Looking Beyond Marginal Pricing of Electricity Reimagining Market Design for a Near-Zero Marginal Cost Electricity System

Sammanfattning

The Nordic power market is organized around an energy-only design in whichmarginal pricing of electricity and the merit order coordinate dispatch and, inprinciple, remunerate investment. As the generation mix shifts toward near-zeromarginal cost sources, primarily variable renewables, hydropower and nuclear, theprice signal that this design relies on becomes structurally weaker, while capitalintensivetechnologies depend on revenue predictability scarcity rents alone do notprovide. This thesis examines how the transition toward near-zero marginal costgeneration of electricity affects price formation, investment incentives and systemadequacy in the Nordic context. It evaluates structurally distinct market designalternatives against the stated challenges. The study adopts a qualitative, abductiveresearch design combining an integrative literature review with two rounds ofsemi-structured expert interviews. Four market designs are constructed and positionedalong a spectrum of intervention: the energy-only status quo, a Mosaic modelthat layers complementary mechanisms onto the existing architecture, a Broadbandmodel that anchors revenue in contracted capacity rather than delivered electricity,and a Command model based on centralized state planning. Each design is assessedagainst a five-criterion framework covering price formation efficiency, investmentadequacy, system adequacy and flexibility incentives, regulatory and political feasibility,and stakeholder acceptance. The analysis finds that the Nordic clearingprice currently remains functional largely due to hydropower’s water value mechanismand European market coupling rather than marginal pricing, and that scarcityrents tend towards becoming insufficient in order to incentivize long-term investment.No design dominates across all criteria, but the Mosaic model emerges as themost empirically supported and institutionally feasible direction. The Broadbandand Command models address the underlying coordination problem, but at coststhe Nordic and EU context cannot currently absorb. The central contribution ofthe thesis is to reframe the design question, rather than choosing between distinctmarket architectures. The more productive framing is which combination of complementarymechanisms best addresses the specific structural challenges the Nordicsystem faces at each stage of the transition.