↑ Photos: iStock

8. Recommendations

This chapter bring together key insights from the assessment and put them into the Nordic context. It provides recommendations for specific capacity market mechanisms based on the drivers which could cause scarcity events. The chapter further examines cross-border participation, with a particular focus on the proposed mechanisms, and discusses additional harmonisation initiatives alongside second-order building blocks.

8.1 Summary

This section provides strategic recommendations for addressing potential adequacy and flexibility challenges within the Nordic markets. It emphasises that selecting appropriate mechanisms, whether market-wide or targeted, should depend on thorough assessments of system requirements and political objectives, which fall outside the scope of this particular study. Therefore, the recommendations may be considered as a toolkit for use in a variety of scenarios, ranging from likely occurrences to less frequent, combined risk events.

The recommendations assume that common isolated events, such as ‘dunkelflaute’ (extended periods of low renewable electricity generation), cold winters, dry years, and supply outages, are in general adequately addressed through existing market mechanisms, thus requiring no additional interventions. These assumptions are intended to illustrate likely outcomes; however, no detailed forecasting analysis has been conducted within the scope of this report.

However, if the risk of several events happening at the same time is deemed too high, it may necessitate additional, targeted mechanisms. Generally, dispatchable flexible reserve is recommended as the most suitable design to efficiently provide the required flexibility while causing minimal market distortion. In extreme and infrequent scenarios, such as a combination of dunkelflaute, cold winters, and significant supply or interconnection outages, the recommended approach is the implementation of ‘strategic reserve 2.0’.

For cross-border participation, the report concludes that dispatchable flexible reserve could beneficially incorporate cross-border cooperation when multiple countries implement similar mechanisms, provided transmission constraints are carefully considered and accounted for using derating factors. Conversely, Strategic Reserve 2.0 is less suited for cross-border participation, as it serves as a last-resort instrument, activated only under conditions of extreme system stress, typically when cross-border capacity is either fully utilised or unavailable, and all market-based solutions have been exhausted. In the case of market-wide CRMs, cross-border participation should always be accommodated for.

Finally, the report advocates regulatory harmonisation across the Nordic markets. Recommendations include aligning methodologies for defining the VoLL and reliability standards for each country and promoting cooperation on shared procurement platforms. Such harmonisation is expected to enhance efficiency, reduce operational costs, and minimise fragmented regulatory approaches across the Nordic region.

8.2 Different solutions for different needs

This report does not recommend a single mechanism. Instead, it aims to create a toolbox of the most appropriate mechanisms for different future scenarios, considering the Nordic context.

Key questions to consider are: What are the credible drivers of future scarcity? What challenges do they present, and which types of resources are best suited to address them? How can a mechanism be defined which allows the relevant resources to compete effectively against each other?

The optimal solution for the Nordic region depends on the outcomes of adequacy and flexibility needs assessments, as well as political objectives. Since conducting such assessments falls outside the scope of this study, the recommendations encompass multiple future scenarios, including both likely and less probable ones. While the recommendation provides an indication of the frequency of events and the likelihood that combinations of events could lead to scarcity in the Nordic region, this is based solely on reports available at the time of writing (see Chapter 2.5.1) and is intended as a starting point for evaluating the suitability of different mechanisms. A robust needs assessment is required to determine both frequency and likelihood with greater accuracy.

Exhibit 8.1 presents the recommendations in a tabular format. Based on the preliminary frequency and likelihood of scarcity-related challenges, it provides an indication of the suitability of market-wide versus targeted mechanisms. The table then offers a direct recommendation for one of the shortlisted mechanisms. While the recommendations offer some reasoning in the table, a comprehensive understanding requires a thorough review of the underlying assessment provided in this report.

Exhibit 8.1 – Recommendations based on different future scenarios
Different events give rise to distinct challenges, each requiring a tailored solution.

#	Event	Frequency of event*	Likelihood of causing a scarcity event in the Nordic region within the next 10 years with energy-only market**	Market wide CRM	Targeted mechanism	Reasoning	Preferred option based on assessment	Reasoning
1	Low intermittent RES output (within-day fluctuations)	Frequent ■■■■	Highly unlikely ■■■■	Not preferred ↓	Not preferred ↓	These events are already priced into the Nordic energy market. No need for additional intervention.	n/a	n/a
2	Dunkelflaute (longer periods without intermittent RES output)	Infrequent ■■■■	Highly unlikely ■■■■	Not preferred ↓	Not preferred ↓	Intermittent RES variability is a fundamental characteristic of the market. Existing price signals should naturally incentivise flexibility, and the current capacity in the Nordics is sufficient to meet demand under normal operating conditions.	n/a	n/a
3	Cold winter	Infrequent ■■■■	Highly unlikely ■■■■	Not preferred ↓	Not preferred ↓	Cold winters are a predictable challenge, and existing markets should generate adequate long-term investment signals. Price spikes can be effectively managed through forward markets and hedging strategies, ensuring resilience without the need for additional interventions.	n/a	n/a
4	Dry years	Infrequent ■■■■	Highly unlikely ■■■■	Not preferred ↓	Not preferred ↓	Dry years affect hydropower availability but can be mitigated with; existing hydropower planning (using water values) adjusting this naturally; market-based storage solutions (e.g. pumped storage and increased reservoir capacity) and sufficient interconnection to the continent.	n/a	n/a
5	Large supply outage	Rare ■■■■	Highly unlikely ■■■■	Not preferred ↓	Not preferred ↓	Large supply outages are rare and are typically managed through reserve markets rather than capacity mechanisms. If necessary, providing strong market signals that the procurement of mFRR and aFRR CM volumes will increase years in advance can help incentivise new investments, reducing the need for additional interventions.	n/a	n/a
6	Interconnection outage	Rare ■■■■	Highly unlikely ■■■■	Not preferred ↓	Not preferred ↓	As with large supply outages, existing reserve market should address these concerns.	n/a	n/a
7	Dunkelflaute Cold winter	Rare ■■■■	Unlikely ■■■■	Possibly beneficial ↓	Preferred ↑	Continued efforts to improve the energy-only market in the Nordics should be sufficient to prevent this from leading to a scarcity event. However, if assessments indicate that this could become a concern, a market-wide CRM may offer some support but might not be the most cost-efficient solution. Targeted support could be a more effective approach for addressing specific resource adequacy challenges.	Dispatchable Flexible Reserves	Encourages new investment in assets that provide within-day and multi-day flexibility, as well as seasonal reliability. Capacity is partly ringfenced from the market to prevent crowding-out-effect, and activated only at critically high prices, indicating a potential capacity shortfall. Within-day flexibility is achieved by triggering assets in the intraday market (eligibility requirements must be adjusted accordingly). Activation in the market makes operability more efficient, avoinding need for dispatch decisions by TSOs.
8	Large supply outage Low intermittent RES output (within-day fluctuations)	Rare ■■■■	Unlikely ■■■■	Possibly beneficial ↓	Preferred ↑	Continued efforts to improve the energy-only market in the Nordics should be sufficient to prevent scarcity events. However, if assessments indicate that this could become a recurring issue, a market-wide CRM may provide some support but might not be the most cost-efficient solution. Targeted support could be a more effective approach for addressing specific ressource adequacy challenges.	Dispatchable Flexible Reserves	Encourages new investment in assets that provide within-day and multi-day flexibility, as well as seasonal reliability. Capacity is partly ringfenced from the market to prevent crowding-out-effect, and activated only at critically high prices, indicating a potential capacity shortfall. Within-day flexibility is achieved by triggering assets in the intraday market (eligibility requirements must be adjusted accordingly). Activation in the market makes operability more efficient, avoinding need for dispatch decisions by TSOs.
9	Interconnection outage(s) Low intermittent RES output (within-day fluctuations)	Rare ■■■■	Moderate (Denmark) ■■■■	Possibly beneficial ↓	Preferred ↑	A market-wide CRM could be beneficial if implemented optimally, but targeted mechanism may offer greater efficiency. In particular, a targeted mechanism could be more effective in addressing specific weaknesses, especially in Denmark, which relies heavily on interconnections with other countries.	FFR availability obligation	Secure sufficient available capacity in the mFRR Energy Activation Market (EAM) to mitigate flexibility shortfalls caused by outages of other suppliers of flexibility or failures on interconnection towards neighbouring markets that provide flexibility. Compliment FRR CM as this mechanism target new investments. Regulatory challenges related to reserve markets must be addressed.
10	Dunkelflaute Cold winter Dry years	Very Rare ■■■■	Moderate ■■■■	Possibly beneficial ↓	Preferred ↑	Cold and dry years are already priced into the energy market. Periods of dunkelflaute are rare, but when combined with cold winters in dry years, they could create a potential 'missing money problem.' Given the infrequency of such events, a targeted mechanism with ringfenced or partially ringfenced capacity would be the least disruptive solution.	Dispatchable Flexible Reserves	Encourages new investment in assets that provide within-day and multi-day flexibility, as well as seasonal reliability. Capacity is partly ringfenced from the market to prevent crowding-out-effect, and activated only at critically high prices, indicating a potential capacity shortfall. Within-day flexibility is achieved by triggering assets in the intraday market (eligibility requirements must be adjusted accordingly). Activation in the market makes operability more efficient, avoinding need for dispatch decisions by TSOs.
11	Dunkelflaute Cold winter Interconnection outage(s) or Large supply outage	Very Rare ■■■■	Moderate ■■■■	Not preferred ↓	Preferred ↑	The Nordic system should generally have sufficient capacity. However, large outages, though rare, could cause short-term disruptions and may require additional flexibility. Targeted mechanisms with ringfenced assets are the most effective way to ensure investment in critical capacity without distorting the market or leading to unnecessary costs.	Dispatchable Flexible Reserves	Encourages new investment in assets that provide within-day and multi-day flexibility, as well as seasonal reliability. Capacity is partly ringfenced from the market to prevent crowding-out-effect, and activated only at critically high prices, indicating a potential capacity shortfall. Within-day flexibility is achieved by triggering assets in the intraday market (eligibility requirements must be adjusted accordingly). Activation in the market makes operability more efficient, avoinding need for dispatch decisions by TSOs.
12	Dunkelflaute Cold winter Interconnection outage(s) or Large supply outage Dry years	Very Rare ■■■■	Likely ■■■■	Not suitable ↓	Preferred ↑	To safeguard against these rare events, market-wide mechanisms are not suitable, as they increase overall capacity, which is unnecessary in most years and therefore highly costly. Instead, targeted mechanisms for ringfenced capacity or flexibility are more effective, ensuring investment in specific critical capacity without disrupting the market or leading to excessive costs.	Strategic reserve 2.0	Addressing rare but critical adequacy gaps (e.g., extreme weather, unexpected outages). A certain amount of generation or demand-side capacity is kept outside the market and activated only when needed. Ensures additional capacity is available during multi-day or seasonal shortages. Does not provide real-time or within-day flexibility unless combined with other products. Within-day flexibility is possible to achieve with warming contract.

Notes:
*Anticipated frequency of the event combinations. Please note that it is intended for illustrative purposes only, and no detailed analysis has been performed to forecast it in this report.
**This is an indication based on available reports at the time of writing.
Source: AFRY.

The above analysis offers guidance on selecting the most appropriate design for the Nordic region under varying system conditions. It is important to acknowledge that the assessment is based on a number of assumptions regarding scarcity events and their treatment within an energy-only market framework. These assumptions are intended to illustrate likely outcomes; however, no detailed forecasting analysis has been conducted within the scope of this report.

The following sections will outline further recommendations, focusing on cross-border participation and the second order building blocks.

8.3 Cross-border participation

Cross-border participation, while beneficial for minimising global market distortion and potentially improving cost efficiency, can be challenging in many cases. Its suitability depends on the specific mechanism in question. The following section assesses the feasibility of cross-border participation, mainly focusing on the recommended designs in Exhibit 8.1. See Chapter 7.7.1 for more details on cross-border participation.

8.3.1 Targeted mechanisms

Strategic reserve 2.0 services are rarely activated, and when they are, it is typically in response to events such as interconnector failures or periods in which imports are maximised and network capacity between zones is constrained by thermal limits. Since thermal grid constraints may prevent the reserved assets from delivering their response to where it is needed, there is a risk that they will not effectively address scarcity issues. In terms of impact to and from neighbouring markets, their infrequent activation results in minimal market distortion, thereby avoiding negative impacts which would normally imply need for cross-border participation. There may be exceptions.

Conclusion: While enabling cross-border participation in Strategic Reserve 2.0 could enhance global welfare, the risks to domestic security of supply outweigh these benefits. Therefore, strategic reserves are not generally considered suitable for cross-border participation.

FRR availability obligation is considered a suitable solution for addressing real-time challenges, specifically balancing close to real-time. This recommendation is based on the assumption that balancing issues in the Nordic region will primarily occur in situations where available transmission capacity is constrained, for example, during interconnector outages. The key objective of the mechanism is therefore to attract FRR resources locally, ensuring availability in the specific areas where support is needed. As such, assets located in neighbouring areas do not fulfil the eligibility criteria.

It is important to note that awarded assets will bid into their local Energy Activation Markets (EAM), which is expected to be coupled with most of Europe in the near future through the MARI (for mFRR) and PICASSO (for aFRR) platforms. This means that local FRR capacity decisions may have direct cross-border implications for all countries participating in these European markets.

Conclusion: Not suitable for cross-border participation.

Dispatchable flexible reserve, like strategic reserve 2.0, is rarely activated and is unlikely to cause significant market distortion in neighbouring markets. Therefore, the main incentives for enabling cross-border participation would be to enhance overall welfare and reduce operational costs for each country. However, this must be balanced against the risk that these assets may be “out of reach” when needed due to insufficient cross-zonal transmission capacity.

The case for cross-border participation is stronger if multiple countries have a need for and implement this mechanism. In such cases, the likelihood of transmission constraints during scarcity events should be accounted for by applying appropriate derating factors.

Conclusion: Suitable for cross-border participation between markets that implement this mechanism.

Market-wide mechanisms should facilitate cross-border participation. However, it is crucial to properly account for limitations in the cross-zonal transmission grid.

Conclusions: Suitable for cross-border participation.

8.4 Other harmonisation initiatives

Harmonising markets, rules, and platforms across Europe, especially in the Nordic region, is not new. While often challenging, such efforts typically succeed in making markets more efficient in the end. Addressing key issues early prevents complications later when differing rules and systems become entrenched.

Examples like the implementation of SDAC, SIDC, and the integration of European aFRR and mFRR EAM (PICASSO and MARI) show that these projects are lengthy, costly, and prone to delays. This is expected when multiple stakeholders with varying challenges and motivations must align. Converging different system needs into a unified framework requires compromises, often leading to suboptimal solutions. It is far easier to agree on a new design before commitments are made than to renegotiate once systems are established, when change becomes difficult and contentious. At the same time, it may be prudent to strike a balance by initially launching a minimum viable product, deferring more complex features and refinements to later stages. This can help avoid protracted debates that risk stalling progress entirely.

To minimise future challenges, early consensus among Nordic decision-makers is recommended on the following:

Needs assessment: Align adequacy and flexibility assessments across the Nordic countries.
VoLL: Common methodology for defining VoLL, as recommended by ACER in their ‘Security of supply 2024’ report on a European level.
Regulatory harmonisation: Where applicable, adopt a common approach to CRM or NFFSS rules.
Platform cooperation: For markets introducing new mechanisms, explore shared systems for procurement. Even if mechanisms differ, certain features can be aligned. Using a common system provider can help save costs.

Ultimately, it comes down to timing. Early alignment prevents issues in the future.

8.5 Second order building blocks

Once policymakers have completed a needs assessment and determined that a capacity or flexibility mechanism is required to handle a given event (see Chapter 2.5.2), they must decide on the appropriate type of mechanism (see Chapter 5) considering the fundamental design choices (see Chapter 4.2). Beyond these initial decisions, second order design choices must be addressed to ensure the mechanism is effective and well-aligned with system needs. These second-order building blocks can generally be adapted to fit any of the designs. The following section discusses the second order building blocks, focusing on the recommended design in Exhibit 8.1.

Contract type and duration

Strategic reserve 2.0 may allow shorter contracts, such as annual or seasonal, if attracting existing assets to prolong their lifetime is the ambition. Similarly for refurbishments, such as having CHP plants to be able to switch to biofuels instead of heat pumps to deliver heat. DSR may accept or even prefer shorter contracts (although this cannot be assumed universally). The business case for bidding into such mechanisms relies on any investment and operating cost being fully financed by the mechanism, since it cannot participate in the market or get revenue from any other sources.

Ringfenced or restricted solutions aimed at new investments, such as dispatchable flexible reserve, will require long contracts. The business case for bidding into these mechanisms relies on the investment cost to be fully financed by the mechanism, since it cannot participate in the market or get revenue from any other places.

FRR availability obligations would also typically require longer contracts as might require new investments, but refurbishments and (some) DSR could potentially be open to shorter contracts.

Market-wide mechanisms should accommodate different types of capacity providers through varied contract durations. This can help to ensure a balanced mix of resources, enhancing overall system reliability and resilience, while allowing resources to offer a range of services at different times, enabling revenue-stacking (and cost-sharing).

The Nordic region would benefit from a form of shaped (time-specific) contract, as conditions leading to scarcity events are most likely to occur during winter. Both market-wide and targeted mechanisms could benefit from using shaped contracts to reduce costs. However, the needs assessment should adequately investigate this to confirm that scarcity events are indeed limited to winter periods.

Duration of need

The duration of need should be established through a comprehensive needs assessment. Recent studies indicate an evolving diversity in system requirements, highlighting the necessity for capacity capable of rapid response as well as sustained operation over extended periods. AFRY's modelling of the GB electricity system underscores this trend, stating: “Critical stress events move from typically a few hours to multiple days in duration. The GB system moves from one in which critical stress events are a few hours in duration, driven by high demand coinciding with plant failure, to one in which critical stress events are due to weather events that last multiple days in duration”

AFRY Management Consulting (2023), Long-Term Capacity Adequacy Assessment – National Grid ESO Study, published 9 January 2023. Available at: https://bid3.afry.com/download/18.265bb48a1968504d618365d5/1746210114097/Resource%20adequacy%20in%20the%202030s%20Final_0.pdf

. Similar conclusions were presented in a joint report by Wärtsilä and AFRY on Finland, noting: “A difficult weather year in the Finnish context means a year with days to weeks of simultaneous high demand and low output from wind power.”

Wärtsilä & AFRY Management Consulting (2024), How Firm and Flexible Capacity Supports Finland to Become a Green Superpower – Capacity Market Options for Finland, April 2024. Available at: https://www.wartsila.com/docs/default-source/local-files/finland/wartsila-afry-report_finland-to-become-a-green-superpower.pdf?sfvrsn=62b61f43_3

Market time unit (MTU)

The design should target shorter MTUs to facilitate participation by flexible technologies, ideally non-fossil assets, such as BESS and DSR, which cannot respond for extended periods. Relying solely on technologies capable of continuous energy delivery throughout the entire period would restrict participation and may result in higher costs compared to the alternative.

Procurement mechanism

The choice of procurement mechanism depends on other design considerations. More frequent and complex procurements, attracting a range of technologies and providers, suggest that auctions represent the optimal approach. Conversely, one-off or infrequent procurements might be better addressed through tenders.

Cooperation and harmonisation across Nordic borders would likely be most effectively managed through auctions, where an auction optimisation algorithm can ensure reliable and consistent outcomes.

Lead-time and frequency of procurements

It is critical to allow sufficient lead-time to enable new-build projects, while balancing this against the urgency for rapid deployment. Shorter lead-times typically favour assets that can be deployed quickly, potentially excluding technologies that may offer greater competitiveness over the long term. Reviewing typical construction times (see Chapter 2.7.2) can help identify the types of assets the mechanism should target.

Short-term flexibility requirements are best addressed through procurement processes characterised by shorter lead-times and smaller MTUs, in order to maximise market participation. In contrast, long-term flexibility needs are more effectively met through mechanisms that offer extended lead-times and longer contract durations, reflecting the higher upfront investment typically associated with such assets. A balanced procurement strategy that combines both short- and long-term measures can help ensure immediate system stability while also supporting sustained investment in flexible resources.

Nature of penalty

A design that involves the application of an administered penalty in combination with non-payment in the event of non-availability is recommended. This applies to all the shortlisted designs.