Schweden : March 25, 2008

The electricity market in Sweden is divided into two separate areas – wholesale and retail. The wholesale market has a geographical monopoly providing the distribution grids. The retail market, since its deregulation in 1996, is subject to competition in supplying electricity to end-consumers. The price level in the retail market is set at the Nordpool (the Nordic Electricity Exchange), and retailers work as financial intermediaries providing service to consumers who purchase their electricity requirements from the Nordpool. Since consumers can track the market, the retailers face tough competition. Often it is not the price add-ons which determine the selection of any particular supplier (although this can be an important factor). Other intangible factors such as customer service, green products, or billing flexibility can sway the consumer from one retailer to another.

The Nordic electricity market is exciting given that consumers have the ability to purchase structured products (e.g., futures and forwards) provided at the Nordpool. The market, however, is very volatile with consumers needing to focus on the timing of their purchases. The small markups taken by the suppliers in addition to the Nordpool prices are almost always overlooked due the market’s volatility. Volatility is derived from many factors such as hydrological balance, nuclear output, fuel prices (mainly oil and coal), climate (precipitation, wind and temperature) and emission rights.

The question is whether consumers are benefiting from a sensitive and often volatile market, like the Nordpool, where they can track the electricity market. Huge fluctuations in prices have led to market-timing being one of the most vital factor in obtaining optimal pricing. A perfect example is the price of the second quarter forward contract this year which had decreased over 30 percent in less than one month. Normally, consumers do not have the time or experience to track the market and forecast price trends. Many electricity suppliers have their own advisory boards available to the consuming public; however, the importance of independent analysis is essential to ensure the best prices. The Swedish electricity market has a bad reputation for its non-transparency in production costs. Since most producers also act as suppliers to end-consumers, doubts have been rising regarding their veracity.

All the electricity suppliers are involved at Nordpool either for the purpose of buying or selling electricity. At Nordpool, the prices reflect the cost of the last produced kWh according to merit order dispatch (i.e., the unit with the lowest variable cost is taken into production first). Inevitably, this way of determining electricity prices gives rise to speculation whether larger electricity producers manipulate prices at the Nordpool. For example, prices can rise due to fake production interruptions at nuclear power facilities or by keeping water supplies in holding tanks thereby curtailing domestic production and thus relying on more expensive imports. These actions would increase suppliers’ profits; however, much of the above is based on speculation with no price manipulation ever being proven.

The electricity producing companies are results-oriented which drives them to provide product where it’s most profitable. In the Nordic countries, electricity is relatively inexpensive compared to other European countries. All Nordic suppliers want greater latitude to sell their electricity in more expensive markets, however, this is not currently possible given both logistical and political concerns. Perhaps one day we will have a truly unified European market and at such time, Scandinavian residents will look back on our current times as the “good old days”.