years, where the surplus is higher than in a normal year. The end-tariffs to consumers will increase, however, as the direct subsidies paid to new renewable generation, is recouped. In addition, the renewable investments require new grid investments, making it likely that grid tariffs will increase as well (cf. Figure 5) Figure 5: Price effect of RES and Cables (Illustrative) Cables would counter this RES effect and thus improve the dire investment climate now faced by non-subsidized capacity (large hydro, gas, coal, etc.). These technologies are needed in a future energy mix, but are current facing distorted investment signals due to current market design and the uncertainty around locked-in must-run capacity like wind and small hydro. A stronger interconnection would partly reinstate a sensible investment climate for the nonsubsidized capacity. Inflow variation constitutes an additional price risk. For investors, it is not only the price level, but also the price volatility that impacts investment decisions. Price volatility can be volatility from hour to hour, between weeks, or between years. While cables may increase the price volatility from hour to hour, they reduce the volatility between weeks and between years, and reduce price volatility that is related to inflow. The price effects of cables are illustrated in Figure 7. Figure 7: Price effect of cables depending on surplus situation (illustrative) The already planned cables to the Continent will counter this RES effect by approximately 2 /MWh. Price effects are illustrated in Figure 6. The cables assumed are NordLink from Norway to Germany, NSN from Norway to Great Britain, Estlink 2 from Finland to Estonia, and NordBalt from - 7

8 Cables are a means to balance surplus or deficit situations. The result is less price dependency with respect to inflow or other factors that impact the power balance. The effects illustrated in Figure 7 were also quantified in THEMA report R : "Fornybarutbygging og utenlandsforbindelser mot 2020" (in Norwegian with an English summary report). It should be noted that the inflow risk is particular high if the normal year already implies a considerable surplus. In this situation, wet conditions will add further to the surplus. As a result, without cables, prices will react drastically downwards in order to account for the additional surplus. The dry year effect, will not be as drastic, however, as a reduction in inflow would not necessarily result in a severe deficit, given the normal surplus. Flexibility The European energy market requires increased integration and flexibility in the future. EU s motivation behind energy market integration was first to promote cost-efficient resource utilization and infrastructure development. With the recent push for renewables, however, both Continental and Nordic power markets risk experiencing strong short-term imbalances due to the intermittent nature of wind and solar. Figure 8: Weekly average price structure for Southern Sweden Connecting Sweden more closely to Continental power markets would be beneficial in two ways: Firstly, it allows flexibility to be traded across the connection, and hence increase the value of Swedish assets or infrastructure. At the same time, cables contribute to overall reduced system costs of balancing the system, possibly avoiding more expensive investments in supply-side, demand-side or grid flexibility measures. In this respect, new and direct interconnection may also open for new business opportunities for Swedish power producers in intra-day or reserve markets. Due to increasing shares of renewable generation and the need to balance foreseen and unforeseen variations in the power grid, the role of the these markets is likely to grow. Despite the already planned cables, we expect the Nordic price structure to remain fairly flat compared to the Continent. Thus, there will be substantial room for arbitrage and provision of flexibility, and still not importing volatile prices from the Continent. This is illustrated in Figure 8. Secondly, increased interconnection would allow further build-out of renewables on both sides of the connection, provided they are cost-efficient at given market prices and support mechanisms. As addressed above, it is crucial that the development of renewables, grid, and interconnection is balanced. A significant additional value potential lies in possible capacity markets or mechanisms in the future. Some countries are discussing the introduction of capacity markets or mechanisms (e.g. Germany), while others have more or less already decided on it (e.g. France, Great Britain). It is not clear as of today to what extent cables may participate in these capacity mechanisms/markets. The interconnectors future role in the European power system depends on how the market design for these markets develops. However, given fairly secure hydro generation resources on the Nordic part, new cables should be able to provide secure capacity into those markets that may need them. A well designed capacity mechanism could significantly increase the value of the cables. Diversification and security of supply Lastly, Sweden would diversify its supply situation, and increase its security of supply. Sweden is well-connected to the Nordic countries, but thus quite reliable on the supply situation in the Nordic market, which heavily relies on precipitation and the availability of nuclear generation. Denmark is well connected to Germany and the Nordics, but is still considering further reinforcements. Thus connecting further to Denmark would be a way to increase security of supply. In addition, Sweden has options of strengthening interconnection further east, to Poland and Baltics, or of extending its interconnection capacity with Germany. Regardless of where a cable would go, connecting Sweden to larger continental markets would be a way to solidify its security of supply. A more diversified power supply could be crucial in wet and dry years, but also for balancing the increasing share of wind power

9 Welfare-economic effects of Swedish cable alternatives We have studied three different cable options: a cable to Germany, a cable to Denmark (in a situation where Denmark also builds a cable to Great Britain) and a cable to Poland. We find that all cable options have different implications. While a cable to Germany would generate the highest congestion rent and have the largest price impact, a cable to Denmark would generate most benefits from increasing the value of the surplus. The value of a cable to Poland depends on Polish capacity developments. If Poland turns out to be a low price area, the cable would foremost be beneficial from a security of supply point of view. With tighter capacity margins, the cable would have similar benefits as a cable to Germany. A summary of the quantified indicators for the three dimensions of surplus, flexibility, and security of supply for the different cable options is given in Table 2. Please note, however, that the effects accounted for in this table should not be summed up to add to a total welfare effect. The effects are rather partial effects along the selected dimensions specified. A proper welfare discussion for each cable can be found in the respective sections for each cable in this chapter. Table 2: Total score along the three beneficial dimensions identified for the different cable alternatives for Sweden Cable to Germany Surplus [EUR mill p.a.] Flexibility [EUR mill p.a.] SoS [EUR mill p.a.] (700 MW) Denmark (700 MW) Poland High Capacity (700 MW) Poland Low Capacity (700 MW) Cable from Sweden to Germany With an additional 700 MW cable to Germany, Swedish prices would increase by 0.4 EUR/MWh, increasing the value of Sweden s production resources. Regarding arbitrage opportunities, we find that a cable from Southern Sweden could obtain similar levels of congestion rent as a cable from Norway, given that Sweden re-enforces its internal grid and removes bottlenecks between Southern Sweden and the other Swedish zones as planned. Surplus: We find that the value of the surplus production in Sweden increases considerably for a cable to Germany. This finding is robust for the modelled sensitivities. An overview over the surplus dimension and the price effect is given in Table 3. In addition to the standard sensitivities on fuel prices, CO2 prices, and precipitation, we also included sensitivities on the effects if NordLink between Norway and Germany is not built, if an additional line between Sweden and Germany is built (also 700 MW), if an additional nuclear reactor is built in Finland (a fourth reactor Olkiluoto 4), and if demand turns out to be lower than expected. Please note that we have modelled 700 MW cable to Sweden. Svenska Kraftnät is currently only planning a smaller 600 MW cable to Germany by 2025, but there is of course large uncertainty regarding the actual size of the cable. However, we see that the results are robust also in the case with a second cable to Germany, concluding that it is room for at least an additional 1400 MW capacity between the countries. Table 3: Overview over effect on surplus and effect on overall congestion rent surplus value (EUR mill p.a.) Price effect (EUR/MWh) Reference High Fuel Low Fuel Low CO Wet Dry Without NordLink With second cable With Olk With low demand Trade patterns between the connected countries are expected to change. This is shown in the figures in Table 4. As can be observed, direct exports to Germany would naturally increase, while exports to other trading partners would be somewhat reduced

10 Table 4: s in trade from Sweden (Reference case) imports TWh p.a. export TWh p.a. trade TWh p.a. Norway Finland Denmark Germany Poland Baltics The price effect of the cable varies by zone and by sensitivity. The outcome space of the price effect over the standard sensitivities for fuel prices, CO2, and wet/dry simulations is shown in Figure 9. If Sweden connects more strongly to Germany, prices in SE4 and all price areas connected to SE4 increase. The price effect will further be passed onto the other Nordic counties. Since existing bottlenecks between SE3 and SE4 are removed due to the southern arm of the SouthWestLink and additional internal Swedish capacity is built in North- South direction, the price increase is more or less similar in all Swedish and Norwegian price zones and a bit lower in Finland and Denmark. Figure 9: Price effect by price zone for cable to Germany Table 5: Congestion rent potential for trade between Sweden and Germany Congestion rent total (EUR mill p.a.) Congestion rent on new line (EUR mill p.a.) Reference High Fuel Low Fuel Low CO Wet Dry Without NordLink With second cable With Olk With low demand Table 6: Congestion rent estimates (Reference case) Sweden Norway Congestion rent ( mill p.a.) Capacity (MW) CR per MW ( per MW) In fact, the arbitrage opportunities from a cable between Sweden and Germany are similar to expected arbitrage opportunities for a cable from Norway to Germany (cf. Table 6). Thus, Sweden is in this sense as well positioned to provide flexibility to the Continent as Norway is. This is also reflected by the graph in Figure 10, showing the average price structure in Southern Norway, SE4, and Germany. It can be observed that prices in Sweden and Norway and very similar, both showing the typically flat price structure for the Nordic hydro system. Flexibility: Due to the relatively large hourly price differential between Sweden and Germany, a cable to Germany provides a significant arbitrage opportunity. Table 5 shows total congestion rent on all capacity between Sweden and Germany, and the trade income on the new cable. Please note that, as of today, there is already a 600 MW link between Sweden and Germany, thus the 700 MW cable would come in addition, adding to a total capacity of 1300 MW

11 Figure 10: Price structure in Southern Sweden, Southern Norway, and Germany in 2025 with cable from Sweden to Germany (Reference case) Table 7: s in welfare estimates of a cable to Germany (Reference case) Arbitrage in PS in CS Total change Sweden Norway Finland Denmark Security of supply: In order to estimate the effect in years with severe shortage of energy, we modelled the Nordic countries in a dry year with full nuclear outage. In this case, Sweden has a power deficit in the magnitude of 50 TWh. A cable to Germany would in a deficit situation increase import opportunities to fill the power gap. We measured the benefits of the cable as the difference between consumer and producer surplus in the situation of severe energy shortage. A cable would bring down prices, and since there is a shortage of supply, consumers gain more than producers lose. All in all, we estimate a value of EUR 20 mill p.a. in this case. Please note that this should not be interpreted as a yearly benefit as this situation will only occur occasionally. Welfare indicators for Sweden and other Nordic countries: The above indicators focus foremost on Sweden. We also looked into the overall welfare consequences for the other Nordic countries. Via changes in prices; producers, consumers, and TSOs in the Nordic countries are differently affected. A summary of welfare implications for a cable to Germany are shown in Table 7. While Sweden would naturally have the largest benefits of such a cable, the benefits for the other countries vary. For example, the Norwegian TSO would achieve a lower congestion rent, while producers and consumers would be similarly affected by the change in prices,. The further the Nordic market becomes integrated with Germany, the less the arbitrage on existing cables. Please note, however, that the planned Norwegian cables would have a similar effect on the Swedish cables. Also, Denmark would lose some transit market flows, as more power flows directly from Sweden to Germany instead of via Denmark. The congestion rent estimates reported in this section differ from the congestion rent estimates reported earlier in two respects: Firstly, not all congestion rent on the cable will belong to Sweden here we assume that only half of the congestion rent will be Sweden s part; secondly, the price effect of the cable also impacts arbitrage on existing interconnectors and cables which is accounted for in the figures presented in this section. We have also estimated the congestion rent and welfare indicators for alternative fuel and CO2 assumptions. An illustration of the effects the cable has on total congestion rent income for the different countries is given in Figure 11. It shows the outcome in the reference case (indicated by dots) together with a potential high/low case (indicated by the bars)

12 Figure 11: s in congestion rent share of a cable to Germany Considering the total welfare (i.e. the sum of changes in congestion rent on all lines, changes in consumer surplus, and changes in producer surplus), we obtain a range of results as indicated in Figure 13. The welfare estimates are fairly robust across the different scenarios and sensitivities we modelled. Figure 13: s in welfare estimates for cable alternative to Germany As for the effect for producers and consumers, the effect is illustrated in Figure 12. It shows changes in producer and consumer surplus for Sweden, Norway, Finland, and Denmark for the alternative standard sensitivities. As above, the bars illustrate the outcome space across the sensitivities, and the dots illustrate the reference case outcome. Figure 12: Effects on consumers and producers in the Nordic countries As can be observed, the market consequences are considerable also for the other Nordic countries. Due to the increase in prices, producers gain, while consumers have to pay slightly more. However, for those countries that are expected to be in a surplus situation in 2025, the cable implies a net benefit. The cable would also increase security of supply in Germany and provide much needed flexibility. Additionally, it would allow further build-out of renewables in Germany. As a cable also reduces peak prices in Germany, German consumers will benefit as well. Cable from Sweden to Denmark and the UK (SE-DK-GB cable) A new 700 MW connection to Jutland and further to the UK would reinforce Denmark s position as a transit country. For Sweden, it would foremost increase the value of its surplus, although it also provides some arbitrage potential. This arbitrage potential, however, is less than for a cable to Germany, due to more similar prices in Jutland and Southern Sweden. The cable combination would also have considerable value in terms of security of supply. Surplus: Similar to a cable to Germany, a cable to Denmark would increase the value of the surplus in Sweden. This observation is robust across the different fuel, CO2, and precipitation scenarios. An overview over the price effect of the cable and the resulting net change in producer and consumer surplus is shown in Table

13 Table 8: Overview over effect on surplus and overall congestion rent surplus value (EUR mill p.a.) Price effect (EUR/MWh) Reference High Fuel Low Fuel Low CO Wet Dry Trade with other countries is also naturally affected. Direct export to Denmark would increase, while direct exports to other countries would decrease (cf. Table 9.) Overall, the cable also consolidate Denmark s role of a transit country for power flows, in particular in connection with the assumed cable between Denmark and Great Britain. Table 9: s in trade from Sweden (Reference case) imports TWh p.a. export TWh p.a. trade TWh p.a. Norway Finland Denmark Germany Poland Baltics The price effect of the cables (Sweden-Denmark plus Denmark-Great Britain) is illustrated in Figure 14. It shows that such a cable combination would have a similar price effect in Norway, Sweden, and Finland. For Denmark, the price effect of the cable combination is more neutral, as it balances between higher prices in Great Britain and lower prices in the remaining Nordic countries. Flexibility: The price differential between Sweden and Denmark is somewhat smaller than the differential between Sweden and Germany. A smaller price difference implies a generally lower arbitrage potential for a new DC line to Jutland compared with a cable to Germany. The arbitrage estimates are summarized in Table 10. The price structure for an average week is depicted in Figure 15 for Southern Sweden, Southern Norway, and Jutland. Table 10: Arbitrage estimates for a new cable to Denmark Congestion rent total Congestion rent on new line [EUR mill p.a.] [EUR mill p.a.] Reference High Fuel Low Fuel Low CO Wet Dry As the price structure in Southern Sweden is more similar to that in Jutland compared to prices in Southern Norway, the arbitrage potential is somewhat lower than it would be for a similar cable from Southern Norway (cf. Table 11). This, however, due to the assumed interconnection capacity between Southern Sweden and Denmark being much higher than between Southern Norway and Denmark. More trade naturally yields more price convergence. Although this may not be observed from the average price structure graph illustrated in Figure 15, more similar prices between Southern Sweden and Denmark is reflected by hourly value differences if one evaluates hourly prices for the entire year- The correlation coefficient for prices between Southern Sweden and Denmark is 0.70, while it is 0.64 for prices between Southern Norway and Denmark. Figure 14: Price effect per price zone for cable to Denmark

14 Figure 15: Price structure in Southern Sweden, Southern Norway, and Jutland As for the results for Denmark, please note that the table includes the effect of the cable between Denmark and Great Britain, hence the substantial increase in congestion rent for Denmark. Table 12: s in welfare estimates Arbitrage in PS in CS Total change Sweden Norway Finland Denmark Table 11: Congestion rent estimates Sweden Norway Congestion rent ( mill p.a.) Capacity (MW) CR per MW ( per MW) The results are robust across wet, dry, low and high fuel, and CO2 scenarios. A depiction of the total congestion rent effect, effects for consumer and producers, and total welfare effect across scenarios is depicted in Figure 16, Figure 17, and Figure 18. Figure 16: s in congestion rent share of a cable to Denmark Security of Supply: In the same manner that we estimated the security and diversification effect of a cable to Germany, we find a similar value for a cable to Denmark in combination with a cable to Great Britain. In this case (i.e. dry year with full nuclear outage in Sweden), the cable creates a value of EUR 94 mill p.a. This should however not be interpreted as a yearly benefit as it will only occur occasionally. It should be noted that this value is the combined value for both cables, i.e. the cable to Denmark and the cable between Denmark and Great Britain. Thus, security of supply is increased not only via the direct link to Denmark, but also by the link between Denmark and Great Britain and existing cables between Denmark and the remaining Nordic countries. Figure 17: s in producer and consumer surplus for cable to Denmark Welfare indicators for Sweden and other Nordic countries: The overall welfare effects of the assumed cable combination are summarized in Table 12. Compared to the cable to Germany, the overall welfare effect for Sweden is somewhat lower, although the numbers are not directly comparable due to different cable configurations. One large difference is relatively low impact on overall congestion rent, as prices in Sweden and Denmark are more similar than prices between Sweden and Germany. The impact for consumers and producers in the Nordic countries, however, is still significant

15 Figure 18: s in total welfare-economic effects for cable to Denmark Cable from Sweden to Poland We assume two cases. In the first case, we assume a capacity surplus in Poland achieved by new built nuclear, coal, and lignite, which results in low prices. In the other case, we assume tighter capacity margins in Poland, resulting in prices more similar to German prices. In the first case, prices in Poland could be well below prices in the Nordics, and a cable to Poland would therefore lower Swedish power prices. This would reduce the value of domestic generation resources. The value of such a cable would lie in its security of supply and diversification potential, as well as in the arbitrage potential. Sweden would become a transit country for cheap power from Poland. In the second case, the benefits of a cable to Poland are more similar to the benefits of a cable to Germany or Denmark. The results underline the importance of capacity assumptions and prices in the counterpart markets for the results. Surplus: In the first case, where we assume a surplus in Poland by 2025, prices in Poland will be well below prices in Sweden. A new cable to Poland would thus lower prices in Sweden, decreasing the value of Swedish generation resources. Since Sweden is already assumed to be in a surplus situation by 2025, producers suffer more from lower prices than consumers gain. In the second case, where Poland is characterized by tighter capacity margins, effects on the value of the surplus are positive. The cable would import slightly higher prices, increasing the value of domestic generation resources. The results for both cases are summarized in Table 13. Table 13: Overview over effect on surplus and overall congestion rent High Capacity surplus value (EUR mill p.a.) Price effect (EUR/M Wh) Low Capacity in surplus value (EUR mill p.a.) Price effect (EUR/ MWh) Reference High Fuel Low Fuel Low CO Wet Dry Additionally, the cable would alter the role of Sweden in terms of trade. Increasing access to cheap power from Poland, the cable would increase power transits via Sweden. This is reflected by the values presented in Table 14, which shows the cable effect on trade between Sweden and its trading partners. Imports from Poland increase, together with exports to other trading partners. Table 14: Swedish trade effect of cable to Poland (high capacity margins in Poland) imports [TWh] export [TWh] trade [TWh] Norway Finland Denmark Germany Poland Baltics In the second case of tighter capacity margins in Poland, the cable mainly would be used to increase exports to Poland. This is reflected by the numbers presented in Figure 16. Table 15: Swedish trade effect of cable to Poland (low capacity margins in Poland) imports [TWh] export [TWh] trade [TWh] Norway Finland Denmark Germany Poland Baltics The price effect for the different modelled area prices depends in addition strongly on the capacity margins in Poland. (cf. Figure 19 and Figure 20)

16 Figure 19: Area price effect of cable to Poland (high capacity margins in Poland) Table 16: Arbitrage estimates for a new cable to Denmark High Capacity Congestion rent total [EUR mill p.a.] Congestio n rent on new line [EUR mill p.a.] Congest ion rent total [EUR mill p.a.] Low Capacity Congestion rent on new line [EUR mill p.a.] Reference High Fuel Low Fuel Low CO Wet Dry In the case of lower prices in Poland (high capacity margins), we observe a negative price effect of the cable in all Nordic areas. Thus, unlike cables to Germany and Denmark, the cable decreases prices in the Nordic countries under these assumptions. In the case of tighter capacity margins, prices in Poland would be higher, thus the cable would increase prices similar to the cables to Denmark and Germany. Figure 20: Area price effect of cable to Poland (low capacity margins in Poland) The arbitrage potential is also reflected in the price structure graphs depicted in Figure 21 and Figure 22 for the two modelled cases. In the case of an oversupply in Poland, prices in Poland are well below Swedish prices and in particular German prices. In the other case, prices in Poland are more similar to German prices (though some of the price peaks in Germany do not occur in Poland). Flexibility: In the case of low prices in Poland, the negative price spread between Poland and Sweden opens considerable arbitrage opportunities. In case of higher prices in Poland due to tighter capacity margins, the cable also generates substantial cable income, although it arises in this case both from exports and imports. The potential congestion rent in both cases is summarized in Table 16. Interestingly, the large positive price spread between Sweden and Poland in the high capacity case actually results in higher arbitrage potential than in the case of lower capacity margins and higher prices in Poland

17 Figure 21: Price structure in Southern Sweden, Germany and Poland (high capacity Poland) countries increases. The increased transit volume, combined with overall lower prices, raises the congestion rent in the other Nordic countries as well. A summary of the welfare effects in this case is in Table 12. Table 17: Swedish changes in welfare estimates of Poland cable (high capacity Poland) Arbitrage in PS in CS Total change Sweden Norway Finland Denmark Figure 22: Price structure in Southern Sweden, Germany and Poland (low capacity Poland) With tighter capacity margins in Poland, prices in the Nordic countries would increase, benefiting the countries with a surplus. Arbitrage opportunities would increase for Sweden, while they would be reduced or unaffected for the other Nordic countries. The effects are reflected by the figures in Table 18. The cable would benefit Polish consumers as it has a negative price effect in Poland and increase security of supply in a tighter polish market. Table 18: Swedish changes in welfare estimates of Poland cable (low capacity Poland) Arbitrage in PS in CS Total change Sweden Norway Finland Denmark Security of Supply: In a situation with low precipitation and nuclear outage in Sweden and high capacity margins in Poland, the estimate for the value of the cable that arises from cheaper import opportunities is in the magnitude of EUR 89 mill per year. Thus, per MW, the effect of the cable would be much higher than the value for a cable to Germany, as Polish power would be a cheaper insurance. The costs for this cheaper insurance, however, are a negative impact on the net consumer and producer surplus. In the case with higher prices in Poland, the security of supply value would be in magnitude of EUR 33 mill per year. Welfare indicators for Sweden and other Nordic countries: A cable to Poland would under the assumptions of a capacity surplus decrease power prices in the Nordic area. Consumers in the Nordic countries would overall gain from lower spot prices, while producers would lose values from a decrease in prices. In addition, with Sweden as gateway, also the commercial transit flow to the other Nordic Our observations are robust across various fuel price, and CO2 price scenarios. The respective outcome space for values for consumer and producer surplus, change in total congestion rent, and total welfare is given in Figure 23, Figure 24, and Figure 25 for the high capacity case, and in Figure 26, Figure 27, and Figure 28 for the low capacity case. In the event of capacity surplus in Poland, the cable to Poland provides the lowest overall welfare value of the cable options studied in this report. The low welfare value is due to the fact that the Nordics, compared to other countries in North-West Europe, are already a low price zone, with an excess of power. Thus, connecting this surplus area with another low price area does not provide substantial benefits. In this case, it would be better to for example increase grid capacity between Poland and Germany directly. This would also improve welfare effects in Poland

18 s in total welfare This finding, however, relies on Poland becoming low price areas. Otherwise, the benefits are similar to that for a cable to Germany or Denmark. Figure 26: s in consumer and producer surplus with cable to Poland (tighter capacity margins Poland) Figure 23: s in consumer and producer surplus with cable to Poland (capacity surplus Poland) Figure 27: s in congestion rent share of a cable to Poland (tighter capacity margins Poland) Figure 24: s in congestion rent share of a cable to Poland (capacity surplus Poland) Figure 28: Total welfare economic effects of Poland cable 2025 (tighter capacity margins Poland) Figure 25: Total welfare economic effects of Poland cable 2025 (capacity surplus Poland) Cable to Poland (High Cap) effects in Sweden Cable to Poland (High Cap) effects in Norway Total welfare-economic effect Cable to Poland (High Cap) Cable to Poland (High Cap) effects in Finland effects in Denmark

19 Comparing the cable alternatives Although the cable sizes are similar, one has to be careful with directly comparing the cable options. In particular the different configuration of the Denmark option (i.e. an additional cable from Denmark to Great Britain) makes direct comparison difficult. Furthermore, the aim of this study is not to rank options, but to outline the implications of various cable options under a given set of assumptions. Nevertheless, one can draw some overall lessons from the analysis. Depending on the relative importance of the three beneficial dimensions above, one may choose Denmark for offloading surplus and for security of supply considerations, given forecasted connection status with the Continental market. One may choose Germany for capturing flexibility in addition to off-loading the surplus. Under the assumptions of a capacity surplus in Poland, the Polish cable would bear largest value in terms of diversification and security of supply. In case of tighter capacity margins, the values across the specified dimensions are somewhat more similar to cables to Denmark and Germany. Having said that, please note that also no other Nordic country than Sweden connects directly with Poland, adding to the diversification argument. The results, however, are strongly dependent on the future developments of generation capacity margins and prices in these countries. Our findings are summarized in Figure 29. Please note, that the relative positioning of the cable cases in Figure 1 is rather illustrative than quantitatively objective. Figure 29: Relative score along the three beneficial dimensions identified

20 Appendix 1: Main assumptions Table 19: Fuel price assumptions Units Reference High Fuel Low Fuel Low CO2 Coal $ per ton Gas $ per Mbtu CO2 per ton Table 20 Electricity demand (gross demand) units 2025 Norway TWh Sweden TWh Finland TWh 93.8 Denmark TWh 38.6 Table 21 Power generation by fuel type Units Wind 2025 Hydro 2025 Nuclear 2025 Total 2025 Norway TWh n/a Sweden TWh Finland TWh Denmark TWh 12.5 n/a n/a 43.8 Table 22 Total balance Units 2025 Norway TWh 8.8 Sweden TWh 18.0 Finland TWh -6.1 Total TWh 20.7 Table 23 Transmission capacities From To 2025 Norway Germany 1400 Norway Netherlands 700 Norway Great Britain 1400 Sweden Germany 610 Sweden Poland 600 Sweden Lithuania 700 Finland Estonia 1000 Denmark* Germany 2848 * some un-symmetries in import/export capacities

21 Appendix 2: Detailed results Figure 30: Average annual prices in Nordic countries and Germany in 2025, with planned cables only Table 24: Cable benefits for different cables for Reference case Congestion Rent Producer Surplsu Consumer Surplus Total change Cable to Sweden Germany Norway Finland Denmark Cable to Sweden Denmark; Norway Denmark to Finland Great Britain Denmark Cable to Sweden Poland Norway (high Finland capacity) Denmark Cable to Sweden Poland Norway (low Finland capacity) Denmark