Sweden’s Energy Paradox

Author: William Moulod

Rising Domestic Prices, Forced Exports, and Vattenfall’s Strategic Missteps

Sweden, a self-proclaimed leader in sustainable energy innovation, now faces a complex and costly energy dilemma. Domestic electricity prices are soaring, exports are surging, and taxpayers are left wondering why their investments are benefitting other nations instead of their own households. At the center of this story lies Vattenfall, Sweden’s state-owned utility, whose controversial decisions to shut down nuclear reactors have magnified the impact of flawed European energy policies.

This isn’t just a Swedish problem—it’s a wake-up call for Europe. As energy costs spiral and competitiveness dwindles, the continent faces setbacks that could undo decades of progress. Let’s break this down.

The Rise of Electricity Prices in Sweden

Over the past five years, electricity prices in Sweden have climbed significantly. Between January 2019 and December 2022, wholesale electricity prices fluctuated dramatically, peaking at around €200 per megawatt-hour in late 2022. Although prices have stabilized somewhat, they remain elevated compared to pre-2019 levels. For Swedish households, the burden is acute. By mid-2024, average household electricity prices, including taxes, had increased 11.6% year-over-year.

This surge isn’t solely due to production costs. Sweden’s participation in the interconnected European energy market ties its electricity prices to the marginal pricing system, where the highest-cost producer—often gas-fired plants in Germany—sets the market rate. For Swedish consumers, this means paying more for energy even though much of it is generated by cheaper, cleaner sources like hydro and nuclear.

Vattenfall’s Nuclear Shutdowns: A Pivotal Mistake

In 2019 and 2020, Vattenfall decommissioned two nuclear reactors, Ringhals 1 and 2. This decision, driven by arguments of unprofitability and political pressure to shift toward renewables, has proven short-sighted. Here’s why:

• Loss of Stable Energy Supply:
  Nuclear power, which provided consistent base-load energy, has been replaced with intermittent renewables like wind and solar. These sources, while clean, cannot fully meet demand without sufficient storage technology.

• Grid Bottlenecks:
  Southern Sweden, where demand is highest, has suffered from insufficient supply due to the reduced capacity of the nuclear plants and the north-south grid bottleneck, which limits the flow of northern hydropower.

• Higher Costs and Imports:
  The lost capacity has made southern Sweden reliant on electricity imports from Denmark and Germany—at prices inflated by their own reliance on fossil fuels.

Had Vattenfall invested in modernizing its nuclear reactors or extending their lifespans, Sweden could have avoided much of its current energy crisis. Instead, the closures created vulnerabilities that are now exploited by the dynamics of the European market.

The Burden of Forced Exports

Sweden’s electricity exports have surged in recent years, particularly to countries like Germany and Finland. In 2022 alone, Sweden exported approximately 17 TWh of electricity, generating $425 million in revenue from Germany alone. Yet, this export success comes at a cost.

• Why Are Exports Necessary?
  Sweden is part of the EU’s interconnected energy market, designed to ensure regional efficiency. This means electricity flows freely across borders based on supply and demand. When Germany, grappling with its nuclear phase-out and reliance on gas, needs power, Sweden is obligated to supply it.

• Who Pays the Price?
  Swedish electricity is often exported at rates lower than domestic production costs, even as Swedes face record-high electricity prices. This creates a paradox where Swedish taxpayers fund an energy grid that prioritizes the needs of other nations.

• Tied to Volatility:
  Sweden’s clean energy exports are priced according to the European market, which is driven by gas prices and geopolitical instability. Even as Sweden produces low-cost, renewable energy, its prices are dictated by fossil-fuel-dependent neighbors.

The European Energy Market: A Systemic Flaw

Sweden’s challenges are compounded by structural issues in the EU energy market:

1. Marginal Pricing System:
   Electricity prices across Europe are set by the highest-cost producer in the market. This means Sweden’s low-cost hydro and nuclear power is priced as if it were gas-generated electricity from Germany or Poland.

2. Inefficiency in Policy Coordination:
   Europe’s simultaneous push to phase out nuclear and reduce fossil fuels has created a gap in stable energy production. Sweden, with its relatively balanced energy mix, is now subsidizing the shortcomings of others.

3. Lack of Domestic Protections:
   EU regulations prevent Sweden from insulating its domestic market from regional price fluctuations, leaving Swedish consumers disproportionately burdened.

The Broader Implications: Europe Falling Behind

These energy policies aren’t just hurting Sweden—they’re undermining Europe’s global competitiveness:

• Skyrocketing Costs:
  Businesses across Sweden and Europe face higher production costs, driving some industries to relocate to regions with cheaper, more stable energy supplies.

• Innovation Stalled:
  Resources spent managing the energy crisis could have been directed toward developing advanced grid technologies or storage solutions.

• Strategic Vulnerabilities:
  Europe’s reliance on energy imports and its slow adoption of nuclear power have left it exposed to geopolitical shocks, as seen with the Russian gas crisis.

A Path Forward for Sweden and Europe

The situation is dire, but it’s not irreversible. Sweden can lead the way by addressing both domestic and regional challenges:

1. Reinvest in Nuclear:
   Sweden must reconsider nuclear power as a critical component of its energy mix. Reopening or building new reactors would provide stable, low-cost energy.

2. Reform the EU Energy Market:
   Sweden should advocate for changes to the marginal pricing system, ensuring countries with efficient, clean energy systems aren’t penalized by the inefficiencies of others.

3. Upgrade Infrastructure:
   Resolving the north-south grid bottleneck and investing in energy storage solutions would allow Sweden to better manage domestic demand and export surplus strategically.

4. Align Vattenfall with National Interests:
   As a state-owned utility, Vattenfall must prioritize the needs of Swedish taxpayers and consumers, not just its export revenues.

Conclusion: A Wake-Up Call for Energy Policy

Sweden’s energy paradox—a nation with abundant clean energy yet rising prices—serves as a cautionary tale for Europe. Vattenfall’s nuclear closures and the EU’s flawed energy market have created a perfect storm, leaving Swedish citizens and businesses to bear the brunt of policy missteps.

It’s time for Sweden to reclaim control of its energy future. By investing in nuclear, reforming market structures, and prioritizing domestic interests, Sweden can ensure its energy policies benefit its citizens first—without abandoning its role as a leader in Europe’s energy transition.