The document summarizes Swedbank's analysis of consistently high electricity prices in Sweden during the winter. It finds that limits on nuclear power generation combined with high demand due to cold weather have driven prices up. Swedish households have high electricity consumption and costs due to cold weather and electricity heating. The structure of Swedish industry also contributes to high consumption. The electricity market is dominated by a few large utilities and more studies are needed on investment and pricing. Regional electricity zones and increased renewable generation may help boost supply and lower prices going forward.

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 7740
e-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 level
in over a year. More expensive generation resources have been
substituted instead, which has is driving up prices.
Price peaks in recent winters raise questions whether the
Swedish market can produce electricity at competitive prices
and whether producers can ensure a consistent energy supply.
High energy consumption
Swedish electricity consumption has levelled off in the last 15
years after having grown from the 1970s until the mid-1990s.
An important reason why it is growing more slowly is increased Due to increased
energy efficiency, which continues to improve among efficiency, electricity
households and companies, not least due to higher energy consumption is growing
prices. Although Sweden ranks among the most energy-efficient more slowly
countries in Europe, it is not a given that increased efficiencies
will lead to lower total consumption. Instead, lower heating
costs could translate to higher demand for electronic products.
Despite efficiency improvements, Sweden is still among the EU
countries that use the most electricity per capita. In 2010
average consumption per capita was 15200 kWh, according to
the IEA, ranking Sweden sixth internationally behind Iceland,
Norway and Finland, among others. High Swedish electricity
consumption applies especially to home heating due to the cold
weather, but also because of the sources of energy being
consumed. In Sweden, homes are more commonly heated with
electricity than in other countries, which mean that household Swedish household
spending on electricity is significantly higher than in those other spending on electricity
countries. Total electricity costs represent 3% of Swedish is among Europe’s
household spending, twice the EU average. Even compared highest
with our Nordic neighbours Denmark (2.5%) and Finland (2%),
which have a similar climate, Swedish household electricity
costs are higher as a share of total spending. The share of
spending on electricity is higher still in a number of Eastern
European countries such as Bulgaria, Slovakia, Hungary and
Romania, but that is due more to low incomes than high
consumption.
Another reason for high electricity consumption in Sweden is
the structure of its business sector, where processing
industries, led by forestry and steel, account for a large share of
industrial consumption. Together with the chemical industry,
these three sectors account for as much as three fourths of
industrial electricity consumption. At the same time Swedish
industry has become more dependent on electricity in
connection with a gradual transition from oil.
Considering that Sweden's dependency on electricity is greater
than our most important competing countries, high prices or
disruptions to generation could have a greater negative effect
on the economy than in comparable countries. Growing
international competition has led to less energy-intensive goods
and production processes, however. As a result, total industrial
2 Swedbank Analysis No. 1 • 17 February 2012

3. consumption per unit produced has continuously dropped in
recent decades. High electricity consumption in the Swedish
economy requires a well-functioning, competitive electricity
market, however.
Prices vary greatly on electricity
exchanges
Swedish electricity prices are set daily on the Nordic electricity
exchange, Nordpool. A defining feature of the Nordic market is
the large share of hydroelectric-based generation, particularly in
Norway. In a normal year hydroelectric accounts for half of
Nordic electricity generation, while nuclear represents slightly
over 20%. As indicated in the diagram below, prices have been
volatile on the Nordic exchange. This is largely due to
fluctuating hydroelectric production caused variations in
precipitation, although accessibility to nuclear power can also High volatility in electricity
have a major impact. This is especially true of the Swedish prices due to fluctuating
nuclear power industry, where capacity utilisation in recent power production
years has been less than 80%, which has to be considered
unsatisfactory. In Finland, the corresponding figure is slightly
over 90%. Prices are also erratic on other European electricity
exchanges, however, which in general have a significantly lower
turnover than Nordpool.
Electricity prices on the Nordic electricity exchange, Nordpool
110
100
90
80
70
EUR/Megawatt-hour
60
50
40
30
20
Average 2005-2012
10
0
05 06 07 08 09 10 11 12
mean
Source: Reuters EcoWin
Source: Nordpool
In recent years the EU’s trading system for emission allowances
has had a big impact on electricity prices on both the upside
and downside, depending on the market price of the allowances
and the amount of CO2 emissions generated by producing
Record-low market prices
Swedbank Analysis No. 1 • 17 February 2012 for emission allowances
3

4. electricity. Uncertainty in international climate negotiations and
a weaker global economy impacted the emission allowance
markets globally and in Europe in 2011. The price of European
allowances has reached record-low levels, which should put
downward pressure on the spot price of electricity. Another
important factor is prices on international fuel markets, mainly of
coal, which affect electricity prices when more expensive
electricity generation is added during the winter. At the same
time the European electricity market is gradually becoming
more intertwined, because of which prices have gradually
evened out. Since deregulation in 1996, prices in the Nordic
market have been lower on average than the corresponding
cost of new production capacity. This is because the monopoly
situation prior to deregulation in the Nordic region and several
other European countries created overcapacity which, after
deregulation, led to a price decline. Today prices are at a level
that again should make it more profitable to invest in new power
plants.
The price of electricity in Sweden has more than doubled in
nominal terms since the market was deregulated, while the Energy taxes and
consumer price index has risen by 23%. A not insignificant network fees have risen
share of the price increase has been through higher energy substantially
taxes, network fees and the introduction of VAT. Since 1996
taxes and fees on electricity have risen faster than the actual
price of electricity. From an international comparison for the first
half 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 its
high consumption, prices were below the EU average as well as
the other Nordic countries. In addition to lower energy taxation,
Finland’s lower prices are probably due to fewer local
bottlenecks 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
-0,1
Source: Swedish Energy and Eurostat. Prices are in cent per kWh and based on households with
electricity 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 made
households, especially single-family homeowners, more
concerned about future electricity prices than was even the
case with mortgage rates. Since price elasticity for electricity
consumption is relatively low, other consumption is limited by
rising electricity prices. High electricity prices could also have
consequences for home prices, where older, less energy-
efficient properties become less attractive compared with those
that consume less energy.
Measures to increase generation capacity
Nordic electricity generation is dominated by a few players,
none of which enjoy a market share of more than 20%. There is Swedish electricity generation
significantly greater competition in individual pricing zones, is dominated by a few utilities
however, since the production capacity of the various
companies is geographically concentrated. In Sweden,
Vattenfall, Fortum and Eon account for as much as 85% of
electricity generation. There have often been claims that the
lack of competition is stifling the electricity market, which was
discussed by, among others Sven-Olof Fridolfsson and Thomas
P Tangerås in a noted article in 2009.
Researchers have found no support, however, for the theory
that producers, because of their size, are pushing prices higher
on the Nordic electricity exchange. They are affecting prices The efficiency of electricity
though by under-investing in electricity generation. The shift in markets requires more
generation to more expensive production tends to push prices studies
higher. In Sweden, where hydroelectric power plays a major
role, it can be tempting to replace nuclear power production,
which is jointly owned by the various producers, with
hydroelectric during the summer months. This would over-utilise
hydroelectric power and reduce access to water during the
summer, affecting electricity prices later in the year. The lost
production from nuclear power could instead be shifted to the
more profitable winter period. The Finnish nuclear power plants
are partly owned by producers and major consumers, because
of which there is less motivation to push prices higher with the
help of nuclear power. However, there is still not enough
research on how under-investments in production capacity and
underutilisation of nuclear power can be utilised to capture
market power, i.e., push electricity prices higher.
Because of the EU's aim to create a single European electricity
market, Sweden has been divided as of 1 November 2011 into
four different electricity zones to improve transmission capacity
in the national grid. These zones are an effort to stimulate Regional electricity
increased electricity generation where demand outpaces supply zones will stimulate
and to signal where networks need to be strengthened. In more electricity
zones with electricity deficits, prices are rising, which should generation and
stimulate the addition of new capacity. In southern Sweden, strengthen the grid
which has such a deficit, the grid is being expanded in part
through the so-called southwest link, which is expected to be in
operation in 2014. The risk with smaller electricity pricing zones
Swedbank 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 today's 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 today's
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 Kennemar
Economic Research
Department Swedbank Analysis is published as a service to our customers. We believe
that we have used reliable sources and methods in the preparation of the
SE-105 34 Stockholm analyses reported in this publication. However, we cannot guarantee the
Telephone +46-(0)8-5859 7740 accuracy or completeness of the report and cannot be held responsible for
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any error or omission in the underlying material or its use. Readers are
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Legally responsible publisher Neither Swedbank nor its employees may be held responsible for losses or
Cecilia Hermansson,
damages, direct or indirect, owing to any errors or omissions in Swedbank
+46-8-5859 7720.
Analysis.
Magnus Alvesson, +46-8-5859 3341
Jörgen Kennemar, +46-8-5859 7730
ISSN 1103-4897
6 Swedbank Analysis No. 1 • 17 February 2012