writes for The Economist
Do not cut the cables!
This is a discussion post. Opinions in the text are the responsibility of the writer.
The more electricity prices rise, the greater the calls for state control over the electricity grid to retain Norwegian power in Norway. Yes, there are even calls to cut the power cables that allow Norway to export energy abroad.
At first glance, this may be understandable. The energy-intensive industry with small margins fears for the future. The people who work there fear for their work. Consumers worry about rising bills as winter rolls in.
But if you look up for a moment, you will see that it is a good thing in the long run that Norway is connected to the European electricity grid. Unfortunately, this long-term macroeconomic outlook was drowned out in the electoral campaign that we have left behind.
The price fluctuations of recent years should really be a wake-up call and facilitate investment in electricity production and transmission capacity.
At the same time, it must be stimulated to develop a more profitable (and therefore less vulnerable) industry and adopt new financing and business models that make green change more affordable in all sectors of the economy.
Offers export opportunities
Norway has been connected to the European electricity grid since 1991. There are good reasons why this has been Norwegian energy policy for so long.
When hydropower reservoirs are low, Norway must import energy. But when they are well supplied, they offer export opportunities.
By upgrading existing power plants and introducing new ways of storing energy, for example in the form of large hydrogen reserves, there would be less need for imports, less risk of price spikes, and even more opportunities to export surplus electricity.
Olvar Bergland, an energy economist at NMBU – Norwegian University of Environmental and Life Sciences, says there are up to 40 TWH in untapped potential in existing power plants or in the development of simple small-scale plants.
This represents just under a third of the electricity Norway currently generates from hydropower (136 TWH per year). At today’s futures prices, this additional energy would be worth around NOK 20 billion.
Give the locals shares
Norway’s power grid is in need of an upgrade too.
There is only one cable that connects the electrical regions of the north and south of the country, which explains the high price differences in the country in recent months. Much power is captured in the north. It could have supplied homes and businesses in more populated parts of the country.
Sweden has invested heavily in such improvements, because politicians saw export opportunities.
Norway and all other countries will have to sacrifice some hills and valleys in the least damaging way in the fight against climate change.
What about the resistance development of power plants and power grids that are often encountered? Well, politicians can’t and shouldn’t stroke everyone’s hair. Nor should they hide behind the ideal of local self-government.
Of course, the rights of indigenous peoples and reindeer herding must be taken into account. But the reality is that Norway and all other countries will have to sacrifice some hills and valleys in the least damaging way in the fight against climate change.
So compensation schemes can be helpful in calming the mood, for example by giving local people stakes in new power plants.
Pre-purchase agreements, in which heavy industry players buy electricity at an average price in advance, can trigger much-needed financing.
This approach can make consumers more vulnerable to price fluctuations. The advantage may be stronger incentives to make existing houses more energy efficient. An investment in this through low-interest, government-guaranteed loans can alone launch a massive new sector.
High margin industry
Norway’s renewable energy is a valuable resource. It should be used wisely to lead the industry with a high margin.
Norway must avoid by all means being affected by what is called the “Jevons paradox”: that a more efficient use of resources only leads to an increase in resource consumption. Yet that is precisely the current status quo. It devalues the unit price of Norwegian renewable energy.
Valuable production and associated services must be stimulated by:
- Tax mechanisms that offer generous discounts on research and innovation.
- Grants that support operating costs and capital requirements.
- Purchase guarantees.
If governments place initial orders, private customers almost always do the same. The defense and space industries are a good example.
High-margin companies can also offer products and services in ways other than sales, which require more investment from the customer.
Renting a product is much cheaper for the customer and guarantees a stable income for a longer period of time. This is not inconceivable in a sector such as maritime technology. Not even in a nascent sector where Norway can be at the forefront: the liquidation of oil activities.
Test of bigger challenges
Power protectionism, like other forms of protectionism, slows the economy. Delays wear and tear and becomes indecisive. So it is better to be pragmatic, innovative and be prepared.
This also applies more generally to welfare state support, which many Norwegians will need in the face of the major economic changes that are taking place.
The current concern over electricity prices is just a preview of the biggest challenges ahead.