Impacts of the European Emissions Trading Scheme on Finnish Wholesale Electricity Prices

This study deals with the matter to what extent the costs of the EU Emission Trade System (EU ETS) end up in the electricity prices. The study encompasses both a theoretical and an empirical review of electricity price formation. It includes an econometric analysis of electricity price formation and the impact of EU ETS on power prices. On the basis of the econometric analysis is concluded that cost compensation due to EU ETS is indeed occurring. On average, about 75% to 95% of a price change in EU ETS is passed on to the Finnish NordPool spot price. The analysis also shows that the degree of utilisation of generation capacity (and hence the network loads) have an effect on electricity prices. This hints at possible market imperfections and can aggravate the price effects of EU ETS.