IEA Commends Swedens International Market Approach to Energy but Stresses the Importance of a Credible, Long-Term Plan on the Future of Nuclear Power

(Stockholm) — 9 June 2004

“Swedish energy policy sensibly combines market forces with government influence to achieve economic efficiency, energy security and environmental protection,” said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Stockholm at the launch of “Energy Policies of IEA Countries – Sweden 2004 Review.” Sweden is to be commended for its liberalised electricity market which, through Nordpool, has been a model of competition for many countries. Sweden also has impressive emergency response measures to deal with any oil import shortages and holds reserve stocks consistently above 90 days of use. “But the major issue impeding the Swedish energy sector today is the continued uncertainty over the future of nuclear power,” he stated.

Uncertain Future of Nuclear Power
Nuclear power has been a political issue in Sweden since the general election of 1976. Debate on this issue has continued, even while Sweden was developing a substantial nuclear power park. In 2002, nuclear provided 46% of the country’s electricity generation and 35% of primary energy supply.

While one reactor has already been shut down (Barsebäck 1 in 1999), the debate over nuclear continues. The resulting uncertainty constrains necessary investment in the power sector and puts long range climate change plans in doubt. Any solution on nuclear must provide a long-term vision and be accepted as credible by all sides. The IEA report encourages any plan for government-mandated plant closures to take into account the costs associated with replacing nuclear power and the implications for Sweden’s energy security, greenhouse gas (GHG) emissions and economic growth. While both nuclear and non-nuclear futures are viable for Sweden, a firm decision which recognises all implications of the choice is needed as soon as possible.

Greenhouse Gas Emissions Cutting Tools
Sweden has one of the lowest per capita emissions of GHG in the OECD. While the country must limit its emissions growth under the burden-sharing system of the Kyoto Protocol to 4% above 1990 levels, projections forecast that emissions will only grow 1% over that period. However, the country has adopted a more stringent target, seeking to reduce emissions by 4% from 1990 levels by 2010 and per capita emissions by 40% by 2050.

The primary means of cutting emissions is through taxation. As part of the “green tax shift”, a complicated tax structure has evolved with very high taxes targeting certain energy sources. The tax on CO2 is 910 SKr (€100) per tonne, even though many forecasts project the price of allowances under the EU emission trading system will only be about €20/tonne. While the tax shift has had an impact and was largely responsible for raising biomass from 12% of energy supply in 1990 to 16% in 2002 for example, additional tax increases would have diminishing returns on emissions reductions. The ongoing changes to the tax system and its complexity also give rise to transactional costs for producers and consumers and could deter energy investments.

Renewable energy is another means of curbing GHG emissions. The primary support for renewables is the green certificate electricity programme wherein suppliers must obtain green certificates equal to a certain percentage of their supply. The system has a strong market component that promotes generation from the lowest-cost technology and spurs technology improvements through competition. However, the target of 16.9% of electricity generation coming from renewables by 2010 is ambitious. The costs of achieving this goal should be monitored to ensure that customers are not unduly burdened by resulting high electricity prices.

Sweden could benefit from a simplification of its emissions cutting tools. In addition to the tax system and the green certificates programme, there are also direct subsidies for certain renewable technologies, voluntary long-term agreements for companies and the coming EU emission trading system. While a number of different tools will be needed to effectively curb emissions, the potential overlap between programmes makes the system overly complicated.

Electricity Market
Sweden is to be commended for its successful liberalised electricity market. As part of Nordpool, Sweden has one of the least-regulated most market-driven electricity sectors in the OECD. Current challenges include a growing concentration of generation companies, a tightening supply-demand balance and constraints in the interconnection capacities between countries. These issues can best be addressed in an international context through enhanced co-ordination with other countries both at political and regulatory levels. In addition, care should be taken that the new transitional capacity mechanism does not crowd out an efficient market response to peak demand periods.

Natural Gas
While natural gas currently provides just 1.5% of Sweden’s energy supply, it has captured between 20% to 25% of the relevant market, where it is available. Gas could potentially expand Sweden’s fuel diversity and lower GHG emissions (if displacing other fossil fuels). Gas use would become a particularly attractive option if nuclear plants are phased out. The government has taken a commendably hands-off approach to natural gas, allowing the suppliers and consumers to decide their level of involvement. At the same time, the government could make supplying and procuring gas easier for all parties by simplifying the regulatory structure governing transport.