top of page

In 2022 Norwegian state introduced electicity subsidies

According to a new calculation The Norwegian state is estimated to spend NOK 40.7 billion on electricity subsidies in response to high P in 2022, with the largest item being electricity subsidies at NOK 34.8 billion. The government introduced new measures, including increased and accelerated electricity subsidies for households and now consumers will pay only NOK 32,980. Subsidies are possible due to policy that returns a large part of income from power production back to the community and people. In addition to subsidies, as the Ministry of Finance Pollestad stated: “... there will be a plan for the business community, and we will limit exports when reservoirs are low.

 

Diagram 1:



According to diagram 1 market equilibrium at Pe and Qe. When there is negative consumption externalities D curve is inelastic, since electricity doesn’t have any close substitutes and MPB=MSB, which means that there are no non-price determinants. Allocation of subsidies resulted in a downward shift of supply curve from MSC to MPC (=MSC+subsidies) and external cost is vertical distance between the MSC and MPC. Since the government of Norway's intervention in the market for electricity is subsidies, which means that now producers of electricity are encouraged to supply more of good at the same output but at lower prices due to reducing cost of production by the amount of subsidies (MSC - MPC). Thus, because of the subsidy given for every unit sold, producers are willing and able to supply more in order to earn higher income. Additionally, subsidies result in equilibrium price decreasing from Pe to P2, which means that now consumers are willing and able to pay for electricity at lower prices, so Qd increases from Qe to Q2. Thus, subsidies given to firms leads to reduction in P of electricity, making it more affordable for families to provide this essential good. Now, Qe < Q2, which indicates that there is inefficient allocation of resources, which causes deadweight loss.


Advantages of subsidies:


The Norwegian government's decision to impose subsidies in 2022 has both positive and negative impacts. Firstly, electricity subsidies benefit households and housing associations, as they receive the largest single item in the bailout package of NOK 34.8 billion. “Without electricity subsidies, families in the southern part of Norway would have to pay NOK 73,000 for electricity this year.”, whereas with subsidies, they only have to pay NOK 32,980, since the government contributes NOK 36,460 in support. Therefore, consumers are better off, since this reduces financial burden on households and makes electricity more affordable.



Secondly, subsidies on electronic bills will reimburse an average of NOK 40,260. “Southern Vestland Rogaland, Agder, Telemark, and old Vestfold, has had the highest electricity prices and with annual consumption of 16,000 KWh would have an electricity bill of NOK 73,240 this year.” Now due to subsidizing, it will cover NOK 40,260 of this sum, so that consumers will actually have to pay NOK 32,980. Therefore, consumers are better off, since they are paying less than half of the initial price and can pay for electricity bills.



Thirdly, the government's decision also benefits the Norwegian state, as they have earned extra NOK 27 billion from the extraordinary electricity prices from Jan. 1 to July 19 this year. Pollestad believes that the Norwegian mindset of collective ownership is what has made such strong subsidies possible. Subsidy is possible because of policy that returns a large part of the income from power production back to the community. Therefore, the government and society are better off.



Disadvantage of subisides:


Increased household subsidies account for NOK 1.5 billion, and electricity tax revenues have been reduced by NOK 2.6 billion, which could impact overall tax revenue of the government. Thus, the government is worse off.



To address the crisis, the Norwegian government has implemented several measures in addition to subsidies, they included reduced electricity tax revenues, and increased subsidies for electricity production. Government plans to take further action to address the electricity crisis. One such measure is to develop a plan for the business community. This plan may include measures such as incentivizing businesses to reduce their electricity consumption during peak demand periods, or help them to pay their electricity bills. Another measure is to limit exports when reservoirs are low. Norway is a net exporter of electricity, but during periods of low hydroelectric power generation, it may need to limit exports in order to ensure that its own citizens have access to electricity. Finally, the government is working on lasting measures to change the system and manage the market to avoid future electricity crisis.

 

In conclusion, the Norwegian government is taking a multi-faceted approach to address the electricity crisis in 2022. Ultimately, the goal is to create more sustainable electricity system to avoid situations like this in future.



180 views0 comments

Recent Posts

See All

Comments


bottom of page