This is how the power market came to be – Energy and Climate
Berit Tennbakk has followed the process from the energy act’s conception in the 1980s until it was adopted in 1990, and she has followed the power market ever since. She is today a partner in THEMA Consulting and also sits on the government board the energy commission.
<2°C: – Why did we get a power market?
Berit Tennbakk: – The starting point was that we had largely electrified the country during the 1970s. We had regional monopolies that were responsible for grids and production and that they were self-sufficient. Consumers were at the mercy of these monopolies, they could not choose who they bought power from.
We talk to
Berit Tennbakk is a partner in Thema Consulting.
It was precisely this demand for self-sufficiency that meant that quite a large surplus of power was built up. At the same time, we had an indicative power price, which in practice was adopted by the Storting, which was based on the costs of building new capacity. But as long as there was no incentive to keep costs down, power became more and more expensive.
– But we hear that there was a power market before the energy act too?
– Yes, there was a market for what was called random power, the price was low. There, the manufacturer sold surplus production by transferring it to neighboring areas, but they were paid quite poorly for it. We can also call it the «pooling exchange».
Exchanged with Sweden, got poorly paid
– «Random force»? What is it?
– It is a bit in the word “accidental”: Suddenly you had a surplus, the consumption was not large enough in the area. Then you had to call those in the neighboring valley and ask if they needed anything. The idea of carpooling was to make coordination simpler across monopoly areas. And since the ride-sharing exchange worked, we had a setup that could be used when the entire electricity market was to be liberalized.
– Was there any exchange of power with foreign countries?
– Yes, since the 1950s, primarily as insurance against dry years. The requirement for the monopolists was that they should be able to cover all consumption in their area for nine out of ten years. If it was a dry year, you had to buy power from others. In Trøndelag they therefore began to exchange power with Sweden, they were admittedly poorly paid. Also, when exchanges with other countries were started, it was initially due to the need for dry year protection.
This interview was done in connection with our new theme note “Handbook for the energy debate”. It provides a simple introduction to how the power system is built and how the Norwegian and European electricity market works.
1990: The Energy Act
– Regardless: Then came the market reform. What was the problem it was supposed to solve? Was it getting revenue for all the surplus power?
– It was all based on socio-economic theory: There you don’t see the market as an instrument to create profit, but as a system where the fact that each individual actor follows his own interests gives the best result for society as a whole.
– How would it work in practice?
– Even in today’s extraordinary situation, “everyone” is pretty much unanimous that we need power exchange, efficient resource utilization and the lowest possible prices for consumers. This was also the background for the market reform: the market is not there for the producers to earn as much as possible. It is a tool for low cost and lower prices. But the market is also a rationing tool: When there is a deficit in the goods it sells, the price goes up. The distributional effect of that can of course be unfortunate.
– Many also think it makes little sense to sell what is actually a socially critical resource on a free market?
– But this is not a free label. It is a thoroughly regulated marked under strict framework conditions. The producers compete, yes, but the conditions ensure that the actors have the right incentives to bid in prices at true costs. And invests more when it is profitable. Don’t just rake in the profits.
The net monopoly
– Even though these were old monopolists?
– The monopoly part was separated into what we know today as network companies. That part is not suitable for market management. It is primarily the production that does this. It is also competition in the end-user market. You can discuss how well it works, but the idea is also there that it should be an instrument to incentivize lower costs and thus give a lower price to the consumer.
– But how to provide the right incentives? How to prevent them from taking profit?
– Individually, the producer is of course interested in earning as much as possible. But this is where the competition comes in. Everyone is interested in selling their product at the highest possible price. If you sell too expensive, it is the competitor who sells instead. And what all experience has shown is that competition has largely worked effectively in the power market. And we can document that we have got lower and similar prices through the reform.
– How to «like»?
– There were bigger price differences between different areas before. The cost was determined by what had to be done to carry out the detection duty. And then it was a bit of an incentive to keep costs down – these were monopolists, after all.
The rise of hourly rates
– And then there were political agreed prices which were set by the Storting. Whereas today the price varies from hour to hour, and they are determined by an algorithm which can seem quite unpredictable. What was the real reason why we had to start operating with hourly prices?
– Because the demand for power changes all the time. And then we’re not just talking about from hour to hour, but from one second to the next. It also means cost-free by producing from time to time. The energy market works accordingly the marginal cost principle. When demand increases, production must increase to improve the balance. It has a cost and the different demand.
When the power system was deregulated in 1990, it was not technically possible to have a brand where we bought power second by second. There was no technology or computing power for it. So we bought a number of kilowatts per walk. The idea was to find a manageable time interval, and reflect that the cost varied from hour to hour because demand varied.
– But why does demand cost so much?
– Because of the supply curves: In the hours of highest demand, you have to use more expensive production than in the hours when demand is low. Then it is reasonable that the price will be higher at the same time as well.
The EU followed our liberalization model
– Gradually, many other countries have also liberalized their power markets, and in the EU it is now a common power market. Is it fair to say that it is inspired by the Nordics?
– Yes. It is built on the same principles. It is true that Great Britain deregulated at about the same time as Norway, but they created a more market-based carpooling exchange – where the manufacturers and the large companies operated with a more limited market solution than what Norway did.
– If you ask people in the power market today why a liberalized market is good, they often point to the fact that the power mix is different in the various countries. Was it also a driving force for liberalisation?
– It was very early in the picture. Especially considering the connections with Denmark, which had a lot of coal-fired power.
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In the Expert Interview, we talk to researchers and other subject experts about themes that are relevant to the climate crisis and the green shift.
Thermal systems such as coal, gas and nuclear power have different characteristics and hydropower. Coal power is more flexible than nuclear power in the short term, but it costs to regulate production. Modern gas power plants are more flexible than those you had in the 1990s. But even there, the costs of adjusting are still greater.
Therefore, the exchange with Denmark was based from the start on being able to draw on the strengths and weaknesses of the various power mixes.
– Interaction with Norwegian hydropower was a prerequisite for Danish wind power development
– But not with Sweden?
– Sweden had a lot of hydropower on top of nuclear power, so they had a lot of flexibility themselves. But in the exchange with Denmark, the hour-for-hour exchange was economically advantageous. In addition, they were early adopters of climate policy, with having to reduce emissions from their own power sector. Then it was even more important for them to be able to exchange with hydropower – they needed flexibility in the system without increasing CO2– leakage. Today, it is primarily wind power that supplies Danes with electricity. I would go so far as to say that the massive expansion of wind power would not have been possible without the interaction with Norwegian hydropower.
– And that gave Norwegian producers both a place to get rid of power that would otherwise have gone into the fjord, and at the same time the opportunity to pump water back for free at night?
– Norwegian hydropower could shut down and import when Danes produced wind power for extremely low prices, and then send the power back during the day with good payment. The hourly price was absolutely central to getting the dynamics right when there are such large daily variations in demand. It continues to be.