Area price spreads in the Nordic electricity market: The role of transmission lines and electricity import dependency

Illustrated on the case of Nordic electricity market we conduct an econometric analysis of area price spreads (difference between area price and system price) in thirteen price zones during 2010 (Jan) - 2012 (Jul). The objectives of the study are twofold: (1) assess the dynamics of area price spreads and identify whether significant differences exist among the bidding zones, and (2) assess the role of cross-border transmission line variables, namely Elspot capacities, Elspot flow, and transmission line utilization. Furthermore, we test how large role plays an area's ability to cover its hourly demand by import in determining area price spread and illustrate this on the case of Finland. Methodologically, we utilize non-parametric methods for the first objective and autoregressive exogenous model for the second objective. The study contributes to the limited theoretical discussion on spatial price risks and identifies cross-border trade and import security as key focus areas.