Nordic report on the electricity market
The Competition Authority's focus on electricity markets
The genesis of a Nordic report on electricity markets – background information
Significant changes have taken place in the Nordic electricity markets in recent years with the liberalisation of the electricity system. Iceland has not been immune to these developments, and Icelandic electricity consumers can now choose between electricity suppliers. The Nordic competition authorities also compiled a report on the electricity market for 2003, but Iceland did not participate that year. The liberalisation of the Icelandic electricity system was then in its early stages. With the opening of the market here at home and the changes that have taken place in the legal framework and energy production in Europe, the Nordic competition authorities considered it appropriate to pick up the thread from 2003 and conduct another review of the electricity market.
The Icelandic electricity market – the Competition Authority's priorities
In the opinion of the Competition Authority, measures should be considered to make competition in the Icelandic electricity market more effective. Referring to the Nordic report, the Competition Authority points to the following ways to achieve this:
The Icelandic electricity market is in many respects different from other Nordic electricity markets. Much more has been invested in power stations in Iceland in recent years than in other Nordic countries. This is due in part to the fact that in Iceland it is possible to harness considerable hydropower and geothermal energy at a relatively low cost. There are also significantly fewer electricity retailers in Iceland than in the other Nordic countries, and the share of the largest producer in electricity generation is very high.
In this country, the licensed and competitive activities, i.e. transmission and distribution on the one hand and generation and sale on the other, are usually within the same company. Furthermore, distribution undertakings often also operate heat and water supplies within their distribution area. As a result, a large part of the companies' operations is a licensed activity, which can have an impact on competition between them. Likewise, there are not many electricity retailers in Iceland and a small proportion of consumers have switched retailer so far.
The main findings of the Nordic report
There is considerable concentration in the Nordic countries in various areas of the electricity market. The number of retailers varies, but energy generation is largely in the hands of a few large companies. However, concentration has not increased significantly in recent years. There is generally a great deal of common ownership and cross-ownership in the Nordic electricity sector, which can give rise to various competition issues.
Production has not increased in line with demand in the other Nordic countries besides Iceland. This is due to various reasons. In general, it is difficult to build new power stations because of various legal constraints. It is important that the framework for the electricity market is such that cost-effective decisions are made about the future development of the electricity system.
Energy prices have been very volatile in the Nordic countries. This is due to various reasons. Water management and changes in regulation, including pollution quotas, have played a part in this.
Investment in transport systems has been widely inadequate in the Nordic countries. The Nordic competition authorities consider it necessary for the regulation to support an adequate level of investment, as a good transmission system is one of the prerequisites for competition in the electricity market. Furthermore, the regulation of the transmission system must include incentives to keep costs down.
To ensure that transmission companies and distribution networks do not discriminate against their customers, it is desirable to separate the monopoly and competitive operations. The competition authorities in the Nordic countries consider it most appropriate to separate the ownership of the competitive and monopoly parts of the electricity market. If this is impossible, functional separation is desirable.
The biggest problem for retail in the electricity market is consumer price awareness. Few have switched electricity retailers in some of the Nordic countries, especially in Iceland. To increase consumer price awareness, electricity meters that regularly send out information on usage would be desirable, provided they can be installed without excessive cost. Consumers could then better adapt to electricity prices, which would promote more favourable terms for them and better utilisation of electricity.
„The forces of competition must be harnessed in the electricity market.”
Páll Gunnar Pálsson, Director of the Competition Authority, says he expects the report from the Nordic competition authorities to be a useful contribution to the discussion on competition in the electricity market here in Iceland. „In a small and isolated electricity market like ours, the government and energy companies must constantly seek ways to strengthen competition for the benefit of the public. A clearer separation between the monopoly and competitive activities of electricity companies, and more accurate and frequent electricity metering, can make a difference in this regard.”.
The report: Capacity for competition (PDF document - Opens in a new window).
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