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

Abstract

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