ELS #Energy - Market Uptade: High-cost protection in Sweden

Last week, the Swedish government presented its anticipated high-cost protection proposal. The model is designed so that households and businesses receive support based on a national reference price of 0.75 SEK/KWh, which is then compared with the average price per electricity area one year back, during the period between October 2021- September 2022. Depending on how much higher electricity prices have been in Sweden’s two highest-priced bidding zones, support will be issued to customers in SE3 and SE4. Hence, the rest of Sweden, where prices remained relatively low during the period, is not covered.

Revenues stemming from bottlenecks are normally to be used to remove the bottlenecks themselves, or to lower tariffs. However, in the current situation of high energy prices, the EU has proposed that these revenues can be used to compensate customers for the increased costs of electricity. When costs for, among other things, external capacity fees and investments in transmission capacity were calculated, SEK 55 billion remain to be paid out to the Swedish electricity consumers. Svenska Kraftnät (the Swedish TSO), along with the Swedish government, will return with further information about solutions concerning 2023 in mid-November.

High energy prices have already led to a rationalisation within the industry. Many actors struggle to operate as high energy prices and inflation are strongly linked. The risk of an economic downturn, as a result, is a probable outcome if prolonged.

Thus, the government must keep the market signals alive in order not to increase inflation, which the current suggestions seem to be achieving. The Swedish government has previously praised the Norwegian model, ​​where the state will pay half of the electricity bill that exceeds a maximum amount. Hopefully, this indicates that the Swedish government does not follow through. Efforts to protect the wider economy are important to enable a strong recovery, but as ELS Analysis has been saying: it is paramount not to cap prices, but to cap costs. Cutting price signals are unlikely to solve anything, but would rather cause even deeper dislocations and long-term ripple effects. Not least on investment into renewables in the coming years. With these suggestions, such a negative outcome seems to have been largely averted.

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