Inger Sommerfelt Ervik
Senior Adviser, Department of Construction, Industry and Energy, Norwegian Competition Authority
Overriding the market mechanisms can do great damage.
This is a debate post. Opinions in the text are at the writer’s expense.
The Norwegian Competition Authority believes that the Price Measures Act should not be used to set a maximum price for electricity. Then it can go as in the UK. A number of companies are now in danger of going bankrupt because the purchase price is higher than the sale price.
To help households, other instruments will be more accurate, such as government transfers.
Prohibited from setting unreasonable prices
The high price level of electricity hits many hard. Several, including political parties, have called for a maximum price for electricity.
The possibility of setting a maximum price is authorized in the Price Measures Act. It states that it is forbidden to set unreasonable prices and gives the Norwegian Competition Authority the authority to set the maximum price “when it is necessary to promote a socially justifiable price development”.
However, the fact that prices are high does not mean that they are unreasonable or that regulation is in the best interests of society.
Supply and demand
Electricity prices are determined in two stages, on the Nord Pool power exchange and at the electricity companies.
Nord Pool is a marketplace where players from Norway, Sweden, Denmark, Finland and other countries meet. We have no reason to believe that prices there are governed by anything other than the balance between supply and demand.
We also have no indicators that the electricity companies set prices to consumers that are much higher than the purchase prices they have from Nord Pool.
Override can damage
It is important to maintain the mechanisms that ensure that the market is balanced, and that regulate the consumption of scarce goods. This also applies in cases where special conditions result in large sales in prices, as we see in the electricity market now.
Overriding the market mechanisms can cause great damage.
The Norwegian electricity market is regulated in a way that will provide security of supply. In the UK, they have introduced a maximum price for electricity. This has led to a number of electricity companies reporting that they are in danger of going bankrupt because the sale price is lower than the purchase price.
We have seen from California that bankruptcies in the electricity market can lead to supply problems for electricity customers. We believe that we should not put ourselves in a position where we risk this in Norway.
In addition, markets often function so that the maximum price becomes the current price. A fixed electricity price of, for example, 50 øre / kWh will mean that we can not enjoy the periods when electricity prices are low.
Unintended effects have meant that we have largely refrained from using maximum prices as a measure.
We considered the maximum price of sanitary napkins when prices soared at the beginning of the corona epidemic, but did not consider it relevant when we saw that the prices were due to high purchase prices.
Then we avoided ending up in the same situation as Italy. There, a maximum price led to a shortage of bandages as it no longer became profitable to import them.
We understand that many people despair over high electricity bills. Government transfers to households will help with the increased expenses – without compromising the market.