Handling Sweden’s Electric Reform Threats

Strong leadership is needed to complete the reform process in the Nordid countries to benefit end customers, by introducing a paradigm shift to EWPC, and making them active participants in the electric market.

Handling Sweden’s Electric Reform Threats

By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

The version of the article “Why has the Nordic electricity market worked so well?” that I found on Internet is written by Professor Lars Bergman for Elforsk AB, which is owned by the Swedish electrical utilities. Maybe explaining the question mark, Professor Bergman starts the conclusion of the article with: “There are two major threats to the success of electricity market reform in the Nordic countries. The first is that security of supply can not be maintained. The second is that market power prevents the potential benefits of competition to be realized.” That is a clear message for those in the ship that they are operating under E1R2 deregulation.

Peter Fritz, the Secretary of Market Design-program of Elforsk AB, starts the foreword of the article with “The development of liberalized electricity markets around the world is, partly, an experiment of applied market theory with uncertain outcome. For this paradigm to benefit customers thru efficient supply of electricity, we need increased and better knowledge on how competitive electricity markets really work and how to solve the problems that might occur.” That is the kind of knowledge that the EWPC paradigm is offering.

To handle both threats, Sweden and the other Nordic countries should complete the reform by introducing EWPC with its R1E2 policy. In the 1996 article “Lessons from the UK and Norway,” Richard Tabors, one of the authors of the book “Spot Pricing of Electricity,” and at the time with Tabors, Caramanis & Associates, wrote that “No restructuring can take place that does not guarantee system reliability. Whoever the operator may be, that entity must have a pool of resources that can be dispatched to supply balancing functions, ancillary services, and reserves… its operators must have at its disposal the short term resources needed to maintain reliability and stability.” This is an excellent synthesis of the R1E2 policy.

Professor Bergman also wrote that: “… retail electricity prices (before tax) have become strongly lined to wholesale electricity prices.” It is precisely the development of the resources of the demand side, to integrate the retail and wholesale markets under EWPC, what is needed in the Nordic market to complete the reform and reap the benefit of competition. There is, however, a need for a very strong leadership in the Nordic countries if there are contracts and regulations of the weird kind that may be in the way of such development.

Now that it is clear that the natural monopoly can be restricted to the transportation system (see The Natural Monopoly Transportation System ), I can take the first part of a sentence (not being out of context) that Professor Banks wrote to respond to Mr. Len Gould’s comment: “The business of creating an electric market in which customers enjoyed a meaningful participation was discussed by Fred Schweppe (of MIT) at a long conference in Portugal that I have mentioned a number of times in this forum. Doing this is almost certainly correct, but I stay away from this topic because I don't really understand the details,…”

It seems strange that Professor Banks “don’t really understand the details” of meaningful customer participation, since he just stated under The Old Response to Jack Casazza that “The economy that Fred Schweppe was thinking about was the economy in the first part of your econ 101 textbook. That economy is irrelevant for the deregulation discussion.”

As I responded to Prof. Banks on 4.3.06, Prof. F.C. Schweppe understood that a successful [regulated energy] marketplace require, among other elements, "No monopsonistic behavior on the demand side" and said that "monopsonistic behavior is difficult on the demand side because the number of customers ranges from thousands to millions." How many (transmission) customers are there in Sweden?”

That is why that understanding the details of a meaningful participation of customers is of the utmost importance. In addition, as can be seen in my presentation at Carnegie Mellon University, “electric restructuring is ‘fundamentally an information technology event.’” as Stanley Klein’s wrote in 1998. Writing about technological revolutions, Dr. Carlota Pérez adds “these new technologies provide the potential for modernizing the whole productive structure and for raising the general level of productivity and quality to a higher plateau.”

In fact, Schweppe et al criterion for economic efficiency in the regulated energy marketplace is “Motivate customers to adjust their own electric energy usage patterns to match utility marginal costs. (See the book Spot Pricing of Electricity)” That is why EWPC concerns itself strongly with the development of the resources of the demand side.

Furthermore, the application of a marginal cost pricing algorithm as NordPool employs together with an undeveloped and unresponsive demand side is a sure “mechanism for bleeding electricity customers,” as Professor Banks explains. However, instead of the kind of the “surfeit of increase ‘choice’ in Sweden,” what is needed is developed and responsive customers on the demand side, that allow 2GRs under EWPC to set the marginal cost pricing at reasonable levels in line with individual customers set price caps (see No Need for Regulated Price Caps - I and No Need for Regulated Price Caps - II).

Writing about that if deregulation could not be achieved in the U.S., … “then it could not be realized any where in the face of earth, at least in the medium to long run” Professor Banks states and adds: “By that I mean after any excess capacity that might be available has been utilized.” Such statement is faulty because, while the generation and transmission capacity may be utilized with respect to current demand, the development of the resources of the demand side can change the situation in the medium run. In addition, the U.S. lobby activities have led to an unacceptable extension of the VIUs paradigm.

As my hero Uno Lamm proved, when he introduced High Voltage Direct Current technology (see The Sixth Disruptive Technology), facing a strong opposition by the same California IOUs referred to in The BIG California LIE, the Nordid countries don’t need to wait for the experience of the U.S. What they need, I repeat, is a strong leadership.