Flow-Based in the Nordics – Is the Media Uproar Fair?

What is flow-based?

Let’s start with the basics. Flow-Based Market Coupling (FBMC) or “flow-based” is an advanced method that integrates electricity markets across countries or regions. It is used to boost cross-border electricity trading, enhance grid reliability, increase price alignment across regions, and improve market resilience particularly with the integration of large-scale renewable energy sources. It has been compared to a car traffic controller, making sure cars (electricity) flow smoothly across the network, avoiding congestion on busy routes while still meeting demand in every city (price region), ultimately increasing efficiency for the whole energy system.

Flow-based market coupling is set to increase price alignment across the Nordic price regions. Photo: Svenska Kraftnät

What are the downsides?

Though increased efficiency and enhanced supply security are clear advantages, flow-based does come with its drawbacks. It is said to be making the trading system more complex, requiring actors to stay up-to-date with the latest technological developments. This can give rise to transparency issues, making it difficult for market participants, especially smaller ones, to understand and trust the system. Initial forecasting of the Nordic market has also shown that the introduction of the method could lead to slight average price increases for certain regions. This has, however, so far not been proven in practice.

Learnings from the past quarter

As of October 2024, flow-based is live in the Nordic region. Stirring up initial scepticism among actors, who have suspected that the method is causing increased price volatility, the past few months have on average seen similar price volatility to the same period the previous year and increased electricity flows between regions. Just in the first month, the trading flows between the price regions in northern and southern Sweden increased by 30%. This widely exceeded expectations at 10% predicted by the Swedish TSO Svenska kraftnät.

Average system prices were slightly lower with flow-based compared to average system prices for the same period during the last 12 years. The 12-year curve in the graph is less volatile due to the availability of more data points, and could be due to the larger share of baseload power that the system provided in the past 12 years. Source: Internal

A common reference when understanding the overall prices of electricity in the Nordics is to measure the “system prices”, which indicates the hypothetical prices if no price regions or grid capacity limits would exist. The introduction of flow-based has led to average system prices that are lower compared to the average for the same period during the last 12 years. However, whether this trend is solely a result of the flow-based introduction is still too early to determine and will require more data.

Moreover, looking at the development in the past year, electricity prices were the lowest they have been in years. Therefore, a few days of price peaks such as what the Nordics experienced in December – that affect mainly customers with hourly pricing – should not be a reason to dismiss the method altogether.

Why flow-based is needed

The introduction of flow-based in the Nordics can be seen as a natural progression of the energy system. The energy system is on its own becoming more complex as the influx of new energy markets, weather-dependent energy sources and trading software technology is transforming the energy landscape. The method, which is already used widely across the EU, is creating a way to cope with this rapid transformation.

Electricity demand in the Nordics is expected to almost double by 2040. This stresses the need for more efficient grid utilization. According to Svenska Kraftnät, the introduction of flow-based increases the electricity flow from producer to consumer, equivalent to expanding the grid at a cost of 40 to 50 billion SEK. As society shifts to a more efficient and flexible energy system, with a growing share of renewable energy sources, actions like these are in dire need.

From a wider perspective, flow-based can make way for a renewable shift. The method is enabling an increased use of wind and solar while facilitating cleaner energy exports to regions with higher fossil-fuel dependency. This is crucial as the energy system transitions.

Energy storage and flexibility solutions are key to further stabilize price volatility. Photo: Ellevio

Is flow-based the future?

Since flow-based market coupling has only been in place for a few months, it is still too early to predict its long-term future in the Nordic market or its impact on electricity prices. What is certain, however, is that future prices will depend increasingly on unpredictable factors such as the weather. Consequently, price peaks and troughs of this nature – whether familiar to us or not – are likely to occur more frequently.

The flow-based method is not perfect; it requires constant iteration and improvement to become a fully beneficial part of the Nordics’ energy system. While it may occasionally cause extreme price peaks that would not have occurred under the old model, these instances are difficult to prove and should not be a cause for alarm for private consumers or the media covering the topic.

Looking at the bigger picture, flow-based is necessary to make use of the grid capacity already installed, ensure the costs on the system remain low and to drive renewable energy production and export. By combining the method with energy storage and flexibility solutions that can stabilize price volatility and optimize production and consumption, the energy system in the Nordics is bound to see a more efficient, flexible and export-competitive future.