Connected but Divided? The Impact of the Flow-Based Method on Incentives to Invest in Electricity and Wind Power in Sweden

Abstract

Sweden needs to expand its electricity production to meet a growing demand, driven by the electrification of society. Wind power is one of the most viable options for expansion, as a renewable energy source with low costs. It does, however, tend to ”cannibalize” its own revenues, since electricity prices drop during periods of high wind quantity. The Nordic countries recently implemented the flow-based capacity calculation method, which influence prices by determining how much transmission capacity is available. It is assumed to lead to price convergence in the region. This method has the potential to reduce cannibalization and can increase the incentives to invest in wind. This study investigates how incentives to invest in electricity and wind power have changed under the new method. This is done by using time series models across Sweden’s bidding zones. The results suggest that relative incentives to invest in wind power have increased in Northern Central Sweden. Contrary