Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1412: Geographic Price Granularity and Investments in Wind Power: Evidence From a Swedish Electricity Market Splitting Reform

Erik Lundin ()
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Erik Lundin: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden

Abstract: I evaluate the effect of the 2011 Swedish electricity market splitting reform on the allocation of wind power, exploiting a unique data set of all Swedish applications for wind power since 2003. By comparing investments in each price zone before and after the reform using a difference-in-differences (DiD) estimator, I find that 18 percent of all projects constructed by large firms after the reform were allocated to the high price zone due to the reform. This effect is not driven by geographic differences in approval rates, suggesting that the estimated effect also reflects investor preferences.

Small, sometimes locally owned firms, did not react to the reform. A likely reason is that the locational choice set of small firms usually only include one of the price zones. A triple differences estimator using small firms as a control group, and a nearest neighbor matching estimator comparing areas with similar prerequisites for wind power, largely confirm the main DiD results. However, due to the comparatively few applications submitted prior to the announcement of the reform, the parallel trends assumption cannot be entirely verified, suggesting that results should be interpreted with care.

Keywords: Electricity market design; Zonal market; Electricity market integration; Spatial price dispersion; Wind power; Wholesale electricity market; Nord Pool

JEL-codes: D22; D47; Q21; Q48

36 pages, October 25, 2021

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