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Geographic Price Granularity and Investments in Wind Power: Evidence From a Swedish Electricity Market Splitting Reform

Erik Lundin ()

No 1412, Working Paper Series from Research Institute of Industrial Economics

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 (search for similar items in EconPapers)
JEL-codes: D22 D47 Q21 Q48 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2021-10-25
New Economics Papers: this item is included in nep-ene, nep-eur and nep-reg
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