On 18 October 2022, Ulf Kristersson (M) outlined his administration’s Statement of Government Policy in the Riksdag. He made ending gang violence his top priority, second place was given to seeing off the impending recession, and then he said his third priority was to get Sweden “out of the energy crisis in order to reach our climate goals and return reasonable electricity prices to the Swedish people.” If Kristersson was wondering how this would be received, he barely had a chance to finish his speech before protests and indignation began from what seemed like a 360° array of stakeholders. What then should be made of the Kristersson Government’s energy and climate policies?

Arguably, it should not have been a big surprise that a Kristersson Government would make radical changes to Sweden’s energy policy. The Sweden Democrats (SD), Moderates (M), Christian Democrats (KD) and the Liberals (L) all campaigned independently – and were elected – on a platform of reinstituting nuclear power. And nuclear power has the advantage of being both zero (or at least low, on a life-cycle basis) carbon, and despatchable. Many industry experts and even environmentalists see that nuclear has a role in the energy system of the future. What was less certain was what the new Government’s attitude would be to wind energy. On the one hand, the Christian Democrats had been strong in their rhetoric against wind, or at least against the presumption that wind should be the go-to energy source for Sweden’s future. The party’s Facebook page included a post that said “…No one should be forced into wind power… We Christian Democrats protect a … predictable electricity production that meets the climate challenge, that does not destroy our industry or household electricity prices. It can happen without the Green Party’s endless steel forests of wind turbines.” 

But what was surprising about the Tidö Agreement (TA) was that it went further than allowing municipalities the right of veto within their district and defunded the expansion of wind power offshore, out of sight, or at least with a much diminished impact on citizens’ vistas. How should this be interpreted? And does it mean that in codifying policies in the TA that the parties have stepped over the line from election rhetoric towards policies driven by sentiment and ideology? Ebba Busch says not. But the Kristersson Government has produced scant details for what will power Sweden in the decade+ that the country needs to wait until nuclear power can be built.

The Tidö Agreement and energy

What then does TA have to say about Sweden’s energy policy and climate? The goal is clearly described, as “to restore the electricity system so that people and companies receive stable and low electricity prices and to reduce emissions by increasing the efficiency of the transition.“ It sets out the process to do so via a number of points;

1. Conditions for investments in new nuclear power

The conditions for investments in nuclear power must be strengthened through special government credit guarantees amounting to SEK 400 billion 

2. Investigate the restart of planned electricity production in southern Sweden

A thorough investigation of what would be required for the restart of Ringhals 1 and 2 should be carried out unconditionally and quickly

3. New energy policy goal

The energy policy goal is changed from 100% “renewable” to 100% “fossil-free” [meaning that nuclear is explicitly included in meeting this goal]

4. New rules for the electricity market

A new investigation into the design of the electricity market is added with the task of developing proposals aimed at ensuring that all power types have equal rules of the game as well as a system where support services required for a well-functioning electricity system are priced. [meaning that despatchable sources of electricity achieve a premium to reward their contribution to grid stability]

5. Management of authorities, government works and new research direction

Vattenfall should immediately start planning new nuclear power at Ringhals and other suitable locations. New management of Vattenfall, i.a. through a new cabinet group, with the participation of civil servants, who are tasked with steering Vattenfall in a direction towards becoming a leader in the development of planable, fossil-free electricity production, with e.g. directive for the procurement of new nuclear power. The management of Vattenfall must take place according to the usual principles for the state’s ownership management.

6. Legislative changes for new nuclear power

Legislative changes to enable new nuclear power. The prohibitions in the environmental code to allow new reactors in other locations than today and have more than ten simultaneously in operation are removed. The ban on restarting closed reactors must be removed. Necessary regulations must be urgently developed to create the conditions for small modular reactors (SMRs) to be able to be built and used in Sweden. Shorter permit process and fast track for new nuclear power.

7. Better conditions for cogeneration
8. Better conditions for hydropower
9. Wind power

Wind power has an important place in the energy mix, but must be built on competitively neutral terms and with consideration for the environment and local interests. All new electricity production that strengthens the power system, and that contributes to a rapid expansion of the power system, is needed. The plan to have the electricity grid collectively subsidise the offshore wind power grid connections is stopped. The principle that whoever connects to the electricity grid must bear the costs caused by the connection must also be maintained at sea. [Svenska Kraftnät estimates the cost of the connections to be 30-42 billion to connect 40 TWh of offshore production, corresponding to a quarter of the current annual production.]

10. Solar energy

Within the framework of energy research, funds are set aside to develop methods to recycle spent solar cells

11. Energy efficiency 

Proposals that during a transition period give households extra incentive to reduce their electricity consumption should be investigated and developed

12. High cost protection, support for energy saving and reduced electricity prices

High-cost protection for affected households and businesses as soon as practicable – with retroactive payment. The expansion of exporting electric cables, for example Hansa Powerbridge, should be paused until the price differences between the price areas have decreased significantly. The goal should be to create a better balance between electricity production and electricity use in different parts of Sweden, in order to thereby provide the conditions for more stable and lower electricity prices so that in the long term and after investigation, Sweden can become a unified electricity price area.

Multiparty negotiations make challenging external communications

One inference that may be drawn when analysing TA is that it was put together without much of an eye for how messages would be received externally. Possibly, this could be due to negotiations over the wording being agreed hurriedly, due to the time pressure to get an agreement within the time allotted  by the Speaker. This is especially the case when it comes to the obvious mismatch between nuclear, which is given extra incentives and other forms of assistance, whereas renewables must compete on competitively neutral terms. 

Point 5, referring to the governance of Vattenfall, also attracts attention. As the final sentence in this paragraph implies, there are usual principles for state ownership of companies, and Vattenfall has operated with its own Board that has been quite outspoken about the company’s view of the commercial attractiveness of nuclear energy. Not only does the company say that it is simply infeasible to restart Ringhals 1 & 2, but one member of the Board is openly hostile to nuclear energy, on the grounds that it makes little commercial sense. Therefore, the assumption must be that a new Board must be put in place that can be trusted to deliver the Government’s instructions. The need for civil servants to help administer the company is also unusual. Possibly this is to ensure that the Government has visibility into the internal decisions being made by Vattenfall.

Point 12 has a nationalistic theme. Sweden is currently the biggest exporter of power in Europe. This comes at a time when European solutions are being called for that enable more network capacity to move energy from where it is available to areas that are suffering shortages, halting the Hansa Powerbridge from Sweden to Germany means that the power will be available at a lower price for Swedish households and industry. Meanwhile, the 4 price areas within Sweden were established to create economic incentives to build power generation and transmission where it was needed. Unifying the price areas therefore removes that system, but with the benefit of being able to demonstrate to the electorate that Swedes are benefiting from Swedish energy.

Stakeholder responses to the Tidö Agreement: Dismal

Industry stakeholder responses, or at least those communicated in Sweden’s main papers have been largely negative. Amongst the critique from experts were;

• Daniel Gustafsson, Head of the Power System department at Svenska Kraftnät: “The economic deterioration combined with the uncertainty that such a large and sudden change in the rules of the game would create among investors means that many of the planned offshore wind projects will probably not come to fruition.”
• Jesper Kühn Olesen, Project Director at Ørsted: “All countries with a coastline are looking at how offshore wind can become an important part of the energy mix. Sweden questions whether they want to be part of that journey.” … “We must have stable frameworks. This raises the question of which direction Sweden wants to take, and what should happen here and now. And we as developers and investors are left with uncertainty.”
• Anna Borg, CEO of Vattenfall: The company’s multibillion-dollar project at Krieger’s flat could be in danger if the grid expansion is halted. The project, with an expected annual production of around 2.6 TWh, received permission from the Government almost six months ago, but no investment decision has yet been made. “It naturally increases the cost of that project, so we have to look at how it works.”
• Tomas Kåberger, Professor of Industrial Energy Policy at Chalmers University of Technology, and also sitting on Vattenfall’s board, as well as being one of the drivers of the electricity market reform in the 1990s: “I simply don’t think they understand what they are writing.” Asked whether he sees a risk that the state may incur large costs through Vattenfall, which will not appear in the budget? “Yes, that is the point of those writings. If Vattenfall does unprofitable things because someone decides to do so, not as much money will come into the treasury.” [the Government has the ability to avoid costs in the State budget, by directing Vattenfall to take sub-economic decisions] 

The offshore wind industry and the energy market are complaining about three fundamental issues. Firstly, there is a general frustration that after some years of lobbying, the previous government created a system that incentives wind developers, and the new government is changing the rules of the game, as the industry is approaching their final investment decisions. Whatever any new system brought in to replace it, the industry faces delay and uncertainty. Secondly, some question whether large investments into offshore wind will be made, given that private investors would not be getting assistance from the state in terms of grid connections. Thirdly, and perhaps most ominously for the Government, Kåberger, one of Sweden’s leading energy market authorities, apparently questions both their competence and fidelity. 

With that said, it may be unsurprising that the wind industry is against changes that reduce public subsidies to their industry. Nevertheless, it is challenging to identify stakeholders who are in favour of the changes. Vattenfall has both nuclear and renewables production, and is cool to being told to invest in nuclear. Its CEO, Anna Borg, notes dryly that the company is “initiating a feasibility study looking at the conditions for building at least two small modular reactors … Knowing this we can’t afford to exclude any fossil free options. Look forward to see the outcome of this study” Meanwhile Kåberger, who is on the Board, dismisses the proposal to build more nuclear power as “financially hopeless”.

One positive comment came from the owner of the old Barsebäck nuclear plant, which is being demolished. CEO Åsa Carlsson says that “There are positive signals coming from the new Government”. Also, the CEO of OX2, a wind power developer, says that he “sees no threat whatsoever,” from the new policy.  

Further reforms proposed for the fuels market

Nine days after the Tidö Agreement was announced, the Government proposed that it would make, via the budget, a small 80 öre/litre reduction in the fuel tax in 2023, and in 2024 for a massive relaxation of the “reductions obligation” (Sw. reduktionsplikt). from the current targets of 7.8% for gasoline and 30.5% for diesel to the EU minimum of 6%. This is expected to have huge savings for motorists, reducing the price of petrol and diesel by 6.50 and 10 kronor per litre. Undoubtedly, this policy will find support from millions of motorists, especially those in country areas with long distances to commute. However, it has been met with fierce opposition from climate groups. A report published by WWF, ClimateView and the Swedish Society for Nature Conservation amongst others says “The new Government’s climate measures could increase greenhouse gas emissions by up to 25 million tonnes during the mandate period, compared to the current climate policy.” And it was the fuels policy that led to the comparison to Hungary in the introduction, with Mikael Carlsson also saying “It’s so extremely bad, I don’t know if it’s possible to be that bad.”

The Government is having none of this. Newly appointed Minister for the Environment, Romina Pourmokhtari (L), stressed that the Government had not lowered any ambitions about the Riksdag’s proposal to reduce emissions from transport. “We have not lowered any ambitions. We will work very hard to see what small measures we can take to get both industry and people to change at the pace we want.”

The Holy Trinity of energy choices gets a fourth amigo: Timeliness

Two decades ago choices about power sources were generally made based simply on local economics and with the assumption that the solution would be reliable. Consumers wanted to be able to turn the lights on as they wanted, and industry wanted cheap power. As consciousness about global warming has increased, the need for low carbon energy sources has grown dramatically, and as the main incremental sources of renewables are wind and solar, which both suffer from being dependent on the weather, the energy industry has thought of the solution set as a Holy Trinity – trade-offs need to be made between costs, the drive for zero carbon and reliability. Until quite recently, relatively little attention has been given to how long it takes to build new power generation. In Sweden, that changed about two years ago, when it became clear that massive new green industries were keen to establish themselves in Sweden, and the country needed to think through how to build sufficient energy to power this green industry. 

The Löfven and Andersson administrations were working through this issue. But the Ukraine war underlined the issue of the timeline to build different sources of energy, when, almost overnight, Russian gas was shut off (quite literally overnight, when the Nord Stream pipelines were destroyed). Suddenly, Sweden, like the rest of Europe, found that it needed to build new power urgently. Now choices become much harder, as four independent parameters needed to be managed. Illustratively, the right side fought the election on the basis that it would introduce nuclear energy to solve Sweden’s power needs. This was apparently part of their success in winning an extremely tight contest. What the electorate (arguably) failed to fully appreciate during the campaign was that the timeline for nuclear power would do nothing to resolve Sweden’s current predicaments of high prices and the risk of shortages. 

Is nuclear energy cheap?

Older generations of Swedes have tended to think fondly of their nuclear plants. It is certainly true that for decades Sweden had stable supplies of cheap and plentiful power at a time when the majority of the grid’s needs were served by nuclear and hydro. This generation of Swedish nuclear plants built in the 1970s and 80s were built by the state and the capital costs were largely depreciated. Additionally, the costs of nuclear plants have risen significantly since Sweden last built one. The question of what it would cost to build a new nuclear plant in Scandinavia today was recently considered by Aalborg University in Denmark. The study looked at the 3 nuclear plants built most recently in Europe – Hinkley Point C in the UK, Olkiluoto 3 in Finland and Flamanville 3 in France, and found that today’s costs for building and operating over the lifetime of the plant were 70-80 EUR/MW. In comparison, the same study cited that offshore wind can be built for 45-50 EUR/MWh. In other words, nuclear power was found to be 55-60% more expensive than building offshore wind.

How much new power does Sweden need?

Sweden’s power demand has been relatively stable over the last 20 years. But, according to the long-term market analysis by Svenska Kraftnät this is poised to change dramatically. The report published in May last year wrote that “estimates for the annual average demand vary between 180-225 TWh of electricity including losses, thus a large increase compared to today’s approximately 140 TWh. At the same time, new investments are regularly introduced, which often mean an even greater need for fossil-free electricity. In November 2020, for example, LKAB presented a plan to change its operations over a 20-year period to produce carbon dioxide-free so-called sponge iron instead of iron ore pellets. The investment is estimated to result in increased electricity use of 55 TWh, of which 12 TWh corresponds to the electricity demand for SSAB, which is included in the roadmaps … [And] H2 Green Steel plans to invest SEK 25 billion in a plant for the production of fossil-free steel with an estimated electricity demand of 12 TWh per year from 2026. There are several uncertainty factors regarding future electricity demand …”

Again, to put it simply, demand is ready to explode. But that will not happen if industry does not find new power production that commits to supply green factories. In the short term, Sweden will survive because it exports around 30TWh p.a., but as new domestic sources of demand are added exports will decrease and the market price will increase. A supply crunch looks inevitable.

Market validation

In order to better understand the reality of energy development, Mundus spoke with Christophe Desplats-Redier, Regional Director Europe at NEOEN, a French independent power producer of exclusively renewable energy (onshore wind, solar and battery storage). His comments add insight into the decision-making process of energy developers and also recent market dynamics;

• The economics of onshore wind are marginal. Today a project taken to Final Investment Decision might show an IRR of 6-9%. Given the risks involved in project development, including that it takes 5 to 7 years to develop (before the construction starts), this makes it challenging to get new projects approved.
• Development economics for renewables have deteriorated significantly over the last 18 months due to the inflation of project costs by 30-50%, and with interest rates rising for project financing from around 3% to 6%. While the spot and shorter-term maturities for power prices have increased dramatically [hence the political debate about renewable windfall taxes], expectations for long-term prices are not that high.
• NEOEN does not develop offshore wind, so while it was challenging to comment specifically, it understands that it takes around 10 years to develop offshore wind projects, and they come with technological and political risks.
• Solar is increasingly attractive. Solar can be developed with a LCOE (Levelized Cost Of Energy) reaching grid parity in southern Sweden. The economics of solar are currently lower than wind. However, projects are less risky, taking just 2-4 years to complete development. Given expectations for falling PV and development pricing, returns on solar plants are expected to improve.
• If the Government decides to decommission nuclear production in Sweden, as planned, then the next few years will be challenging in terms of supply and demand.
• Desplats-Redier’s view is that the Swedish Government should be more active in helping the permitting process in general for wind and solar which are technologies that will bring energy the quickest. Large scale solar is very interesting as it is generally produced in the south of the country (SE3 and SE4) which is where most of the consumption is in Sweden, it is very complementary to wind energy as production happens mostly in summer (versus in winter for wind) and with less visual impact. 

Comment

The issues of energy and climate are almost infinitely complex, as supply, demand, economic trends and geopolitics interact, making an analysis like playing three dimensional chess. Nonetheless, Mundus does believe that conclusions can be drawn. 

It starts with the right block’s nuclear conviction, which seems to be based partly in ideology and partly in politics, in that this was an easy story to sell to the Swedish electorate. True, nuclear is plannable, and a number of other countries are also starting nuclear programs. However, given the higher costs and the expected timeline for completion of 10-20 years, whatever issues that Sweden faces today with high prices and intermittency will have been resolved by the time that the nuclear plants are commissioned. Perhaps this will be by industry having located elsewhere in the world.

Secondly, and because of this, the Government appears not to have fully understood yet its need for wind energy to cover the gap. It can be assumed that the senior politicians understand that Sweden has a large amount of exports that can provide a buffer if renewables are not built at a sufficient rate to supply new industries that want to develop in the short term. This is probably captured in Kristersson’s statement that his philosophy will be robust and “stand-up for Swedish interests”.  

For the medium term Sweden must build urgently if it wishes to show to the world that its contribution to climate change is by being a country-sized incubator for clean technologies. One might speculate that the energy parts of the TA were driven by election promises and the dynamics of closing a deal to govern in just a few weeks. With many other elements to land, it could also be that the leaders’ understanding of project economics for renewables were not up-to-date with the deterioration caused by capital cost inflation and higher interest rates. If this was the case, then it would explain the decision to make wind compete on neutral terms. Some projects may go ahead anyway, but not as many, and with further delays. So, it is likely that there are already conversations between politicians, the ministries and industry seeking to clarify the facts and negotiate a new settlement that delivers wind energy. 

The decision to reduce the reduktionsplikt to EU minimums will clearly resonate with motorists, and should also help with inflation. But, this comes at the cost of an inevitable failure to meet Sweden’s 2030 climate goals. Probably it will be argued that the goals need to be changed. That Environment Minister Pourmokhtari explains her Government’s policies as “work very hard to see what small measures we can take” is curious. It does little to deflect the outrage and the accusations from concerned Swedes that the country will be damaging its international reputation.

More broadly, the Government has had a poor start at managing energy politics, offsiding green groups, economists and parts of industry. That said, there are elements of its ideas that can make sense. Reduktionsplikt stood out as a policy with only one benefit – that of meeting the climate goals. It was a bespoke Swedish solution that has not yet resulted in any Swedish biorefineries being built, and took the country into a policy cul-de-sac with a unique biofuels solution which Europe frowned upon. The idea to incorporate the Environment Ministry into Energy and Industry can help to streamline project development. And, while the new super-minister for this Ministry, Ebba Busch has not yet identified how she will ensure that Sweden reaches its environmental goals at a reasonable cost, she will now have the resources of government available to her, and says she is open that Sweden should have more wind. And perhaps, given that solar is less politicised, the Government can find ways to speed up development to supply southern markets in 2-4 years.

It will be interesting times as the Government develops a plan for its energy and industry, while it manages conflicts caused by the very different philosophies of right-wing and the EU Presidency could make for further contentious decisions. This may require some adjustments for international observers used to a less confrontational Sweden.