European cross-border electricity trade should not be restricted, but rather developed further, according to economists Pär Holmberg and Thomas Tangerås in a new SNS report.
There is an increasing resistance to further integrating the European electricity market. Both the government and the opposition want to slow down the construction of a new electricity cable to Germany, as this may result in higher electricity prices in Sweden. However, there is a danger in focusing on short-term national interests, write researchers Pär Holmberg and Thomas Tangerås in the SNS report International Integration of the Swedish Electricity Market.
“Sure, the high cost of electricity production using fossil fuels on the continent had a major impact on electricity prices in southern Sweden during the energy crisis of 2022. At the same time, however, cross-border electricity trade contributed to not having to disconnect any European consumers from the electricity grid,” says Pär Holmberg, associate professor of economics.
One of the things discussed in the report is the proper level of integration in the European electricity market. Essentially, the researchers respond that connections for transmitting electricity between countries are economically viable if the benefits of increased electricity trade exceed the costs of building and operating such connections.
It may in the short term be economically beneficial for individual countries to limit how much of their grid capacity is allocated to the European market, according to Holmberg and Tangerås. They then go on to say that countries as a whole lose out on a limited electricity trade, while there are also greater goals to consider based on a long-term perspective.
“A nationalist energy policy risks leading us in a completely wrong direction. In order to manage the energy transition and a secure supply of energy, the electricity grid needs to be expanded, and there should also be increased opportunities for cross-border electricity trade. In such a case, the market should also be given better opportunities to operate without excessive political control,” argues Thomas Tangerås, associate professor of economics.
The researchers propose three reforms that may contribute to a more efficient integration of the electricity market. First and foremost, according to Holmberg and Tangerås, withholding transmission capacity from the electricity market should be made less profitable. They also believe that it could make sense to limit the share of profits that a network owner cutting off trade may receive. In addition, they also argue that it may be beneficial to regulate that network owners will no longer be able to decide whether or not to allocate transmission capacity to the market.
about the project
The report International Integration of the Swedish Electricity Market is part of the research project Energy Systems of the Future. It highlights how the energy system should be designed to meet the demands of our climate targets while at the same time offering a secure supply of energy. It focuses on aspects such as how to design regulations and markets to promote an efficient and climate-friendly energy system as well as preparedness when problems arise in the system. The project timeframe is 2021–2023.
about the authors
Pär Holmberg is an associate professor of economics, has a PhD in electric power engineering, is a senior research fellow at the Research Institute of Industrial Economics (IFN) and participates in IFN’s research program Sustainable Energy Transition.
Thomas Tangerås is an associate professor of economics, a senior research fellow at the Research Institute of Industrial Economics (IFN) and participates in IFN’s research program Sustainable Energy Transition.