IEA Commends Finlands Market-Based Approach to Energy Policy

“Finnish energy policy has an excellent record of using market forces and international trade to achieve economic efficiency and enhance national energy security,” said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Helsinki at the launch of “Energy Policies of IEA Countries – Finland 2003 Review.” Finland is to be commended for its liberalised electricity market which, as a part of Nordpool, has been a model of competition for many countries. Further international co-operation will bring more benefits in the electricity sector and help Finland meet its climate change targets at the lowest possible cost.

Development of New Nuclear Power Capacity
Nuclear power enhances Finland’s energy security and minimizes greenhouse gas (GHG) emissions. TVO’s plans for a new nuclear power plant have drawn considerable attention since it would be the first nuclear facility to be built in a liberalised marketplace.

The Finnish government has adopted an appropriate attitude towards the proposed plant. In accordance with its market-oriented approach towards the country’s liberalised electricity sector, the government has allowed the project to develop as a private independent initiative responding to the needs of the marketplace. It has given neither an explicit endorsement of the plant nor state guarantees of any sort. The vigorous and open national debate about nuclear power and the efforts to provide for safe long-term waste disposal are both commendable aspects of a successful nuclear program.

Development is proceeding apace, yet the complexity of the project and its novelty as the first nuclear plant in a liberalised electricity market may give rise to obstacles or delays. Since the country will rely on the new plant for needed electricity capacity, and as a means of reducing GHG emissions, the government should monitor its progress and stand ready with alternative plans if delay or other obstacles arise.

Energy Security
Energy security is an important issue in Finland. The country has essentially no fossil fuel resources and its location makes energy connections with other EU countries more difficult. On the demand side, Finland’s energy-intensive industry and cold climate make provision of reliable, reasonably priced energy absolutely necessary. Faced with such challenges, the country has developed an admirable degree of security, achieved largely through international energy trade, fuel-switching capabilities and an impressive diversification of fuels. The stocks of imported fuels corresponding to five months’ average consumption, far beyond the IEA’s obligation in terms of volume and coverage, shows its strong determination on energy security.

Expanded international energy connections could further improve Finland’s energy security. A more co-ordinated approach among Nordic countries towards financing transmission investments would improve system efficiency and minimize risks associated with extensive international electricity trade. The Nordpool countries should also closely survey the growing need for new generation capacity. Finally, reducing Finland’s dependence on a single supply source for natural gas will require active participation in an international pipeline consortium.

Climate Change
Finland has agreed to keep its GHG emissions at 1990 levels during the Kyoto target period of 2008 – 2012, although projections show emissions rising 15% above 1990 levels by 2010. The National Climate Strategy (NCS) is an important tool in meeting Finland’s targets, although the country will face two major challenges in this area. The first is integrating international emission reduction tools into the domestic policy framework. The government must determine how domestic measures such as taxation and voluntary agreements should be altered, if at all, when the EU emissions trading programme comes into force.

The second challenge concerns the difficulties inherent in projecting Finnish GHG emissions. Such difficulties arise from uncertainty over the proposed nuclear plant and the heavy influence that unpredictable weather patterns have on Finnish energy production and use. These two factors necessitate a certain flexibility in Finland's climate strategy, which can best be achieved through international mechanisms such as emissions trading. The government should take steps now to prepare to employ these tools, if their use becomes necessary.

Renewable Energy
As part of the climate change strategy, the government is encouraging greater use of renewable energy. This would reduce GHG emissions and increase supply diversity, although Finland will face some challenges in reaching the targets it has set for expanded renewable use.

The first challenge concerns the selection of renewable technologies to promote. While wind contributed less than 0.02% of the country’s TPES in 2001, wind technology received 22% of the total renewable energy investment subsidy in 2002. Exploring new ways to expand the economic supply of other renewable energies, notably biomass, may be more effective. The second challenge in the renewable sector is the absence of market-based support mechanisms. The investment subsidy system in place may not be as effective as a system using competition and related market forces. The Report encourages Finland to adopt a more market-based approach in order to develop renewable resources in the most cost-effective manner.