Strategic capacity expansion planning in hydro-dominated power systems: Insights from the Nordics

Conventional capacity expansion planning (CEP) relies on a perfect-foresight planning horizon and linear investment optimization, which fail to capture the non-linear dynamics of electricity markets. In the Nordics, hydro-related weather variability plays a critical role in maintaining the robustness of the power system. This paper addresses the intra-year perfect-foresight limitation in current CEP models, focusing on hydro-dominated power systems with substantial hydro reservoir capacity, using Sweden’s decarbonization pathway toward 2050 as a case study. Our approach provides a robust long-term CEP framework by leveraging short-term price forecasts to guide storage dispatch decisions. The proposed CEP model has been historically validated and captures the dynamics of seasonal storage hydro reservoirs, achieving deviations of less than €1/MWh in annual average prices across all Swedish bidding zones. A comparative analysis between the proposed and conventional CEP models (cGrid and GenX), together with the Ten-Year Network Development Plan (TYNDP 2024), reveals a broad alignment in capacity expansion and dispatch under an average weather year. However, in a problematic weather year, with correlated low wind output and reduced hydro inflows, significant divergences emerge, with half-year price averages differing by up to ± €40/MWh. These discrepancies are mainly driven by contrasting approaches to hydro reservoir modeling. Notably, the proposed CEP model recommends a 37.5 % increase in firm nuclear capacity to mitigate supply shortages, whereas the conventional CEP suggests a 4.4 % reduction, thereby increasing reliance on weather-dependent resources. These findings underscore the limitations of perfect-foresight CEP in power systems with substantial seasonal storage resources. • Compares a linear expansion with an improved framework featuring non-linear dispatch. • Reflects hydro reservoir flexibility consistent with hourly operations. • Shows major deviation in market behavior during the challenging 2002 weather year. • Indicates +38% nuclear capacity in the improved model, while linear on suggests a −4% cut. • Highlights the limits of using perfect-foresight linear expansion models.