The demand for electricity is greater than the supply in Sweden’s major cities. One key reason is that producing more electricity in the areas with the greatest need is not particularly profitable, according to Pär Holmberg and Thomas Tangerås in the SNS report Electricity Shortages in Major Swedish Cities – A Market Perspective.
“There needs to be more electricity production in urban areas. At the same time, however, it is cheaper for power companies to expand elsewhere. They are currently paid the same for electricity even when it is produced far away from the major cities,” says Pär Holmberg, associate professor of economics and working at the Research Institute of Industrial Economics, IFN.
Holmberg and Tangerås argue that it is possible to remedy this situation by introducing new bidding zones. By establishing a more detailed breakdown of these zones, the power companies would be paid more for electricity where it is needed the most. They advocate creating a new so-called partial bidding zone surrounding Stockholm as well as possibly two such zones surrounding Gothenburg and Malmö.
“We propose that the new bidding zones should be partial and only govern how much local producers are paid for their electricity. For households buying electricity, the current zoning will still apply. Svenska Kraftnät may make up the difference. This could make it more profitable to produce electricity close to major cities without making it more expensive for consumers,” says Thomas Tangerås, associate professor of economics and working at IFN.
In order to save more electricity, the researchers also propose a new form of electricity pricing model similar to what mortgage arrangements might look like: consumers can choose a fixed rate for any portion of his or her expected electricity consumption and a floating rate for the remaining consumption. This means that they could insure themselves against high costs when the rates peak, but still be motivated to reduce their consumption when the demand for electricity is the highest in the areas where they live.
“Here too, this involves letting market forces contribute to averting shortages. Customers with a fixed rate have nothing to gain financially from reducing their consumption during high demand,” says Thomas Tangerås.
Pär Holmberg is an associate professor of economics and has a PhD in electric power engineering. He is a researcher at the Research Institute of Industrial Economics, IFN, and is affiliated with the Energy Policy Research Group (EPRG) at the University of Cambridge, United Kingdom, and the Program on Energy and Sustainable Development (PESD) at Stanford University, United States.
Thomas Tangerås is an associate professor of economics. He is a researcher at the Research Institute of Industrial Economics, IFN, and is affiliated with the Energy Policy Research Group (EPRG) at the University of Cambridge, United Kingdom, and the Program on Energy and Sustainable Development (PESD) at Stanford University, United States.
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