Five Paths for Sweden Synthesis Report

Five Paths for Sweden Synthesis report

IVA Electricity Crossroads project THE ROYAL SWEDISH ACADEMY OF ENGINEERING SCIENCES (IVA) is an independent academy whose mission is to promote the engineering and economic sciences and the advancement of business and industry. In cooperation with the business community and academia, IVA initiates and proposes measures to improve Sweden’s industrial expertise and competitiveness. For more information about IVA and the Academy’s projects, see the website www.iva.se.

Published by: The Royal Swedish Academy of Engineering Sciences (IVA), 2016 Box 5073, SE-102 42 Stockholm, Sweden Tel. +46 (0)8 791 29 00

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PROJECT REPORTS (IVA-M): A project report summarises a significant portion of a project. A project report can be a report generated during the course of a project or a final report produced at the end. A final report can be based on several project reports. Project reports contain fact-based analysis, observations and a discussion of consequences. Final reports contain clear conclusions and prioritised policy recommendations. Project reports are often the result of the work of a work group and contain limited conclusions and policy recommendations. The project Steering Committee approves all project reports for publication and they are fact-checked by IVA to guarantee their factual accu- racy and quality.

IVA-M 472 ISSN: 1102-8254 ISBN: 978-91-7082-931-4

Author: Karin Byman, IVA Project Manager: Jan Nordling, IVA Editor: Camilla Koebe, IVA Layout: Anna Lindberg & Pelle Isaksson, IVA

This report is available to download as a pdf file at IVA’s website www.iva.se Foreword

IVA’s Electricity Crossroads project has been in progress since 2014 and will end in 2016. The project has performed analysis to explore what the Nordic electricity system will look like in the period 2030 to 2050, with a focus on Sweden, to show the consequences of different paths in energy policy from the four perspectives: competitiveness, secure supply, ecological sustainability and investment climate. The vision is a sustainable electricity system that will provide a secure supply of energy at a competitive cost.

During the two years the project has been under way there have been changes in the electricity market. Vattenfall and E.ON have, for example, decided to close four nuclear reactors – two in Ringhals and two in Oskarshamn. They have also announced that the six remaining reactors may be closed by 2020 due to poor profitability. Together the reactors account for around 40 percent of Swedish electricity production.

Not long after the start of the project the Government appointed an Energy Commission. Electricity Crossroads has had a close dialogue with the politicians involved in the Energy Commission throughout the course of the project and has provided project results and conclusions on a regular basis to the Energy Commission’s administrative office as well as to members of the Commission.

The project work has been carried out by a Steering Committee and five work groups the members of which have examined the electricity market from various perspectives. The groups are:

• The Electricity Usage work group • The Electricity Production work group • The Transmission and Distribution work group • The Climate and Environment work group • The Public Finances and Electricity Market work group • The Steering Committee for the project as a whole and responsible for this synthesis report.

The work groups have each prepared a project report within their respective areas providing in-depth analysis and summarising the most important observations made. A number of special studies were also conducted. The project reports and special studies are listed in Appendix 2. To supplement the above, a separate analysis was conducted by the NEPP (North European Power Perspectives) network of researchers, aided by various model simulations of the electricity market.

The synthesis report is based on the project reports, but also contains separate information and analysis as well as conclusions and recommendations. The Electricity Crossroads Steering Committee is responsible for these. All members of the Steering Committee stand behind the conclusions and recommendations as a whole but not necessarily each individual statement.

Steering Committee Bo Normark, IVA Div. II (Chairman) Peter Nygårds, IVA Div. III (Vice Chairman) Lina Bertling Tjernberg, Royal Institute of Technology (KTH) Magnus Breidne, Royal Swedish Academy of Engineering Sciences (IVA) Runar Brännlund, Umeå University, IVA Div. IX Mikael Dahlgren, ABB Anders Ferbe, IF Metall Håkan Feuk, E.ON Mats Gustavsson, Boliden Kjell Jansson, Swedenergy Johan Kuylenstierna, SEI Ulf Moberg, Svenska kraftnät (SVK) Birgitta Resvik, Fortum, IVA Div. II Andreas Regnell, Vattenfall Gunilla Saltin, Södra Maria Sandqvist, Teknikföretagen Maria Sunér Fleming, Confederation of Swedish Enterprise Ulf Troedsson, Siemens

Adjunct members of the Steering Committee Pernilla Winnhed, Swedenergy Alf Larsen, E.ON Ellika Olsson Aas, IF Metall

Project administration Jan Nordling, IVA (Project Director) Karin Byman, IVA (Project Manager) Camilla Koebe, IVA (VP Business and Communications) Caroline Linden, IVA (Project Coordinator)

The project’s implementation method is described in Appendix 1. Contents

Introduction...... 7

Electricity Crossroads – project conclusions...... 9 Ecological sustainability...... 10 Competitiveness...... 11 Investment climate...... 11 Secure supply...... 12

Recommendations from Electricity Crossroads...... 13

External factors impacting electricity system development...... 17

Challenges facing the Swedish electricity system...... 25

Political control in today’s electricity market...... 27

Deeper analysis of the production system...... 29 Characteristics of an energy system with a high percentage of intermittent energy...... 29 What does Sweden need to do to achieve a power balance?...... 35 What will happen if all Swedish reactors are closed early?...... 38

Observations and conclusions from the work groups...... 41 What factors affect future electricity use?...... 41 What will the electricity production system look like in the future?...... 43 What role will the electrical grid play in the electricity system of the future?...... 45 Investments in the electrical grid...... 46 What are the most important climate and environmental issues?...... 47 Public finances and the electricity market...... 49

Appendix...... 53 Appendix 1: Methods and criteria...... 53 Appendix 2: Reports produced within Electricity Crossroads...... 55 Appendix 3: Electricity Crossroads work groups...... 55 Appendix 4: Literature list...... 56 GLOSSARY

Balance responsibility – Companies contracted prevailing weather conditions, for example wind with Svenska kraftnät (SvK – Sweden’s national and solar. Often also called weather-dependent, grid) who have a balancing as well as a financial variable, or volatile energy. responsibility to ensure that the amount of electricity they add to and take out of the grid Capacity mechanism – A regulation that guarantees is always in balance. SvK has ultimate physical a certain availability of power. The available balance responsibility. capacity in the system over time is greater than it would have been in an energy-only market, Power balance – To maintain a stable frequency because it can be assumed that a political of 50 Hz, there needs to be a balance between objective relating to delivery reliability is higher production and consumption of electricity. If there than the actual market outcome. is an imbalance, the frequency in the system will increase or decrease. Quota obligation – A component in the energy certificate system whereby some electricity Power reserves – The Swedish power reserves suppliers and electricity users are required to hold currently consist of 660 MW of production energy certificates in proportion to the amount of capacity and 340 MW of consumption reduction. electricity they sell/use. Power reserves are used if it is not possible to balance supply and demand through other means, Nord Pool – the Nordic power market. The but they are not included in the market under member nations are Sweden, Norway, Denmark, normal circumstances. Finland and Estonia.

Energy certificate – A certificate allotted to Baseload power – Electricity production technology renewable energy producers based on the the output of which can be planned regardless of amount of energy they produce. These the weather conditions, such as nuclear power, gas certificates can be sold and transferred. Since turbines, CHP and hydropower. energy suppliers and some energy users are obliged to hold energy certificates corresponding Spot price – The variable electricity price set daily by to the amount of electricity they sell or use (see Nord Pool. quota obligation), a market for the certificates is created.

Energy-only market – A type of energy market where only energy is assigned a price.

EU ETS – The EU Emissions Trading System has been the EU’s system for trading emission allowances for greenhouse gases since 2005. The trading system encompasses all EU member nations, as well as Norway, Liechtenstein and Iceland. Within the EU around 13,000 installations are covered by the system, altogether accounting for 40 percent of the EU’s total carbon emissions.

Intermittent power – Electricity production technology where the output cannot be planned, but where production is determined by the

6 Introduction

Access to electricity is essential for all forms of The Electricity Crossroads project has involved development. By developing a sustainable elec- a process whereby the proposals presented in tricity system, Sweden can combine reduced this reports have grown out of dialogue be- environmental and climate impact with strong tween many players. The premise for the pro- competitiveness. ject was that Sweden’s electricity system should There are sweeping changes taking place in be designed according to the pillars in the the energy sector, creating a climate of great Swedish energy policy, i.e. ecological sustain- uncertainty for energy market players as well ability, competitiveness and supply security. as policy-makers. In light of this, IVA launched the Electricity Crossroads project to serve as a gathering point for ideas on how Sweden can design polices to transform its energy system with a focus on electricity. A reliable electricity system is essential in today’s digitalised society. A competitive electricity system also helps attract investments to Sweden. It reduces environmental impact while also benefitting the Swedish economy. Sweden’s energy policy has up to now focused on maintaining a relatively stable energy system. In the new era of rapid change and where it is difficult to determine which forces and development trends will endure, the Gov- ernment should act to minimise the political risks affecting electricity market players. The Government should also refrain from distorting the competitive situation between different energy sources. A holistic approach and flexibility are needed, involving analysis of the entire energy system on an ongoing basis within a comprehensive framework. Many policy areas are highly dependent on an efficient energy sector, and uncertainty over which path will be chosen for the electricity system will have repercussions in other areas.

7 8 Electricity Crossroads – project conclusions

In an international comparison, the Swedish en- ing the efficiency of Sweden’s electricity system. ergy system has developed very well. Since 1970 This puts a lot of pressure on policy-makers to Sweden’s total energy use has remained constant be flexible and be able to adapt policies to con- and carbon emissions have gone down by 50 stantly changing conditions without creating percent, at the same time as GDP has doubled uncertainty for market players. and the population has grown by 15 percent. A reliable electricity system is essential for The main reason for this is more efficient energy modern and efficient systems in society. This is use and a conscious investment in biofuels and accentuated in a digitalised world where an ef- fossil-free electricity production. ficient supply of electricity is critical in more and Nuclear power and hydropower have domi- more areas. Energy policy therefore provides the nated electricity production, and the infra- foundation for many other policy areas. A failed structure has been adapted to the production energy policy will have consequences in many apparatus and according to electricity demand areas and on basic social functions, jobs and ex- in different parts of the country. Sweden has port revenue for Sweden, also impacting jobs in had energy partnerships with the other Nordic other industries, as well as tax revenue, publicly countries since the 1950s but has still retained a funded welfare services, education, healthcare, large measure of freedom and pursued its own etc., and may result in negative consequences for national energy policy. the climate and the environment. Now big changes are taking place in the elec- Sweden’s electricity system should be designed tricity market and this is fundamentally chang- according to the pillars described in Sweden’s ing the energy policy debate. energy policy, i.e. ecological sustainability, Sweden is becoming increasingly dependent competitiveness and supply security. In recent on the world around it as electricity systems years the investment climate has also come to become interconnected. Thus the energy policy the fore as a separate issue, mainly due to the decisions of our neighbouring countries are in- great uncertainty and substantial future invest- creasingly impacting production and use here ment needs. in Sweden. Technology is being developed at an These pillars, or guidelines, require a reduc- ever-increasing pace and the prices of new tech- tion in environmental impact and zero net emis- nical solutions for electricity production storage sions of greenhouse gases into the atmosphere. are falling. New players are entering the electric- They also require the electricity system to be ity market and more electricity users are choos- perceived as reliable and the cost of the system ing to produce their own electricity. to be competitive. The electricity system should Today it is very difficult to predict where de- not be considered in isolation, but as part of the velopment is heading, which means it is also whole energy system and society, in Sweden and hard to easily plot a course for the future. Our also in relation to other countries. energy policy needs to be able to handle the A premise is that the energy system should at changes that are taking place without jeopardis- least meet the following basic criteria:

9 Figure 1: The pillars described in Swedish energy policy are ecological sustainability, competitiveness and secure supply. In Electricity Crossroads we also including the investment climate. These pillars are interconnected and mutually supportive.

Ecological sustainability

Investment Competitiveness climate

Secure supply

1. The future electricity system must have at least Below is a presentation of the conclusions the same delivery reliability as today. reached in each of these areas. All aspects dis- 2. Fossil-free electricity production. cussed are interrelated and are essential for a 3. An electricity system that is cost-effective for long-term sustainable and competitive energy society. system.

ECOLOGICAL SUSTAINABILITY

The Swedish energy system has a relatively low today’s nuclear power technology and next gen- impact on the climate. However, there is lim- eration nuclear power plants. One assessment ited knowledge of its overall environmental im- method involves performing a life-cycle analysis pact. The impact on, for example, biodiversity for different types of production, taking into ac- is sometimes substantial, although it is hard to count the entire value chain – from raw material measure and not enough is known about it. This production and use to waste. Environmental is- is perhaps most relevant in the case of hydro- sues are complex which means there is no single power and biofuel-based electricity production, method for including all of the environmental but is also a concern with respect to wind power. aspects in the equation. We therefore need to Knowledge about the environmental impact of boost our environmental knowledge in general new and fast growing technologies, such as solar and from several different perspectives. cells and batteries, is limited. One of the main From a sustainability perspective the entire reasons for this is that much of the environmen- energy system – in which the electricity system is tal impact is outside Sweden’s borders. only one part – should be considered. A general In assessing the profitability of different ener- increase in resource and energy use efficiency gy sources, external environmental costs should could in the long-run lead to an increase in de- be taken into account, in Sweden as well as in mand for electricity, for example, in connec- other countries through imports. This could, tion with electrification of the transport sector. for example, change the equation between land- There should also be an international perspec- based and sea-based wind power, or between tive so that measures to reduce environmental

10 impact in Sweden do not lead to increased emis- petitive advantage for Sweden if it is one of the sions or other environmental impacts in the criteria that encourage businesses to invest here countries around us. rather than elsewhere. Ecological sustainability can also be a com-

COMPETITIVENESS

Competitive electricity costs are of utmost im- will end up exporting electricity during periods portance for Swedish industry. In addition to the when electricity prices are low, at the same time actual price of electricity, electricity costs include as we will need to import electricity in short- grid charges, taxes and other control mechanism age situations when electricity prices are high costs. A competitive energy system does, howev- (Rydén, 2016). We are going to have an electric- er, involve more than just low electricity costs; it ity exchange with the world around us in any must also be perceived as being reliable and sus- case, but from an economic perspective it is bet- tainable over the long term, both from an ecologi- ter to aim for an energy policy that encourages cal and a financial perspective. There also need investments and production in Sweden, rather to be financial incentives and financial resources than one that creates a surplus of electricity for for essential investments in the electricity system. export. In the debate, we often hear people say that Sweden’s energy policy should therefore be Sweden should expand renewable electricity aimed at making Sweden attractive for invest- for the purpose of exporting electricity to other ments in development and production of prod- countries. There are certain weaknesses in this ucts where the value added is high. The greater strategy. If Sweden greatly increases the per- the value added in Sweden, the better it is for centage of intermittent energy without having a our economic development. An efficient energy cost-effective solution for using the surplus, we system can play a role in this development.

INVESTMENT CLIMATE

A market model that ensures an efficient price mechanisms that are distorting the competitive formation process in the short term and ensures situation between different energy sources. In- that essential investments are made when they vestments in new production facilities have, over are needed is an important component in eco- the past few years, only taken place with the nomic sustainability. It is also important from support of subsidies. The facilities being built an environmental perspective, because puts are mainly for intermittent energy with low vari- Sweden at the forefront. Players in the electricity able costs. This is driving development towards market and their customers must be able to rely even lower electricity prices, but is not lowering on the electricity market if they are to venture the total cost of the electricity system. Altogeth- into investments. Policy-makers have an impor- er this could lead to the need to close nuclear tant responsibility here to make decisions that power plants ahead of schedule. This situation ensure long-term stability. is affecting all energy sources. There are fewer Electricity producers are currently strug- incentives for modernising hydropower plants, gling with poor profitability as a result of exter- and older wind turbines are being decommis- nal circumstances as well as domestic control sioned due to poor profitability.

11 SECURE SUPPLY

Sweden today has a strong electric energy bal- bution systems will play an increasingly critical ance and has been a net exporter of electricity role as more parties produce their own electric- over the past few years. This is partly due to ity. The need to store electricity and control the fast growth in wind power, but also to high consumption will also increase. Greater coor- availability of other energy sources. Within the dination will be needed between energy sources next few years the supply will go down when as well. Electric energy can be stored in batter- four nuclear power plants are decommissioned. ies and in the form of heat in district heating Svenska kraftnät (Sweden’s national grid) is, systems or chemically as gas in a gas grid. This however, of the opinion that it will be possible increases flexibility and reduces vulnerability to manage the energy and power balance. throughout the energy system. If, however, additional reactors are shut down in Technology development is moving fast and the near future, the power balance will be weak- costs are falling in many energy-related areas. ened significantly – both in terms of energy and Today it is hard to predict how this progress power – and the system will also become less ro- may affect the conditions and address the chal- bust. Sweden will instead become dependent on lenges in the electricity market as soon as 10 to imported electricity, mainly from fossil-based 15 years from now. It is therefore important that electricity production. That will lead to both in- we do not lock ourselves into one particular so- creased costs and increased climate impact, and lution, but that we are prepared and flexible to will reduce delivery reliability (see the chapter best take advantage of the development taking “Deeper analysis of the production system”). place with a focus on cost efficiency. From an electricity production perspective If the remaining six nuclear power plants re- Sweden has several opportunities to replace main in operation until the end of their planned today’s reactors with new fossil-free electricity life, we will have a better chance of cost-effec- production, based on hydropower, bioenergy, tively taking advantage of Sweden’s comparative solar and wind, or new nuclear power. Depend- advantages and the positive technological devel- ing on how the production system is developed, opments that are taking place. This will reduce the electrical grid will also need to be adapted, the environmental and climate impact while also both within Sweden and in electricity exchange helping to ensure a secure electricity supply and between countries. It is likely that local distri- delivery reliability in the system.

12 Recommendations from Electricity Crossroads

Based on the conclusions above, the recommen-  Look at the electricity system from a broader dations are as follows: energy system perspective, with effective coordination between the electricity, heat and gas systems, with electricity being stored PATH 1: as hot water or chemically in the form of gas. Regard electricity as a facilitator for Recognise the opportunities for an overall industrial development and to reduce more efficient use of resources with electricity climate impact as an effective energy carrier.

Electricity use has been relatively constant over  Focus on climate-neutral electricity in climate the past 25 years, despite population and eco- policy, for example by investing in faster nomic growth, thanks to structural changes in electrification of the transport sector, and industry, more efficient electricity use in build- research and development to replace fossil ings and more efficient devices, equipment and inputs with electricity in industry. system solutions. Maintaining a focus on energy efficiency is important from a system perspec-  Invest in research, innovation, demonstration tive, but can also lead to increased electricity use. and business development in strategic areas The project has identified several factors that for Sweden to support industrial development may break the trend of stable, or even declining, and promote a sustainable electricity system. electricity use that we have seen in recent years (Liljeblad, 2016). Faster population growth is one factor that is difficult to predict and con- PATH 2: trol. More proactive measures that can lead to Create the right conditions for cost- increased electricity use while also reducing cli- effective development of the electricity mate impact include electrification of the trans- system port sector and the railway and steel industries, continued digitalisation and opening more data Technological development is happening fast centres. and we cannot predict what options may be A competitive electricity system can bring soon available in 10 to 15 years. In order not to foreign investment into Sweden rather than to lock ourselves into one system today, it is impor- countries with electricity production that is less tant to ensure that we give ourselves time to take green. It can reduce environmental impact while advantage of development taking place. also benefitting the Swedish economy. One relevant issue is the possibility of the early closure of the remaining six nuclear power Electricity Crossroads’ recommendations: plants. If they can be kept in operation until the end of their planned life, we will have time to re-  Create a competitive electricity system to invest in new production capacity and in essen- attract industrial investments to Sweden. tial infrastructure, at the same time as we will

13 have flexibility while the technology is being de- PATH 3: veloped. A fast nuclear phase out will also make Focus on other environmental issues in it more expensive to achieve climate goals at the addition to the climate European level. Calculations made by Electricity Crossroads show that the closure of all reactors All electricity production affects the environ- by 2020 would cost just over SEK 200 billion and ment in varying degrees in both the construc- cause increased carbon emissions in the range of tion stage and operation, and when plants are 500 million tonnes from the power plants that decommissioned. The environmental issues are replace the Swedish reactors. complex and difficult to compare with each other. The debate about the energy system is Electricity Crossroads’ recommendations: often, rightly, focused on the climate issue. But it is important to consider other environmental  The energy policy should provide a clear aspects as well when assessing various energy and long-term framework for players in sources and their impact on the environment. the electricity market. The policy should Today we have limited knowledge of, for ex- involve using control mechanism when it is ample, the impact on biodiversity and the en- justified from a public finances perspective. vironmental impact of new materials and tech- Otherwise, market solutions should be used. nologies.

 Review taxes and subsidies that distort Electricity Crossroads’ recommendations: the electricity market and create the same conditions for all energy sources. Examples  Increase knowledge about environmental of taxes that distort the situation include the impacts in more areas, with the objective nuclear capacity tax and the higher property of, for example, conducting full life-cycle tax on hydropower plants. analysis or other types of environmental analysis for different energy sources.  Review the subsidy system so that it does This will make it easier to put a price on not subsidise electricity production when it negative external effects and take this is not needed. There also needs to be a way into consideration when designing control to control the point when new production mechanisms and making investment facilities are put into operation and enter decisions. the electricity system.  Systematic monitoring and an intensified  Analyse the need for and how to implement dialogue are needed. This will put more an expanded market for various types of knowledge in the hands of various system services, such as accessible capacity parties on how different energy sources, and frequency regulation. specifically hydropower and bioenergy, impact biodiversity. This is essential for a  Taxes that have a fiscal purpose should faster and more predictable permit review be imposed as close to the end consumer process. as possible. Taxes and other fees with a controlling purpose, such as an environmental  More focus and analysis on how new materials tax, should be levied on products or activities and technologies impact the environment, for that need to be steered in a certain direction. example batteries and solar cells, including raw material extraction, production, use and  Invest in development of new solutions the ability to recycle the materials and what is for a more flexible electricity system to needed to make it happen. enable an increase in the integration of solar and wind power.

14 PATH 4: resources efficiently and will generate new com- Set a goal for delivery reliability to main- mercial opportunities. Sweden and many of the tain today’s high level nations around it are moving towards more renewables, but are also increasing the percentage Delivery reliability is in general very high in the of intermittent energy in their systems. This is in Swedish electricity system. Historically, it has many ways a positive trend, but it presents some been an important competitive advantage for in- challenges as well. New solutions are needed to dustry and has also benefitted society in general. maintain the balance in the system and to ensure Now changes are happening in the technical sys- delivery reliability. Sweden could be self-sufficient tem that could reduce delivery reliability unless in power and should be able to have increased steps are taken. In order to evaluate and deter- capacity on days when there is no wind, but im- mine which measures are needed in a changing plementing this could be unreasonably expensive. electricity system, a goal must be set for delivery If all countries chose that path it would lead to reliability in the system. unnecessary overcapacity in the electricity system which would seldom or never be used. The better Electricity Crossroads’ recommendations: the transmission capacity between countries in a larger electricity area, the more effectively joint  Set a measurable goal for delivery reliability resources can be used. in the electricity system to guarantee that at least today’s level can be maintained. This Electricity Crossroads’ recommendations: should be done in cooperation with our neighbouring countries.  Deeper regional cooperation for delivery reliability with surrounding countries for joint  Clarify who is responsible for ensuring that the and more efficient use of resources. goal is reached and that delivery reliability is maintained. Electricity Crossroads proposes  Take a longer term approach to investment that Svenska kraftnät (Sweden’s national grid) requirements for new transmission capacity be responsible for this. in cooperation with the countries around Sweden.  If control mechanisms to maintain delivery reliability are introduced, they should be  To guarantee delivery reliability and to technology-neutral to ensure that the most maintain the balance in the system – including competitive solutions are chosen. in extreme situations – joint regional studies and agreements are needed to determine how much capacity can be counted on in low PATH 5: capacity situations. Strengthen partnerships with those around us

Historically, Sweden has had effective energy partnerships with its Nordic neighbours. Now changes are taking place resulting in an increasingly interconnected energy market. The EU has, for example, presented a proposal for an Energy Union to ensure an efficient, secure and sustainable supply of energy. Sweden should therefore look at opportunities to increase energy cooperation. Increased cooperation will make it easier to use

15 16 External factors impacting electricity system development

Within the Electricity Crossroads project we TECHNOLOGY DEVELOPMENT have been discussing the status of Sweden’s elec- CHANGING THE GAME IN THE tricity market and providing recommendations ELECTRICITY SYSTEM on how to develop it. Sweden is highly dependent on developments in the world around it, and Solar cells and wind power produced around on what measures other countries implement in 4 percent of all energy globally in 2013 and a their energy systems. There are other factors too lot has happened since then. The costs of these that have a great impact on our electricity sys- types of production are falling rapidly and in tem, such as population growth and technical several places in the world, solar and wind are development. Below is an overview of the vari- the cheapest newly constructed electricity pro- ous external factors impacting Sweden’s electric- duction sources (IEA, 2015). ity system. The most cost-effective new electricity production in Sweden today is new wind power. As technologies continue to be developed, it is like- CHANGED ELECTRICITY DEMAND IN ly that the relative cost benefits will increase. THE FUTURE Wind power also has the type of annual varia- tion that fits electricity consumption in Sweden, Electricity use has been relatively constant over because it delivers the most during the coldest the past 25 years, despite population and eco- times of the year. It therefore makes sense to nomic growth, thanks to structural changes in continue to expand wind power production in industry, more efficient electricity use in buildings Sweden. and more efficient devices, equipment and system Interest in solar power is increasing steadily, solutions. among private individuals as well as property Demand for electricity may still increase due companies who have in common that they are to even faster population growth and electrifica- primarily electricity users and not commercial tion in industry and the transport sector where energy companies. The costs are falling and electricity is replacing fossil fuels. We should be technological development is creating new pos- prepared to meet this demand for electricity in sibilities, such as integration of solar energy pro- a sustainable way (Liljeblad, 2016). The way in duction in building facades and roof coverings. which electricity use will develop in the future is These solutions could increase the supply of so- discussed in more detail in the section under the lar energy in Sweden. heading What will impact electricity use in the Due to their dependence on weather and sea- future? and in an associated report and a special sons, solar and wind energy are putting new report on scenarios for future electricity. pressure on the electricity system, and several

17 countries, such as China, Germany and the entitled Energy Storage – Technology for elec- USA, are increasing their transmission capacity tricity storage, published by Electricity Cross- to handle these variations. A higher percentage roads in September 2015. of weather-dependent production in Sweden Technology is being developed in all areas. will challenge the future electricity system as As an example, Figure 2 below shows the fast the amount of power produced will vary. Tech- development of battery technology, which is ac- nology is being developed to handle these chal- companied by falling prices. lenges. There is also fast development and a technol- The solutions can be roughly divided into ogy shift towards more efficient transmission three areas: storage, improved transmission be- of electricity over greater distances. The pre- tween locations with electricity surpluses and dominant technology in the electrical grid over deficits, and technology to handle the variations the past 100 years has been alternating current in weather-dependent electricity production. (AC). Now high voltage direct current (HVDC) Examples of storage technology are batteries, is being developed and installed at a fast pace, thermal storage where energy is stored as heat especially in Europe. HVDC takes up less space in hot water, or chemical storage of electricity as and makes it easier to control the power flow. hydrogen or possibly methane. These technolo- The technology is good for use over long dis- gies are described in more detail in the report tances and can also free up capacity in the ex-

Figure 2: Cost development for lithium-ion batteries. Source: Energy storage technologies, Electricity Crossroads, 2015.

SEK/kWh

17,500 Cost estimated in publications, highest and lowest Cost for Tesla Power Wall Publications, reports and journals Cost for Tesla Power Block 15,000

12,500

10,000

7,500

5,000

2,500

0 2005 2010 2015 2020 2025 2030

18 Figure 3: Falling prices on coal affect electricity prices, weekly average during the year, EUR/MWh. Source: Vattenfall

EUR/MWh

100 Electricity price development in Germany

Marginal cost of coal power plants in Germany

0 2008 2009 2010 2011 2012 2013 2014 2015

isting transmission grid to better manage local critical components and thereby reduce operat- variations in solar and wind power production ing costs. (Nordling, 2016). Constant energy efficiency improvements are Solar and wind are by nature unpredictable, driving down energy demand and reducing en- which means that various technical measures are ergy intensity. Electric motors and lighting are needed to maintain grid stability and to guaran- the highest consumption categories. Electric tee the electricity supply. Alternate production motors account for 40 percent of electricity use or imports are needed to meet the demand when in society and 65 percent of electricity use in there is no wind, as well as technology to main- industry. (Swedish Energy Agency, 2014). With tain stability in the grid. With modern current new, more efficient electric motors and better conversion technology, wind turbines and solar control of them, consumption could be reduced energy systems can be designed to help maintain by up to 60 percent (Siemens, 2016). Similarly, voltage and frequency regulation in the electri- new, efficient LED technology could cut elec- cal grid. tricity use for lighting by 50 percent. Industrial digitalisation is also helping to Energy efficiency improvement in combina- integrate more solar and wind power into the tion with solar energy produced by users them- system. Sensors in the grid are increasing trans- selves could reduce energy transportation in mission capacity temporarily, better weather the grid even if power variations are likely to forecasts and new trading systems are evening increase with solar and wind. out imbalances, and digitalisation is making it easier to control demand to match supply without appreciably compromising comfort. THE SHALE GAS REVOLUTION Digitalisation is also affecting how the electricity system operates. “Big data,” sensors and A technology breakthrough for extracting natu- risk analysis are changing things like, mainte- ral gas and oil from shale in the USA and Can- nance as it is now possible to focus on the most ada has completely redrawn of the geopolitical

19 map. From a situation a few years ago where through the implementation of the EU direc- it was preparing to become dependent on im- tives in Swedish legislation, and indirectly be- ported oil and gas, the USA has instead become cause we belong to the same market. self-sufficient and can now export fossil fuels. The European electricity market is in a period Meanwhile growth in China has slowed down. of transition involving a large-scale expansion One of the results of this is a global surplus of of renewable electricity production, reduced de- coal leading to falling prices. The cheap coal has mand for electricity and low prices on fossil fu- had a major impact on the European electricity els, all of which is putting pressure on electricity markets. Production costs for coal power plants prices. The trend towards an increased propor- have a price-setting effect on margins, includ- tion of intermittent electricity production and ing in the Nordic and therefore also the Swedish limited incentives for maintaining production electricity market, through electricity exchange of, or investing in, new baseload power has with countries like Germany and Poland. Fall- been driving the debate about supply security ing coal prices are partly responsible for the low- in Europe (European Commission, 2016). er prices on the Swedish electricity market. The As a result, several member nations have diagram in Figure 3 shows coal and electricity introduced so-called capacity mechanisms to prices in Germany 2008–2015. secure their electricity supply. This has created a need for supplementary market solutions to maintain the capacity in the system. The mech- FUKUSHIMA anisms have been criticised for creating trade barriers, favouring certain types of technologies The tsunami north of Tokyo on 11 March 2011 or producers and possibly being contrary to the caused a series of nuclear meltdowns at the EU subsidy rules. The European Commission Fukushima nuclear power plant, which resulted has therefore appointed committees and coun- in radioactive emissions. The disaster prompted cils to present proposals in 2016 on how and a renewed debate on the safety of nuclear power if capacity mechanisms can be used, and how in Europe, and Germany decided to phase-out electricity markets should be designed (Euro- nuclear power by 2022. Germany’s “Ener- pean Commission, 2016). giewende” (Energy Transition) picked up speed To reduce emissions of climate-impacting at the same time. One consequence of the Fuku- gases, a trading system for emission allowances shima disaster was a ruling by the EU requiring was introduced in 2005 (EU-ETS). The system all nuclear reactors to be fitted with separate mainly covers facilities in energy intensive in- core cooling systems no later than 2020. For dustry and energy production facilities. They Swedish nuclear power plants this requirement are assigned an upper limit for their emissions, involves significant investment. This, in combi- i.e. a “cap” that is gradually lowered. In con- nation with low electricity prices and the addi- nection with the 2008 financial crisis, industri- tional cost due to the nuclear capacity tax, may al carbon emissions were significantly reduced result in the early closure of reactors in Sweden. and this also lowered the price of emission allowances. This has reduced the controlling effect of the system with respect to the transition EU AFFECTING THE NORDIC from fossil to renewable electricity production, ELECTRICITY MARKET which has also had an indirect effect on electricity prices in Sweden. In 2015 the European The EU’s energy initiatives are based on three Commission presented a proposal to revise the pillars: environmental sustainability, competi- system ahead of the 2021–2030 trading period. tiveness and supply security. These have also This may result in higher electricity prices. been adopted by the Swedish Government. The In February 2015 the European Commission EU’s energy and climate policy has a significant presented the EU Energy Union, a comprehen- influence on Swedish policies – both directly sive strategy aimed at ensuring a reasonable,

20 secure and sustainable energy supply within and solar energy, which has put pressure on the the EU. The Energy Union strategy has a num- price of these energy sources globally. The in- ber of components, including the electricity installed capacity is now so large that Germany terconnection target. Every member state is to could theoretically during some individual have a trading capacity of at least 10 percent hours of the day cover all if its electricity needs of the country’s installed electricity production with solar and wind. But in actuality other ener- to trade with surrounding countries by 2020. gy production must be in operation to maintain Sweden currently has 26 percent, while some stability in the system. The increase in the per- countries have almost none. Some of the main centage of solar and wind can bring challenges reasons for the electricity interconnection target in the form of substantial fluctuation in electric- are to secure the supply of electricity, increase ity production. This puts a lot of pressure on the competition in the domestic market and facili- electrical grid and on surrounding countries to tate more effective climate policies. More effec- help relieve Germany of its electricity surplus. tive electricity markets within the EU also have To meet these challenges, three different capac- a positive effect on Sweden. ity mechanisms have been introduced and an Despite efforts to create a common electricity auction for new facilities in southern Germany market, the member nations are taking the most is being discussed. important energy decisions themselves, such as Germany’s substantial investment in solar on their energy mix, subsidies for renewables and wind is also impacting the Swedish electric- and capacity markets. The member nations ity market. Electricity prices in Germany are are, however, required to follow the guidelines more volatile and the need to increase energy established by the EU’s Directorate General for exchange with other countries is increasing, Competition. partly when there is a surplus and partly during In July 2015, the European Commission pre- periods of low availability from solar and wind. sented a strategy for changes in, for example, the EU ETS (EU Emissions Trading System), a review Norway focusing on of the energy market directive and a new energy exporting electric power market design (European Commissions, 2015). Norway’s electricity production is almost fossil- free because 96 percent of it comes from hydropower. In 2012 Norway and Sweden together DEVELOPMENT HAPPENING established a target of increasing renewable IN SWEDEN’S VICINITY electricity production in their countries by 28.4 TWh from 2012 to 2020. To reach this target the The Swedish electricity market has never been countries have a joint energy certificate system isolated and will now become more integrated to support new production of renewable energy with the countries in its vicinity. (Energimyndigheten.se – Energy certificate system). Germany’s “Energiewende” This has resulted in an increase in wind power (Energy Transition) expansion in Norway. In 2015 wind power pro- Three months after the accident in Fukushima duced 2.5 TWh. Norway’s energy minister has, the German government decided that its en- however, announced that Norway intends to ergy supply would be free from nuclear power stop all financial support for wind power and and would come mainly from renewable ener- discontinue the Norwegian-Swedish energy gy sources by 2022. Closure of nuclear power certificate system as of 2021 (Olje- og energide- plants, reduction of fossil fuels and an increase partmentet, 2016). Norway, which is already a in renewable electricity production are all in- large net exporter of electricity, is planning a cluded in the concept of “Energiewende” (En- major expansion of the country’s export capac- ergy Transition). The implications of this have ity to England, Scotland and Germany etc., with been included a major investment in wind power planned completion of cables carrying 1,400

21 MW each by 2020–2021. Combined with the balance in Finland will help delivery reliability fourth cable between Norway and Denmark of in the Nordic region. 700 MW, the planned expansion represents close to 5,000 MW of transmission capacity. Norway’s Denmark continuing its idea is to be able to export hydropower when expansion of wind power it is not windy and when prices are high in the Denmark invested early on in wind power. In neighbouring countries, and to import cheap 2015 14.1 TWh or 42 percent of Denmark’s to- power when the situation is the reverse. tal electricity requirement of 33.4 TWh was pro- Norway already has large transmission cables duced by wind power turbines, the highest per- into Sweden, Denmark and the Netherlands, centage in the world (Energinet.dk). The target and smaller ones to Finland and Russia. The is for 50 percent of the electricity produced to increased export capacity is intended for other come from wind power by 2020, a goal that it parts of Europe and may reduce Sweden’s ability is expects to reach (Energipolitisk redogörelse to import hydropower electricity from Norway, 2015, Klima, energi- og bygningsministerens re- which could lead to higher prices in the Swedish degörelse til Folketinget om energipolitikken). energy market. Denmark is entirely dependent on the strong electricity exchange with Norway and Sweden Finland investing in new nuclear for its wind power strategy to work. power to increase self-sufficiency Today fossil fuels (coal and gas) account for a The Finnish government's goal is “Cost-effective third of all electricity produced there. The vision coal-free, clean and renewable energy.” The idea is for the Danish energy system to be entirely is, among other things, for coal use to disappear fossil-free by 2050. Wind power will continue and energy self-sufficiency to increase (Arbets- to play a big role and a substantial expansion och näringsministeriet, 2015). in the North Sea area is in the cards. These sig- Today Finland imports around 20 percent nificant investments in wind power will require of its energy needs from Sweden, Norway and a major adjustment of the Danish electricity Russia. Although the Finnish government is be- system. Germany’s energy investments are also lieves that the Nordic electricity market is work- impacting Denmark. In ten years’ time it is es- ing well, increased self-sufficiency is a priority timated that the installed wind power capacity there. Finland also exports electricity, primar- in northern Germany will amount to around 34 ily to Estonia. Finnish electricity production is GW, compared to Denmark’s current 5 GW (En- based on about one third each of hydropower, ergikoncept 2030 – Energinet.dk). nuclear power and CHP. Wind power accounts The variable nature of electricity production for about 3 percent of the electricity produced from wind power requires significant transmis- in Finland. sion capacity within the country and with other To increase the percentage of renewable en- countries in the region, but also puts pressure on ergy, Finland has introduced a so-called feed-in domestic load-balancing electricity production. tariff system with defined national prices, where To achieve the climate goal, the plan is to replace the difference is paid to producers to support fossil fuels for electricity production with biofu- production of electricity from wood chips, bi- els and waste. ogas, wood fuel and wind power (Ministry of Denmark is well connected, with transmis- Economic Affairs and Employment, 2015). Fin- sion cables to Sweden, Norway and Germany. land is also investing in new nuclear power to There are also plans to lay cables to the Nether- reduce its import dependence and replace older lands and England (Energinet.dk). plants that are being decommissioned. The nuclear power plant being constructed in Olkiluo- Baltics connected to the EU to is expected to be commissioned in 2018 and The Baltic energy market consists of Estonia, a planned reactor in Hanhikivi in 2024 (World Latvia and Lithuania and is currently part of Nuclear Association, 2016). An improved power the Nord Pool area. This means that the price

22 of electricity is set on the Nordic electricity ex- bouring countries is being affected by Ger- change. To integrate the Nordic energy market many’s limited transmission capacity between with the rest of the EU, the EU has a project called northern Germany, where numerous wind tur- Baltic Energy Market Interconnection Plan (BE- bines are being erected, and southern Germany, MIP). Examples of cables covered by the project where the majority of the electricity consump- are NordBalt between Sweden and Lithuania, tion takes place. Much of Germany’s electricity LitPol Link between Lithuania and Poland, and transportation in a north-south direction goes Estlink 1 and 2 between Estonia and Finland through Poland (ACER, 2014) (Svenska kraft- (European Commission, 2016). nät, 2015). Today the Baltic countries are together a net The Swedish, Polish and Baltic electric- importer of electricity from Finland, Russia and ity markets have become more closely linked Belarus (ENTSO-E, 2015). The launch of Nord- through the SwePol Link cable between Sweden Balt and LitPol Link is expected to increase Swe- and Poland, and the so-called “Baltic Ring” in- den’s and Poland’s electricity imports (European cluding LitPol and NordBalt (European Com- Commission, 2016). mission, 2015). This has, however, resulted in The production mix in the Baltics consists Sweden and the Baltics also being affected by mainly of fossil fuels. Latvia and Lithuania also the operational planning problems that can be have hydropower and Lithuania and Estonia caused by the cross-border power streams from have some wind power. Germany (Svenska kraftnät, 2015). The Baltics have not produced any nuclear To increase its self-sufficiency, Poland is now power since the closure of Lithuania’s Ignalina planning for its own nuclear power production nuclear power plant in 2009. Up until then elec- and construction is expected to start in 2020 tricity provided important export income, but (World Nuclear Association, 2016). Exploiting the nuclear power plant was closed following Poland’s significant shale gas deposits has been pressure from the EU. To reduce its electricity discussed, but for the time being the country import needs there are plans to build a new nu- has is no specific strategy for this (Maciazek, clear power plant. Russia and Belarus have also 2015). started building two reactors close to the Lithu- ania border (World Nuclear Association, 2016). Russia planning for new nuclear power Russia is connected to the Nordic and Baltic Poland heavily dependent electricity markets via Finland, Estonia, Latvia on coal power and Lithuania, and via Norway. The combined Polish electricity production is largely based on net imports are around 5 TWh (2012). (Energy- coal and the country has the biggest coal re- charts.de, Datasource: ENTSO-E). More than 60 serves in the EU. Coal power represents 76 per- percent of the electricity produced in Russia is cent of Poland’s electricity production. Electric- based on the fossil fuels gas and coal. Nuclear ity is also produced from natural gas, biofuels, power and hydropower account for just under wind power and hydropower. There has been a 20 percent each. big expansion of wind power in recent years and A substantial increase in nuclear power pro- it now represents almost 10 percent of all elec- duction is planned in Russia; partly to replace tricity production in Poland. According to the old nuclear power plants that need to be de- Polish government’s energy and climate policy, commissioned and partly to increase capacity. coal power production will be reduced by an Electricity exchange with Russia may indirectly expansion of nuclear power and through invest- impact availability and prices in Sweden via Fin- ments in renewables and natural gas (Maciazek, land and the Baltics, which are directly linked 2015) (Polish Ministry of Energy, 2015). Poland to Russia. has historically been a net exporter of electricity, mainly to the Czech Republic and Slovakia. Poland’s transmission capacity with neigh-

23 Reactor hall at Forsmark 3, Source: Vattenfall.

24 Challenges facing the Swedish electricity system

Today in Sweden we have the world’s best elec- be have to be closed within the next five years. tricity system in terms of environmental impact, This would result in major challenges in the elec- supply security and competitive electricity pric- tricity system, including a significant worsening es. In Europe a transition is taking place from of the power balance and increased uncertainty in fossil-based electricity production to low carbon the electricity market. Today’s electricity market emission energy sources, while the Swedish sys- regulations are accelerating this. Energy sources tem is already essentially fossil-free. that provide baseload power, such as hydropower Sweden has a high level of electricity use relative and nuclear power, are taxed, while intermittent to other countries, but it still has a lower percent- sources such as solar and wind power are being age of fossil fuels and low carbon emissions com- subsidised. pared to other industrial nations. A secure sup- Sweden is essentially in a strong position to ply of electricity at competitive prices has helped maintain a sustainable and competitive electric- boost technology development and support a ity system, even without current nuclear power competitive export industry, which has had a posi- plants, thanks to hydropower, large forests and tive impact on development in society in general. a forest industry that is delivering biofuel, as well Several factors indicate that electricity use may as coastlines that are available for an expansion of increase in the years ahead, one main factor being wind power. Solar may play a greater role in our population growth. Increased electricity use may latitudes and new nuclear power is also an option. be an important aspect of climate efforts as elec- But it is not just a case of replacing working tricity replaces fossil fuels in the transport sector power plants; the entire infrastructure needs to and industry. Electricity is also contributing to a be adapted to the new conditions. Today tech- more efficient use of resources in general. nology is being developed fast for production, Sweden today has a strong electric energy storage and flexible electricity use and costs are balance and has been a net exporter of electric- falling. The more time we have to make a transi- ity over the past few years. Four nuclear power tion, the less it will cost. plants are going to be decommissioned before Calculations made by Electricity Crossroads 2020 and, although this will bring challenges, (Rydén, 2016) show that closure of the six remain- the electricity system has the ability to handle it. ing reactors by 2020, compared to using them for One concern is the poor profitability being the rest of their planned life, will cost around SEK experienced by electricity producers. External 200 billion. The power we lose will mainly be re- factors such as the low cost of coal and gas, low placed by fossil-based electricity imported from prices on emission allowances and increased pro- other countries. The closure of these plants would duction mainly from solar and wind, are reduc- lead to an overall increase in carbon emissions of ing marginal costs in the system and thereby the close to 500 million tonnes from the power plants amount of compensation for all produced elec- replacing the power from the Swedish reactors. A tricity. Various taxes are a factor in the increase fast nuclear phase out will therefore make it more in production costs for certain energy sources. expensive to reach the climate goals at the Euro- The power industry has announced that there pean level (see the chapter “What will happen if is a risk that additional nuclear power plants will all Swedish reactors are closed early?”).

25 26 Political control in today’s electricity market

The Swedish electricity market was reformed in The Nordic electricity market is characterised 1996. The purpose was to create a framework by large variations in precipitation from year for an electricity market where competition in to year, which impacts hydropower production production and energy trading would improve (“wet years” and “dry years”), and between efficiency and competitiveness for the benefit cold and milder winters on the consumption of Swedish society. One important cornerstone side. Before deregulation, delivery reliability in the electricity market reform was that com- was guaranteed by long-term planning at the panies producing and trading electricity were central level, but after the electricity market no longer permitted to also be involved in the reform, it was assumed that the market would electricity transmission business. The electri- address and solve the power supply issue. Price cal grid would be available to all producers and signals were expected to provide incentives for electricity customers on equal terms. Electricity this, but in fact proved to be insufficient. To production and trading would take place in a ensure supply security, including during dry/ competitive environment and customers would cold years, a power reserve were added to the be free to choose their electricity supplier. The electricity market in 2003, i.e. production fa- aim was for the electricity market to be treated cilities standing at the ready or big electricity like all other sectors of industry and regulated consumers being prepared to reduce their elec- through general industrial legislation. The electricity use in a stretched situation. Procure- tricity market reform created a framework that ment of the power reserve is the responsibility gave companies quite a lot of freedom. Compa- of Svenska kraftnät (Sweden’s national grid). nies were expected to act in a way that ensured When it was introduced it was a temporary so- the goal of an efficient electricity supply to ben- lution. The objective was to develop the market efit consumers would be achieved. It was not so that it could also handle the system’s delivery considered necessary to have any rules in place reliability. But the power reserve has gradually to control how companies would act to achieve been extended – most recently to 2025. Today the goal (Hagman & Heden, 2012). we are still discussing which market solutions In connection with this deregulation, the as- are needed to ensure delivery reliability during sumption was that the electricity market expan- the coldest winter days. But it is fair to say that sion was complete and an electricity market delivery reliability has not been a problem since model was therefore introduced to set prices in deregulation. a mature market. The amount of surplus capac- In 2003 the electricity market was supple- ity that had been in the market fell when older mented with an energy certificate market to plants were decommissioned. The current mar- drive an increase in the proportion of renewable ket model has not yet gone through an invest- electricity production. Energy certificates bring ment cycle, so it is difficult to assess how robust an extra source of revenue for those investing it is. in renewable electricity production. To begin

27 with, biofuel-based industrial boilers and dis- developed through national initiatives. Today trict heating plants were supplemented with tur- market development is driven by the European bines producing electricity, but in recent years Commission. Continued European market de- the energy certificate system has mainly driven velopment will require greater h