Warm weather reduces wholesale, but not retail price of electricity

Cheaper power in Sweden and Norway boosts consumer spending

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Unseasonably warm weather has brought down the market price of electricity in the Nordic Countries. Households in Sweden and Norway can see the change directly in their electricity bills, but not those in Finland.
      The common Nordic electricity market functions differently in the different Nordic Countries on the retail level. Finnish electric utilities blame the situation on rigid rules on informing consumers of price changes.
      Juha Naukkarinen, managing director of Finnish Energy Industries (ET) confirmed on Thursday that electric utilities in Finland have no intention of reducing electricity prices for end users.
      ET described the market situation by saying that "there are no immediate pressures for rises in the end-user prices of electricity".
     
The price of electricity is set by individual electric companies themselves, but no reports of reductions have been forthcoming.
      The fall in market prices has been so sharp in recent months, that its economic impact is seen as considerable. Oil consumption is also lower because of the warm temperatures.
      Econmomists in Sweden estimate that the benefit enjoyed by consumers in the form of lower electric bills will significantly boost consumer spending.
      Jörgen Appelgren, head economist at the Nordea Bank Group, estimates that lower electricity bills alone will boost Sweden’s GDP by 0.2 percentage points, and that annual inflation is going down as a result by 0.4 to 0.5 percentage points.
      Appelgren sees lower energy bills to be the largest single reason why the bank raised its forecast on Swedish GDP growth.
     
The warm winter dividend in Sweden is estimated at about EUR 200 million.
      Nordea also published its forecast for Finland on Wednesday, with no energy price component.
      The Nordic Countries adopted a common electricity wholesale market discount system about ten years ago. The market mechanisms are identical in the different countries in principle, but in practice this is not the case.
      Changes in market prices in Sweden and Norway are reflected much more quickly in bills for end consumer than is the case in Finland. Active consumers in Sweden and Norway are therefore able to benefit from shifts in the energy market.
     
In Finland, changes in prices are passed on to the consumer much more slowly. A typical Finnish characteristic is that consumer prices of electricity are quick to react to increases in the wholesale price, but lower prices pass down to consumers slowly, if at all.
      At the moment there should be powerful pressures to bring down consumer prices, as the market price in the Nord Pool have gone down by half in just a few months.
      On Thursday, ET’s Naukkarinen blamed the Finnish electricity market law, which requires that consumers be informed in writing a month in advance of any changes in price. In other Nordic Countries, a newspaper advertisement is sufficient notification.
      Naukkarinen says that this makes it difficult for Finnish utilities to be flexible.
     
Electricity that consumers are now buying was effectively bought already a year ago at a time when prices were higher than before. This means that retail prices cannot be brought down, even if the day’s market price happens to be low.
      Naukkarinen says that the electric companies would be willing to bring more flexibility into the notification system.
      However, an anonymous expert working in the electricity market does not consider Naukkarinen’s explanations to be credible. The source does not see the notification rules as the reason for immobility in retail prices. The basic reason, in the view of the expert, is that the utilities want to protect their acquisitions, and reduce risks. Also, there is little competition.
      In Finland this is possible, because end-users are quite passive.
      Naukkarinen says that the business would welcome a system of benchmark prices, which would operate in the same way that banks’ market interest rates do, with a basic price, with a profit margin added to it.
      Taisto Turunen, head of the energy section of the Ministry of Trade and industry said in the financial daily Kauppalehti on Thursday that he felt that the idea was a bad one, because of the differences in the nature of the financial market and the electricity market.


Previously in HS International Edition:
  Warm winter eliminates threat of electricity shortage and high prices (3.1.2007)

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