Regulatory policy

“An active energy policy is needed now”

Ole Gunnar Austvik is Professor of Political Economy and Petroleum Economics at INN University.

He recently published a report written on behalf of LO – the Norwegian Confederation of Trade Unions. The task was to provide an overview of the main economic and political challenges that Norway faces as an energy nation and to propose solutions to these challenges.

“I believe that one of the main challenges we face is that the state does not use the room for maneuver we have to regulate this market. Our leeway is greater than what we practice,” says the professor who previously worked at BI Norwegian Business School and the Norwegian Institute of International Affairs (NUPI), and is affiliated with the Harvard Kennedy School.

He suggests that Norway’s power crisis can be helped by export duties and strategic water storage for hydropower.

Electricity is now a hot political topic

At the beginning of August, a price record was set for electricity in Norway. For the first time, the price of one kilowatt per day exceeded four NOK.

This trend is persistent. Prices soared, one record breaking another.

Most people are frustrated and don’t understand why nothing can be done about the situation. With rising fuel prices, interest rates and food prices, electricity prices are causing bills to pile up.

At the same time, electricity has become a hot political topic. The government is being criticized for not doing enough, with ruling Labor mayors across the country demanding answers. Many MPs (the Storting) are asking for a maximum price for electricity and the Storting will join in mid-September for a crisis meeting on the situation.

The belief in the industry is that bankruptcies are coming due to high electricity prices.

Norwegian water reservoirs are at an all-time high this summer.

Must control water levels

The reasons for the high Norwegian electricity prices are, among others, the current global unrest, high natural gas prices and new cables connecting the Norwegian electricity market to European markets. In addition, the water reservoirs are experiencing very low levels.

The short-term solution to this has been a government electricity subsidy; longer-term solutions must be sought.

Austvik suggests that Norway should have a minimum requirement for water levels for hydropower plants, which cover more than 90% of the country’s electricity production.

“In a fluctuating and politically important market, it is a common intervention in Western countries to store energy to deal with shortages. We have the Strategic Petroleum Reserves (SPR) for world oil. The EU is building gas storage facilities and Norway has a unique opportunity to store electricity in the form of water reservoirs,” he said. “I think it’s pretty obvious to have water resources ready for hydropower generation in the winter. We have to make sure that we always have a satisfactory level of water and that we don’t run out of it.

“We don’t have that today?”

“Today, we oversell for a short-term profit. There is nothing wrong with electricity providers. They just do what they have to do to make money, but there is a lack of regulation in terms of storage capacity that society as a whole benefits from,” says Austvik.

An electricity export tax could help bring down high electricity prices in the domestic market, suggests Ole Gunnar Austvik.

An electricity export tax could help bring down high electricity prices in the domestic market, suggests Ole Gunnar Austvik.

“How would you have done that?”

“The state needs to decide that water storage is important. Then it needs to figure out exactly how big that capability needs to be and how it needs to be implemented,” he says.

“How should this be regulated? »

“For example, electricity suppliers should not be allowed to export until they have reached or exceeded the level that has been determined,” says Austvik.

“But could it cause negative reactions?”

“No, I don’t think so, if it’s done the right way. I think this will be understood by both electricity suppliers and the EU. This is how it is done in energy markets around the world, and the EU itself uses it,” he says.

An export tax

In terms of trade policy, it is common to use tariffs to regulate economic exchange between countries – mainly on imports to increase import costs to protect domestic industries.

However, many times throughout history, countries have also used an export tax to lower the domestic price of the export product and/or to obtain government revenue.

Austvik believes that an electricity export duty should now be seen as part of the solution to the national power crisis.

“If you want to keep prices low at home and sell abroad at the European market price, an export tax could be a solution. India has just implemented this on certain steels and minerals to bring down domestic prices, to the benefit of companies that use them as inputs,” he says.

How would this be done in practice?

“Simply put, if the market price is three crowns and we want it to be fifty øre for domestic consumers, the state can charge a fee of two crowns and fifty øre. Then the company will sell for fifty øre, whether it sells to Norwegians or foreign sellers,” says Austvik.

He believes that such a fee could be considered variable in order to collect revenue on all prices above a level defined as a maximum door-to-door price, perhaps as a time-limited regime.

What about the EU and possible violations of the EEA agreement?

Generally, the EEA agreement imposes restrictions on the imposition of taxes on imports and exports, but Austvik believes that in this case, the time has come to negotiate it.

“We are in the midst of a crisis and the EEA agreement was concluded at a different time. Everywhere, security has generally risen to the top of the political agenda, especially when it comes to energy in the EU. I think it is possible to take a closer look if it is possible to find an arrangement,” he says.

The reason is as follows:

“Norwegian export duties to the European electricity market will not discriminate against foreign players since the entire royalty is paid by Norwegian producers. This is not to the detriment of foreign competitors, in practice, as it is a direct government taxation of Norwegian sellers and profits,” says Austvik.

Austvik argues that international energy markets, both in the EU and in the western world in general, are a sector that has long understood that major policy interventions may be needed since the oil crises of the 1970s. had interventions against excessively high oil and gas prices and the building up of strategic oil and gas stocks.

“These are markets that aren’t quite perfect and have major social consequences when access is reduced for periods or prices get too high,” he says.

And when a market is not functioning in a socially acceptable way, the government must actively work to correct it, Austvik believes.

“This is the case in all markets, and in particular those representing socially critical infrastructure such as energy supply. The state is allowed to be active under the EEA agreement in a non-discriminatory way, but he must want it,” says Austvik.

And he should want to, now.

There are several gates that let water through every day at the Hunderfossen power station in Gudbrandsdalen.

There are several gates that let water through every day at the Hunderfossen power station in Gudbrandsdalen.

“It is acceptable and understood that a state must intervene to ensure the stability of a country in the event of an energy crisis. According to the International Energy Agency (IEA), an energy crisis occurs when you do not have access to energy and/or when you have to pay a higher price than is economically or socially acceptable. We are there now,” concludes Ole Gunnar Austvik.

Reference:

Ole Gunnar Austvik “En energinasjon og verden omkring: Noen norske energipolitiske utfordringer” (An energy nation and the world around it: some challenges for Norwegian energy policy), The Inner Norway University of Applied Sciences2022. (link in Norwegian)