A parsimonious model to estimate the impact of hydro scarcity on Scandinavian power exports

Hydro reservoirs in Scandinavian countries are increasingly considered to serve as a back-up for the electricity system in continental Europe that is moving from a thermal-based system to a renewable energy system. Interconnecting Scandinavian hydropower with neighboring systems that are reliant on intermittent renewable energies, offers possibilities for flexible cross-border back-up capacity. In times of low renewable production, it is possible to use flexible hydro generation as back-up for continental Europe. However, these trading possibilities are dependent on the hydro scarcity, which we characterize through the relative position of hydro power in a combined merit order. Conversely, remaining conventional thermal capacities and excess renewable energy production in continental Europe may also provide back-up energy to the Scandinavian system in dry years. Analysing the interdependencies between hydro scarcity, seasonal and stochastic variations in hydro inflow and the Scandinavian trade balance is therefore paramount for understanding the current and future interplay between the continental and Nordic power systems. Hence a theoretical model that explains the Scandinavian trade balance and relates it to hydro scarcity is developed and used to derive different hypotheses on the link between seasonal and stochastic inflow variations and hydro scarcity. These hypotheses are tested empirically. Already a parsimonious model provides a good econometric fit and the empirical findings are in line with the underlying theoretical considerations. Among other things, it is shown that fluctuations in hydro scarcity are highly relevant and have a considerable impact on the trade balance as they translate in deviations from the median filling levels. These in turn influence the market prices in continental Europe as they decrease with increasing filling levels.