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Swedbank Analysis - February 17, 2012
Swedbank Analysis - February 17, 2012
Swedbank Analysis - February 17, 2012
Swedbank Analysis - February 17, 2012
Swedbank Analysis - February 17, 2012
Swedbank Analysis - February 17, 2012
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Swedbank Analysis - February 17, 2012

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Swedbank Analysis - February 17, 2012: Consistently sky-high electricity prices during the winter raise questions about the electricity market

Swedbank Analysis - February 17, 2012: Consistently sky-high electricity prices during the winter raise questions about the electricity market

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  • 1. Swedbank Analysis No. 1  17 February 2012 Consistently sky-high electricity prices during the winter raise questions about the electricity market • Limits on Swedish nuclear power generation and high electricity consumption due to the cold weather have driven up electricity prices to the highest levels in over a year. Swedish electricity producers appear to be underutilising nuclear power during the winter months, which is leading to higher prices. • High electricity consumption in the Swedish economy means that rising prices are having a greater negative effect on households and companies than in other countries. Because of this high consumption and quickly rising prices, Swedish households’ electricity costs are among Europe’s highest. Electricity costs have risen as a share of total household spending and are now nearing the same level as interest expenses. • We expect the price of electricity to fall in the weeks ahead as the weather gets milder. Lower production growth in Swedish and European industry should also help to ease prices in 2012. During the last two winters the price of electricity has risen substantially due to the cold weather, but also because of shortfalls in production. This is particularly true of Swedish nuclear power production, where extensive, long-lasting stoppages have occurred in connection with the cold weather. Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 7740e-mail: ek.sekr@swedbank.com Internet: www.swedbank.com Responsible publisher: Cecilia Hermansson +46 (0)8-5859 7720. Magnus Alvesson +46 (0)8-5859 3341, Jörgen Kennemar +46 (0)8-5859 7730 ISSN 1103-4897
  • 2. In early February the price of electricity rose to the highest levelin over a year. More expensive generation resources have beensubstituted instead, which has is driving up prices.Price peaks in recent winters raise questions whether theSwedish market can produce electricity at competitive pricesand whether producers can ensure a consistent energy supply.High energy consumptionSwedish electricity consumption has levelled off in the last 15years after having grown from the 1970s until the mid-1990s.An important reason why it is growing more slowly is increased Due to increasedenergy efficiency, which continues to improve among efficiency, electricityhouseholds and companies, not least due to higher energy consumption is growingprices. Although Sweden ranks among the most energy-efficient more slowlycountries in Europe, it is not a given that increased efficiencieswill lead to lower total consumption. Instead, lower heatingcosts could translate to higher demand for electronic products.Despite efficiency improvements, Sweden is still among the EUcountries that use the most electricity per capita. In 2010average consumption per capita was 15200 kWh, according tothe IEA, ranking Sweden sixth internationally behind Iceland,Norway and Finland, among others. High Swedish electricityconsumption applies especially to home heating due to the coldweather, but also because of the sources of energy beingconsumed. In Sweden, homes are more commonly heated withelectricity than in other countries, which mean that household Swedish householdspending on electricity is significantly higher than in those other spending on electricitycountries. Total electricity costs represent 3% of Swedish is among Europe’shousehold spending, twice the EU average. Even compared highestwith our Nordic neighbours Denmark (2.5%) and Finland (2%),which have a similar climate, Swedish household electricitycosts are higher as a share of total spending. The share ofspending on electricity is higher still in a number of EasternEuropean countries such as Bulgaria, Slovakia, Hungary andRomania, but that is due more to low incomes than highconsumption.Another reason for high electricity consumption in Sweden isthe structure of its business sector, where processingindustries, led by forestry and steel, account for a large share ofindustrial consumption. Together with the chemical industry,these three sectors account for as much as three fourths ofindustrial electricity consumption. At the same time Swedishindustry has become more dependent on electricity inconnection with a gradual transition from oil.Considering that Swedens dependency on electricity is greaterthan our most important competing countries, high prices ordisruptions to generation could have a greater negative effecton the economy than in comparable countries. Growinginternational competition has led to less energy-intensive goodsand production processes, however. As a result, total industrial2 Swedbank Analysis No. 1 • 17 February 2012
  • 3. consumption per unit produced has continuously dropped inrecent decades. High electricity consumption in the Swedisheconomy requires a well-functioning, competitive electricitymarket, however.Prices vary greatly on electricityexchangesSwedish electricity prices are set daily on the Nordic electricityexchange, Nordpool. A defining feature of the Nordic market isthe large share of hydroelectric-based generation, particularly inNorway. In a normal year hydroelectric accounts for half ofNordic electricity generation, while nuclear represents slightlyover 20%. As indicated in the diagram below, prices have beenvolatile on the Nordic exchange. This is largely due tofluctuating hydroelectric production caused variations inprecipitation, although accessibility to nuclear power can also High volatility in electricityhave a major impact. This is especially true of the Swedish prices due to fluctuatingnuclear power industry, where capacity utilisation in recent power productionyears has been less than 80%, which has to be consideredunsatisfactory. In Finland, the corresponding figure is slightlyover 90%. Prices are also erratic on other European electricityexchanges, however, which in general have a significantly lowerturnover than Nordpool.Electricity prices on the Nordic electricity exchange, Nordpool 110 100 90 80 70EUR/Megawatt-hour 60 50 40 30 20 Average 2005-2012 10 0 05 06 07 08 09 10 11 12 mean Source: Reuters EcoWinSource: NordpoolIn recent years the EU’s trading system for emission allowanceshas had a big impact on electricity prices on both the upsideand downside, depending on the market price of the allowancesand the amount of CO2 emissions generated by producing Record-low market pricesSwedbank Analysis No. 1 • 17 February 2012 for emission allowances 3
  • 4. electricity. Uncertainty in international climate negotiations anda weaker global economy impacted the emission allowancemarkets globally and in Europe in 2011. The price of Europeanallowances has reached record-low levels, which should putdownward pressure on the spot price of electricity. Anotherimportant factor is prices on international fuel markets, mainly ofcoal, which affect electricity prices when more expensiveelectricity generation is added during the winter. At the sametime the European electricity market is gradually becomingmore intertwined, because of which prices have graduallyevened out. Since deregulation in 1996, prices in the Nordicmarket have been lower on average than the correspondingcost of new production capacity. This is because the monopolysituation prior to deregulation in the Nordic region and severalother European countries created overcapacity which, afterderegulation, led to a price decline. Today prices are at a levelthat again should make it more profitable to invest in new powerplants.The price of electricity in Sweden has more than doubled innominal terms since the market was deregulated, while the Energy taxes andconsumer price index has risen by 23%. A not insignificant network fees have risenshare of the price increase has been through higher energy substantiallytaxes, network fees and the introduction of VAT. Since 1996taxes and fees on electricity have risen faster than the actualprice of electricity. From an international comparison for the firsthalf of 2011, Sweden had the seventh highest electricity prices,including tax, in the EU. Denmark has the most expensive,followed by Norway, Finland and Belgium. In Finland, with itshigh consumption, prices were below the EU average as well asthe other Nordic countries. In addition to lower energy taxation,Finland’s lower prices are probably due to fewer localbottlenecks in transmission capacity.Electricity price in various EU countries, euro per kWh 0,35 EUR/kWh Energy+net tariffs 0,3 Tax Value added tax 0,25 0,2 0,15 0,1 0,05 0 - 0,05 -0,1Source: Swedish Energy and Eurostat. Prices are in cent per kWh and based on households withelectricity use of 2,500-5000 kWh per year.4 Swedbank Analysis No. 1 • 17 February 2012
  • 5. The major increase in electricity prices in Sweden has madehouseholds, especially single-family homeowners, moreconcerned about future electricity prices than was even thecase with mortgage rates. Since price elasticity for electricityconsumption is relatively low, other consumption is limited byrising electricity prices. High electricity prices could also haveconsequences for home prices, where older, less energy-efficient properties become less attractive compared with thosethat consume less energy.Measures to increase generation capacityNordic electricity generation is dominated by a few players,none of which enjoy a market share of more than 20%. There is Swedish electricity generationsignificantly greater competition in individual pricing zones, is dominated by a few utilitieshowever, since the production capacity of the variouscompanies is geographically concentrated. In Sweden,Vattenfall, Fortum and Eon account for as much as 85% ofelectricity generation. There have often been claims that thelack of competition is stifling the electricity market, which wasdiscussed by, among others Sven-Olof Fridolfsson and ThomasP Tangerås in a noted article in 2009.Researchers have found no support, however, for the theorythat producers, because of their size, are pushing prices higheron the Nordic electricity exchange. They are affecting prices The efficiency of electricitythough by under-investing in electricity generation. The shift in markets requires moregeneration to more expensive production tends to push prices studieshigher. In Sweden, where hydroelectric power plays a majorrole, it can be tempting to replace nuclear power production,which is jointly owned by the various producers, withhydroelectric during the summer months. This would over-utilisehydroelectric power and reduce access to water during thesummer, affecting electricity prices later in the year. The lostproduction from nuclear power could instead be shifted to themore profitable winter period. The Finnish nuclear power plantsare partly owned by producers and major consumers, becauseof which there is less motivation to push prices higher with thehelp of nuclear power. However, there is still not enoughresearch on how under-investments in production capacity andunderutilisation of nuclear power can be utilised to capturemarket power, i.e., push electricity prices higher.Because of the EUs aim to create a single European electricitymarket, Sweden has been divided as of 1 November 2011 intofour different electricity zones to improve transmission capacityin the national grid. These zones are an effort to stimulate Regional electricityincreased electricity generation where demand outpaces supply zones will stimulateand to signal where networks need to be strengthened. In more electricityzones with electricity deficits, prices are rising, which should generation andstimulate the addition of new capacity. In southern Sweden, strengthen the gridwhich has such a deficit, the grid is being expanded in partthrough the so-called southwest link, which is expected to be inoperation in 2014. The risk with smaller electricity pricing zonesSwedbank Analysis No. 1 • 17 February 2012 5
  • 6. with few producers is that they can gain a dominant position, which can lead to mistrust in the local electricity market. The Swedish Competition Authority’s recommendations to increase competition in the electricity market are to: • Break up joint ownership of Swedish nuclear and hydroelectric power resources, i.e., vertical separation between production and trading on the electricity market • Expand the grid, especially in Norway • Complete integration of the Nordic and northern European energy markets • Improve customer mobility in the electricity market. At the same time there is an underlying need to expand and modernise Swedish electricity generation, especially if use of The share of wind power is fossil fuels is going to be further reduced. Major investments are expected to rise being made in wind power, which is therefore expected to rise from todays 2.5% of total electricity generation to nearly 7% within a ten-year period. This should increase the supply of electricity and thereby help to ease prices. There are objections to expanding electricity generation, since at least in the short term it requires relatively high prices to make the investments profitable. We expect the market price of electricity to retreat from todays high levels in the months ahead. A milder climate and weaker global economy should help to ease prices. In the longer term there are expectations that expanded wind power will lead to lower electricity prices. At the same time Swedish prices are strongly affected by political decisions, especially with regard to energy taxation, because of which there is uncertainty among both households and businesses about future electricity prices. Jörgen KennemarEconomic ResearchDepartment Swedbank Analysis is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of theSE-105 34 Stockholm analyses reported in this publication. However, we cannot guarantee theTelephone +46-(0)8-5859 7740 accuracy or completeness of the report and cannot be held responsible forek.sekr@swedbank.sewww.swedbank.se any error or omission in the underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well.Legally responsible publisher Neither Swedbank nor its employees may be held responsible for losses orCecilia Hermansson, damages, direct or indirect, owing to any errors or omissions in Swedbank+46-8-5859 7720. Analysis.Magnus Alvesson, +46-8-5859 3341Jörgen Kennemar, +46-8-5859 7730ISSN 1103-4897 6 Swedbank Analysis No. 1 • 17 February 2012

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