The economic impact of wind energy harnessing in Nordic countries

By Krisha Udeshi

With COP26 coming, there has been an increasing need to meet the goals of the Paris climate change agreement. Countries and cooperations alike are trying to find solutions and funding to manage the climate crisis. With climate change being ranked as the biggest threat to economic stability, promoting a green recovery from the coronavirus has become a vital mission. At this time, countries have started looking at alternatives; hence, all eyes turn to the success of renewable energies, particularly in Nordic countries. 

The Nordic power industry has slowly but steadily taken steps to become cleaner and efficient, aiming to conserve global temperature rise below two degrees. Renewable energy production in all the five Nordic countries ranges from thirty-two percent to seventy-three percent. It includes a mix of oil, gas, biomass, wind, and hydroelectricity. But in recent years, the growth has been particular in the performance of the wind power industry.

Denmark was an early frontrunner in official usage of wind power, by setting up wind turbines as early as 1981. However, most other Nordic countries had already started looking into wind energy as a viable energy source only after the 1973 oil crisis. By the 2000s, the wind energy sector was dominating investments with nearly a 30% increase in investments compared to the previous decade. Primarily, Swedish and Norwegian wind energy industries exploded, with a drastic increase in the investment.

In more recent times, North Sea Countries (Denmark, Sweden, Norway, Germany, Scotland, and the Netherlands) approved a policy to develop an offshore electricity grid to harness wind energy in 2010, which has propelled supply. Alongside this, Norway joined the Swedish subsidy scheme of Tradable Green Certificates to further wind power usage. The results have been positive. In a recent report by the International Energy Association, the latest project approved by the national regulator would lead to a near three-fold increase in wind energy production by 2021 and a six-fold increase 2030.

Speaking in pure economical terms, moving to green and renewable energy from fossil fuel has a social benefit and thus can be seen as a public good. Public goods creates positive externalities such as cleaner air, but are underfunded in a free market environment due to failed recognition of such social benefits according to private, individual interests. The Nordic government’s provision and subsidy of renewable energy allows improvement to social welfare. The country’s equity and socio-economic indicators such as health are improved.

The conversion to wind energy has provided a variety of benefits for Nordic countries. One, Is that the transition reduces exposure, for the economies, to fuel price volatility in their economies. With oil reserves having already peaked in the North Sea, most oil and gas is imported. And as shown in 2008, wherein oil prices peaked at $150 a barrel and dropped to $50 a barrel, a reliance on imported fuels could cause contagion and subsequent crisis. Wind energy can eradicate this volatile, imported factor by being an abundant, free, and indigenous resource. The production of wind energy is insensitive to market conditions: turbines and generators produce when the weather conditions are ideal rather than when the price is high.

However, the production of wind energy in Nordic countries is not the utopia it seems to be. For, despite the gain in equity, there is ultimately a loss of efficiency as per the first theorem of welfare economics. The distortionary subsidies cause a deadweight loss, faced by suppliers of alternate energies. The production of wind power in the Nordic countries has opened an array of challenges for industries like hydropower, nuclear and thermal energy. The entry of wind power ensures losses for existing producers of alternative energy sources alongside high governmental costs to subsidize the transition. With a 5% share of annual consumption, the entry of wind power eliminates 20% of the electricity market revenues. With a 10% market share, revenues for producers decline by more than 30%. This has caused a decline in revenue by nearly 3 billion euros per year  for alternative energy producers as the energy is being substituted by wind energy. Current wind power in the market has lowered prices by about 20 percent, leading to a direct hydro technology loss of the same magnitude. However, this is not the case only for hydroelectricity, the entry of wind power has caused nuclear and thermal energy power units to lose nearly 70% of their revenue

Despite causing private losses it is an exceptional move for the market. The introduction of wind power into the electricity grid has meant that citizens in Nordic countries are able to consume more electricity for a cheaper price and sustainable alternative to fossil fuels. This was exemplified by Iceland wherein it produced only 6.15 metric tons of carbon emission per capita while being extremely energy intensive and only costing $0.13 per kWh. When this is compared to other countries with similar energy consumption the numbers look very different. In the US, the carbon emissions per capita is 15.50 metric tons and costing $0.16 per kWh. We further know that when an economy undergoes structural changes such as a change in the production of energy, it causes structural unemployment and sufferance of previous industries short term. However, in the long term the economy will stablise as newly redundant resources are redirected to the production of wind power, creating job opportunities and prosperity. 

In conclusion, even though there has been a huge transition to wind energy due to it being cheap, abundant, an indigenous resource and an alternative to fossil fuels, it has had its negative impacts on the economy and the government budget. Despite the socio-economic gain for consumers, the loss of efficiency due to distortionary transfers through government expenditure leaves a question of balancing efficiency and equity. Although in the short run it causes an array of hassles, the benefit it provides in the long run is outweighed by these costs.  

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

Image: Unsplash

References:

  1. Möllerström, E., 2021. Wind Turbines from the Swedish Wind Energy Program and the Subsequent Commercialization Attempts – A Historical Review.
  2. European Wind Energy Association, 2009. The economics of wind energy. EWEA.
  3. Liski, M. and Vehvilainen, I., 2016. The impact of renewable energy on the Nordic electricity market. [online] Energiforskmedia.blob.core.windows.net. Available at: <https://energiforskmedia.blob.core.windows.net/media/21804/the-impact-of-renewable-energy-on-the-nordic-electricity-market-energiforskrapport-2016-319.pdf&gt;
  4. UN Climate Change Conference (COP26) at the SEC – Glasgow 2021. 2021. COP26 Goals – UN Climate Change Conference (COP26) at the SEC – Glasgow 2021. [online] Available at: <https://ukcop26.org/cop26-goals/>&nbsp;
  5. GlobalPetrolPrices.com. 2021. Iceland electricity prices, December 2020 | GlobalPetrolPrices.com. [online] Available at: <https://www.globalpetrolprices.com/Iceland/electricity_prices/>&nbsp;
  6. Montel. 2021. ANALYSIS: Nordic wind power growth takes off | Montel. [online] Available at: <https://www.montelnews.com/en/news/947779/analysis-nordic-wind-power-growth-takes-off&gt;

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