[Editorial in SvD Business section, Tuesday 31 May 2016] “Today’s control mechanisms are preventing development of the future power grid. Current production taxes and subsidies are standing in the way of cost-efficient solutions and flexibility. It’s time to review both the energy certificate system and the nuclear capacity tax,” write representatives for IVA’s project Electricity Crossroads.
An energy supply system that is efficient from a public finances perspective is fundamental for both Swedish households and for the competitiveness of Swedish industry. The course chosen could therefore have a big impact on the Swedish economy as a whole.
The electricity market is facing a challenging transformation. We are moving from an electricity production system dominated by large and predictable nuclear power to a system with an increasing amount of intermittent power production and small power plants. A key issue here is how quickly this change will happen.
The objective for the transition must be a cost-effective energy system with maintained delivery reliability and low environmental impact. That is the vision expressed in IVA’s project Electricity Crossroads, which is about to present its report, “Electricity Market of the Future.”
According to the World Energy Council, the Swedish power grid is the most sustainable one in the world today, with low carbon emissions and high flexibility at competitive prices. The Swedish energy system is also essential for the competitiveness of Swedish industry and is contributing to climate-efficient global production.
Regulation, taxes and control mechanisms have a critical impact on technical solutions, grid efficiency and costs. The energy certificate system has contributed to a significant growth in intermittent wind power. But today’s system is causing an imbalance between electricity supply and demand. And in the long run there could be delivery reliability problems.
One consequence of today’s subsidy system is that Sweden is currently investing in intermittent capacity, which is leading to an increased electricity surplus. This surplus may end up being exported for a price that is significantly lower than the long-term cost of the newly-added production. Meanwhile, nuclear power is facing significant reinvestment needs. Essentially, the subsidy system is driving this change and it is causing unnecessarily high costs for society. The closure of all reactors by 2020 will cost just over SEK 200 billion according to the Electricity Crossroads project’s calculations.
The nuclear capacity tax is affecting profitability as well as the conditions for operation and incentives for new investment and reinvestment, which may result in premature closures. In the long run this means higher electricity prices and – if nuclear power is replaced by a large measure of solar and wind – big price variations. It is also resulting in a less robust energy system and is making it harder to maintain stability, rendering the system more sensitive to disruptions. Meanwhile technologies are quickly being developed and new solutions are in the pipeline to make it possible to integrate more solar and wind into the grid without causing unnecessary disruptions. Let’s wait for the technology to be developed to ensure a cost-effective transition.
We don’t believe it’s possible to develop the grid of the future with today’s regulations. Today’s production taxes and subsidy systems are standing in the way of cost-effective solutions and flexibility. Taxes and fee structures developed for fiscal purposes need to be reviewed in light of current conditions.
Our conclusions are:
1. The Swedish system of taxes and subsidies in general supports intermittent power and results in a net tax on predictable power.
2. Continued subsidies for renewable energy will create lock-in effects and distort the market to the detriment of predictable and dispatchable energy sources that can contribute available power in the winter.
3. The continued use of subsidies increases the need to supplement today’s energy market (so-called energy-only market) with a capacity mechanism to handle power shortages. This will result in costs that consumers will have to pay.
4. The nuclear capacity tax at its current level is an unwarranted burden that came about when the margins on electricity were large and the price of emission rights was expected to be high. The same applies to the property tax on hydropower, which is higher than for other energy sources.
5. Subsidies for renewable energy production should be designed so that high availability is rewarded at times when a power shortage is feared.
6. A clear delivery reliability goal is needed that guarantees transparency and predictability.
If the Swedish Government is aiming for competitive electricity prices in an international perspective, it should be left to the market to find the most sustainable and cost-effective solutions. The more the energy mix and other aspects are controlled, the more the market needs to be regulated and the higher the total cost of the system will tend to get. It’s high time to reform the energy market!
Chairman, Royal Swedish Academy of Engineering Sciences (IVA)
Björn O. Nilsson
Professor, President of IVA
Chairman Electricity Crossroads
Project Director, Electricity Crossroads
Project Director, Electricity Crossroads
Professor, Chairman, Public Finances and Energy Market work group, Electricity Crossroads