Friday, January 21

What can we do to avoid high electricity prices? Three measures stand out.

  • Kjetil Lund

    Director, Norwegian Water Resources and Energy Directorate (NVE)

Without wind power, electricity prices would have been even higher this autumn, writes Kjetil Lund. The picture is from Florø.

We have had a common and well-functioning power market with our Nordic neighbors for 25 years. Is it in our national self-interest to break out of it?

Chronicle
This is a chronicle. Opinions in the text are at the writer’s expense.

We are heading towards a winter with very high electricity prices. Norwegian households are likely to receive thousands of kroner in extra expenses in the coming months. There is little consolation in the fact that most European countries have even higher electricity prices than us.

Some questions are central: Why are prices so high? Will the high prices last? What can we as a country do to prevent this from happening in the future?

Why so tall?

The price of electricity is very high now because we in southern Norway have a low degree of filling in the reservoirs in combination with very high gas, coal and CO₂ prices internationally.

The gas price has increased fivefold, and the CO₂ price has doubled in the last year. We have had exchange capacity with our neighboring countries for several decades, so this would have pushed the Norwegian electricity price upwards anyway. But with more foreign cables, this effect is stronger than before, especially in southern Norway.

How long will the high prices last?

Years with a very low degree of filling occur at irregular intervals. But the power system is more complex now.

We now have more wind power. This contributes to lower power prices.

On the other hand, we have more foreign cables than before. This contributes to higher prices on average.

If gas and CO2 prices remain high, electricity prices in Norway will also remain high.

In NVE’s long-term analysis, we assume that the CO₂ price will be permanently at a higher level in the future. It points to higher electricity prices than we have been used to for a long time to come, albeit not as high as what we are experiencing now.

If gas and CO2 prices remain high, electricity prices in Norway will also remain high

What can we do to avoid high prices?

In the short term, there is little to do with the power system itself. What you can do quickly, however, is reduce people’s expenses if you politically want to.

Norway makes big money on high energy prices – on oil, gas and electricity. The revenue effect of this situation is thus positive for the country, but the distribution effect is skewed.

In the longer term, three possible measures stand out:

1. The only thing we can do is invest more energy efficiency. Here the potential is greater than many are aware of. In NVE, we estimate a potential of 10–15 TWh in construction alone. This corresponds to almost 10 percent of Norwegian power production.

Many measures in energy efficiency are profitable, at least when electricity prices are high. But often the time horizon for profitability is too long for people. And often it is not the owner of the building who pays the electricity bill. Here there is a market failure, and then there is often a need for policy.

The greatest potential in the next few years is to build more wind power on land.

We can also build more hydropower and expand existing facilities.

NVE has received the first license applications for larger solar power plants.

2. The second thing we can do to curb prices is to expand more power generation.

The greatest potential in the next few years is to build more wind power on land. Without wind power, electricity prices would have been even higher this autumn. Wind power also interacts well with our regulatable hydropower. When it is windy, the hydropower producers can withhold the water for later use.

Wind power on land is controversial. If the development of more wind power is to have legitimacy, it is probably a prerequisite that larger parts of the value creation remain locally and nationally. The introduction of a local production tax is a start. A further measure may be to facilitate national and local ownership in the developments, for example by municipalities.

We also have the potential to build more hydropower and to expand and upgrade existing facilities. This will help ensure more controllable power, which is important.

Solar power is also growing in Norway. NVE has now received the first license applications for larger solar power plants.

A third possible measure is to carefully assess the extent of electrification of the petroleum sector forwards. The societal costs of using expensive regulated hydropower for such electrification are high.

In a situation with strong pressure on the power system, this is power that also has a high alternative value for society, for example to a new green business community.

What about offshore wind? Offshore wind has great potential in the long term and can become a large industry, but will contribute little in the next few years. If offshore wind is to become a major industry, the business model should also be based on real profitability for society, not just profitability for commercial actors financed directly or indirectly by the community.

Offshore wind has great potential in the long term and can become a large industry, but will contribute little in the next few years

International cooperation

How about cutting exports and leaving cooperation and agreements with other countries?

Most countries with which we have transmission connections have higher average prices than Norway. This means that cables increase the average prices in Norway. In periods of very high power prices in Europe, such as now, this effect is very strong.

At the same time, power exchange between countries facilitates value creation and an overall efficient utilization of power resources between countries. In situations with a lot of wind and sun in Europe, Norway benefits from a low European price. Foreign connections are also important for our security of supply in demanding situations.

Power exchange facilitates value creation and an overall efficient utilization of power resources between countries

A broader perspective is that Norway has always had a small and open economy vis-à-vis the outside world. We have exported few goods and imported many, which has contributed significantly to our growth and welfare. Few countries have benefited as much from an orderly international trade regime as us. We have had a common and well-functioning power market with our Nordic neighbors for 25 years. It is therefore worth thinking carefully about whether it is in our national self-interest to break out of agreements and established cooperation with our surrounding countries in such a central area as energy.

A good starting point after all

There will be no shortage of difficult choices in energy policy in Norway in the future. Nevertheless, it is worth reminding ourselves that we are in a far better situation than most other European countries. They are going through a major restructuring of the entire power system, a restructuring that can be far more demanding than many have taken inwards.

Norway by nature has fantastic energy resources, we have a power system with low system costs, and we have an efficiently functioning power market. This provides a good starting point for solving the demanding tasks that lie ahead of us.

Finally, it is also worth reminding ourselves that a market-based power system is very suitable for ensuring the efficient utilization of our power resources and for creating great value. But it is unsuitable to ensure a reasonable distribution. That is the task of politics.

Reference-www.aftenposten.no

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