Resource rents in Norwegian Hydropower

Since the beginning of the 1990s, there have been major changes in the regulatory framework for the Norwegian electricity sector. The home market was deregulated in 1991, which presumably meant that power companies shifted their focus away from security of supply to profitability. Furthermore, Norway, Sweden, Finland and Denmark formed a common power exchange. Norway has also built (and plans to build) more direct transmission cables to the continent. Electricity prices in Norway will thus be more closely linked to market conditions in the rest of Europe.

Because the power sector in Norway is mainly based on hydropower - a natural resource - the earnings in the sector could be significantly higher than the costs. This added value is called resource rents. Resource rents can in principle be taxed by the government, and used for other good causes without impeding efficiency. In this report we look at developments in resource rents in the Norwegian power sector during the period 1984 to 2013 in light of the major changes in the regulatory framework for the electricity sector. Moreover, we try to predict what will happen with the resource rents in the medium to longer term.

Resource rents rose sharply around 2000, and have since remained at a significantly higher level than in the 1990s. Our figures show that it is particularly the increased electricity prices which have driven the increase in resource rents. Prices depend today largely on what happens in Europe, especially the price of other energy sources such as coal and the price on emission allowances for greenhouse gases. There have also been increases in productivity in the power sector from around 1990, which may be due to the market deregulation in 1991. To the extent that productivity growth continues, it will increase resource rents further, but historically the effect seems to be small compared to the impact of increased electricity prices.

By comparing the rates of return on capital for different sectors in Norway, we also note that apparently there is little negative correlation between the rate of return in the industry and the rate of return in the power sector despite electricity being a vital input to many Norwegian industries. From 2000 to 2008, both sectors experienced rising and eventually, very high returns. It is also the case that the return to capital in the power sector has less variance than the return to capital in the industry, which indicates that the risk is higher in manufacturing than in the power sector.

Power prices, and thus resource rents, declined significantly in 2012. In the short to medium term, it does not appear that electricity prices will rise again due to several factors; rapid development of new renewable energy, low prices for coal and low quota prices in the EU ETS. In the longer term, however, we expect that electricity prices will rise again. We justify this with the EU target of 43 per cent reduction of green house gas emissions in the EU ETS from 1990 levels by 2030, which will have to lead to significantly higher prices of emissions in the EU.