Structural Changes

Norway opened its market to retail competition in 1991. To reduce transactions costs, a
system of profiling was used from the start for small consumers, so that they did not
need to buy expensive meters. Norway has a hydro-based market, with little intra-day
price variation, which reduces the likely difference in the costs allocated via a profile
and those that would be recorded by an hourly meter. Consumers face three types of
contract the traditional variable contract, which allows the retailer to change its prices
each month (if it wishes to do so); fixed-price contracts which hold prices constant for a
year or more, and a spot market contract which passes on the actual wholesale spot
price for the period. While some customers have switched supplier, others have
renegotiated their contract type while staying with their original supplier. This will have
given them a rate that they prefer to their previous rate, but a renegotiation should
probably be given less weight than a switch when measuring the customer reaction to
competition1
Before the restructuring, there are many vertically integrated utilities with right and
obligation to serve customers in their own service territory. When the reform was
launched, there were about 70 power-producing companies and 230 network owners in
the system. There was some vertical integration between power generation and the
1 A. Al-Sunaidy, R. Green. Electricity deregulation in OECD countries.

network, particularly at the regional and local levels, but many power producers were
not integrated. The largest of them, Statkraft, accounted for approximately one-third of
total generation. About 85 per cent of the electricity system was publicly owned by local,
regional and state-owned companies. The power production capacity of the energydimensioned hydro system in 1991 was approximately 108 TWh in a normal year, of
which the energy-intensive industries consumed approximately one-third. Annual
production could vary considerably from year to year because of the stochastic nature of
water inflow to the hydro system. On the consumption side, around 90 per cent of
power was sold on long-term contracts, defined as contracts for firm power. Those
contracts were negotiated individually and were predominantly bilateral,
nonstandardised contracts between buyers and sellers. Power producers were obliged to
deliver power within their concessionary areas and to cover their firm power contract
obligations through contracts with other power producers. However, the lack of an
organised secondhand market for contracts made most of the electricity market
inflexible. In addition, electricity prices and other contract terms were generally set by
administrative or political decree. For example, the basic price charged by the stateowned company Statkraft, known as the Statkraft price, was an element of the annual
regulation of the company determined by the Norwegian Parliament. The Statkraft price
functioned as a price signal to the rest of the market.

Because of the nature of hydropower production, a market for occasional or

interruptible power developed. In 1972, this market was formally organised as a spot
market in a power exchange, or pool, among the power producers, known as
Samkjringen.
Spot market transactions were carried out at a market-clearing price on an hourly basis
determined by bids sent in by the generators to the power pool based on expected
demand and supply schedules. This wholesale, producer-based spot market,
comprising approximately the remaining 10 per cent of annual power production, met
its objectives efficiently. The market is interesting as a forerunner to the design of the
organised market system produced by Norwegian electricity market reform. In addition,
for almost 20 years before market reform took place in 1991, it represented a training
ground for market participants in marketbased transactions. Thus, because of the
market experience gained from the spot market for occasional power, the learning-bydoing curve for market-based operations was not as steep in Norway as in most other
countries that implemented power market liberalisation.
The market was, in principle, open immediately to all potential buyers. Small consumers
had to pay a relatively high access fee when changing contracts in the first four or five
years. Initially, the market was organised as a separate legal entity within the
transmission company, Statnett, and was termed the Statnett Market.

Common carriage principles requiring access to the network system on a transparent

and nondiscriminatory basis facilitated market-based trade. The dominant, state-owned
and vertically integrated company, Statkraft, was split vertically into two separate legal
entities: the generating company, Statkraft SF, and the transmission company, Statnett
SF. For the other vertically integrated power companies, companies were separated into
generating or trading divisions and network divisions for accounting purposes, but
were not split into companies with separate legal identities.
The network companies were subject to natural monopoly regulations designed to
achieve economic efficiency in network operations. The regulatory regime was
administered and enforced by the sector-specific regulator, the Norwegian Water
Resources and Energy Directorate (NVE), on the basis of rate-of-return regulation. In
1997, income-frame regulations were introduced instead. 2
The market liberalisation reform was implemented without changes in ownership,
because the privatisation of the power sector was politically unacceptable. Despite the
large number of players, there is evidence that generators exercise market power when
transmission constraints result in smaller, more concentrated markets (Johnsen et al.,
1999). The fragmented nature of the industry prerestructuring obstructed least-cost

2 Torstein Bye and Einar Hope. Deregulation of electricity marketsThe Norwegian experience

planning and resulted in high price dispersion throughout the country. The transparent
generation market appears to have reduced that price dispersion (Newbery, 1999).
There has been minimal development of new generation capacity, due in part to more
rigid environmental standards and also to investor uncertainty.
Reduced excess capacity, transmission constraints and connection to other Scandinavian
markets with higher-cost thermal and nuclear generation have resulted in higher
electricity prices (Johnsen et al., 1999). However, that in Norway, higher prices and
reduced excess capacity was both anticipated and encouraged by the government.3
Customer Choice
After liberalization households can choose between different contracts with different
risk profiles. The most common supply contracts offered to Nordic household are: the
default (standard) contract where the supplier may adjust the contract price when he
finds that appropriate, for instance following changes in supply costs; the market based
contract where the price directly reflects the Nord Pool day-ahead spot price plus a
margin or some other kind of commission; and the fixed price contract where there is a

3 Chi-Keung Woo, Debra Lloyd and Asher Tishlerd. Electricity market reform failures: UK, Norway, Alberta and
California

fixed price for an agreed period of time, most often one to three years but sometimes
even longer.4
Complaints that incumbent retailers levied unreasonably high fees on consumer who
wanted to switch to a different retailer, or delayed the switching process unduly, lead to
a series of regulatory measures. Switching fees were first capped in 1992. In 1997,
switching fees were abolished altogether, implying that consumers do not incur any
direct pecuniary costs of switching retailer. Initially, consumers could switch retailer at
the end of each quarter only; from 1998, consumers could switch retailer whenever they
wanted. Retailers and distribution companies were allowed a maximum of two weeks to
process a switch. In 1998, a revised system of profiling consumers not on hourly meters
was introduced. From the same time, data exchange between retailers and distributors
had to be performed electronically (distribution companies are responsible for
metering). The fee that retailers have to pay distributors for these and other services is
capped. Although structural unbundling between distribution and retailing is generally
not required, regulations mandate non-discrimination of retailers. Regulations that
required separation of accounts between competitive (retail, wholesale and generation)
and monopoly (transmission and distribution) elements of the business were however
introduced. These have later been strengthened. Retail tariffs were never been subject to
4 Nils-Henrik M. Von Der Fehr And Petter Vegard Hansen. Electricity Retailing In Norway.
http://idei.fr/doc/conf/eem/papers_2008/vonderfehr.pdf

explicit price regulation. In 2005, the government considered a proposal to require

separate billing of retail and distribution charges thereby removing a potential
competitive advantage of incumbent retailers (who are the only ones that can offer
single billing) but eventually decided against it; invoices must however be in a
standardised format.5

5 Tor Arnt Johnsenb and Ole Jess Olsen Roskilde. The relationship between wholesale and retail electricity prices to
households in the Nordic countries. http://www.vaasaemg.com/pdf/Johnsen-Olsen.pdf