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Are high electricity prices only a nuisance?

The government’s goal is for Norway to cut emissions of greenhouse gases by 55 per cent of the 1990 level by 2030. These are very ambitious goals. Society’s energy use in the future must be adapted to these climate goals. Several have advocated the use of nuclear power and renewable energy sources. It is conceivable that the debate on nuclear power should be taken up, but time for important debates, license processing and development will take too long for nuclear power to be able to contribute to reaching the 2030 targets. The same applies to a large-scale investment in renewable sources.

There is a little more time until 2050, when we should have achieved a 90-95 percent reduction, although it has been shown that 20 years go by quickly. Renewable energy sources are not uncomplicated either, with for example encroachment on nature and displacement of land for food production.

Energy saving is cheap and in any case nice in anticipation of good solutions. Development of power sources where the power can be stored to a small extent or provide predictable regulation (wind, solar, wave power) can be a very expensive solution if we have not exploited the potential for relatively simple energy saving.

Expensive energy, but prosperity has increased

Wage and price developments followed each other fairly closely from 1980 to around 1990. After that, real wages (what we are left with after price increases) have increased markedly. Consumer prices have increased approx. 1.5-2 times, while wages have increased by approx. 2.5-3 times since 1990. This means that economic prosperity in Norway has grown strongly. Strictly speaking, that should enable most of us to pay our electricity bill. However, the increase in prosperity is not evenly distributed, and the support schemes should capture this to a greater extent.

The majority of the increase in electricity prices over the past 30 years has come since 2017, with a marked increase through 2022, where the average electricity price in some months and areas has been up to 10 times the level that households have normally adapted to.

What the winter months will bring, no one knows. But there are prospects for a significant increase, both due to normal variation throughout the year and the uncertain energy situation in Europe. The increase in the price of an important good has therefore come on suddenly for many, and that in itself can legitimize support schemes. However, these should stimulate energy saving and conversion.

The market works, but not perfectly

Integration into the European power market has its price, and that price goes both ways. In a heated debate, which is sometimes characterized by populist rhetoric about the state as a winner and everyone else as a loser, one should not forget that society’s pie in cables and power sales to Europe is getting bigger. Everyone will want to sell their product at market price to make money. It simply means that you sell at the price that the customers will pay.

If this is followed by a tax system that harvests the value that lies in the ground rent (simply put, the value of the land and what it provides, such as water and petroleum), then one also has the opportunity to distribute the high power income to the benefit of most people. Norway has been quite good at designing such tax systems in the energy sector, which also encourages risk-taking in technological development due to good deduction possibilities.

There is reason to think through whether electricity should be governed by market logic or be a form of entitlement. Basic healthcare is an example of a right that most people can agree on, while certain types of cosmetic surgery can hardly be said to be.

The parallel to the energy market is that in a modern society you should be able to have access to light and heat where you live, but that you have to manage to cover the costs of the cabin yourself. Large cabins with built-in jacuzzis are perhaps Norway’s counterpart to American, sprawling car cities with motorways trafficked by petrol guzzlers: Too cheap energy has resulted in the development of infrastructure and cabins in the mountain home which is hardly sustainable in the long term, but where the stakeholders will understandably fight against paying the bills that are now coming.

The distribution policy is an important yardstick

Current support schemes for households seem to be reasonably in line with healthy thinking around distribution, even if the distribution profile is not optimal. Large consumers receive the most support, and the appropriateness of this should be reviewed. There is reason to believe that high energy prices are here to stay.

But what about business? Life for all of us would perhaps have been much easier if it had been possible to support start-ups and small businesses that have come into energy trouble, without the big players with the muscle to finance restructuring on their own keel running away with the profit.

Certain accounts from large hotel chains and others after the corona pandemic can illustrate the point. Seen from a corporate financial perspective, no one can blame them for that. One can say a lot about the matter from an ethical perspective, but they adapt to a regime like their competitors. However, accusing someone of legally adapting to the framework that exists is not a viable path in the long term. It is the authorities’ responsibility to ensure that the framework conditions support behavior that is economically and politically justifiable.

It is reasonable to think that the business community must mainly ensure its own transformation, and that public authorities must support programs that promote transformation (research, technology-oriented and organizational support schemes) rather than contributing with general support schemes that both fail badly and that inhibit transformation in the direction of more energy-friendly production.

Direct support should ideally be short-term. The recognition must be that the design of effective instruments for restructuring will be demanding, but necessary.

Energy use must probably cost more

The situation we are in now is challenging. At the same time, there is reason to emphasize that the international climate agreements to which Norway has acceded require that the overall energy use must be greatly reduced. The technology can certainly help us a long way on our way through renewable solutions with a high degree of efficiency.

But no lunch is free. Even a climate-friendly electric car uses electricity and other scarce goods that may come from unsustainable production, such as coal from Poland or cobalt from child labour. The danger is that a pessimistic belief that technology will help us continue almost as before can become a sleeping pillow for what is perhaps the most important thing, namely reduced energy use through behavioral adaptation in all of us.

Price an important tool

This requires a broad repertoire of instruments, but we must not forget that price is an important tool for conveying what the use of energy costs society. Weak and vulnerable groups should be protected through support schemes. But we cannot escape the fact that climate-friendly conversion will cost a lot, and those who can pay for it themselves should be allowed to do so. We believe that we should get used to the price levels we see now, as soon as possible.

So just dive into it. History has shown that high prices are the most important means of bringing about change.

(Thanks to Bjørn G. Bergem, Møreforsking, for help with basic data.)

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The article is in Norwegian

Tags: high electricity prices nuisance

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