4. Assessment of selected Swedish measures

Sweden has implemented two different electricity support schemes for households, amounting to a support level of approximately 65 billion SEK. The first support for households included the mid and southern parts of Sweden, covering the electricity areas SE3 and SE4 (Figure 3). Households were compensated for electricity consumption between October 2021–September 2022 by 0.5 SEK/kWh in SE3 and 0.79 SEK/kWh in SE4. The support was designed as a direct money transfer to individuals registered on an electricity distribution agreement and paid out in February 2023.

In the second support scheme, all four electricity areas were included, compensating for 80% of the consumption between November – December 2022. Households in SE1 and SE2 were compensated by 0.9 SEK/kWh, while households in SE3 and SE4 were compensated by 1.26 and 1.29 SEK/kWh respectively. For a majority of the consumers, the payments were administered in June 2023.

Figure 3 The four electricity areas in Sweden, SE1-SE4. Source: Fortum, 2023. https://www.fortum.se/privat/elavtal/elpriser/vara-fyra-elomraden

The first compensation scheme constituted a geographically targeted scheme design. However, the compensation was not targeted along other dimensions such as income. The support was not focused on targeting a specific group of consumers, and the reason for exclusion of SE1 and SE2 in the first round of support was the generally low electricity price in these areas throughout the first period. Price differences between electricity grid areas arise due to limited transmission capacity, or so called bottlenecks (Svenska Kraftnät, 2023). Compensation for each electricity area was calculated as the difference between a reference price of 0.75 SEK/kWh, and the average electricity price in the electricity grid area. In the first support scheme, the consumers received compensation based on 100% of the consumption, while in the second scheme, the consumers got compensation for 80% of the total electricity consumption (Regeringskansliet, 2023).

The two measures were consumption-based in their design, with households receiving a direct money transfer proportionate to the total electricity consumed during each period.

As the compensation was uniform in relation to the consumption, the measure’s distributional profile depends on whether specific socio-economic groups were affected differently. Prior to the energy crisis, Menyhert (2022) showed that medium and high-income households in Sweden spend a larger share of their disposable income on energy than the low-income households. A larger support in both absolute and relative terms was thus likely given to medium and high-income households. The recipient of the support varied, depending on the dwelling type. Households with their own electricity agreement (usually single-family houses) received support directly, while some households in owned apartments (housing cooperatives) or rental apartments received support indirectly or not at all. The reason is that, in some cases, the landlord or the housing cooperative were registered for the electricity distribution agreement and received the support. Low-income households live in rental apartments and housing cooperatives more frequently than the mid- and high-income households (Statistiska Centralbyrån, 2017).

Compared to the EU average, Sweden differs in terms of this distribution of energy expenditures between income groups. The EU average data shows a relatively larger share of housing related energy expenditures for low-income households than the high-income households. In terms of both electricity and housing-related energy use, the share of disposable income spent on electricity consumption is slightly larger for medium and high-income households (Figure 4).

Figure 4 The detailed breakdown of households’ 2015 energy expenditures by country and income quintile. The figures present representative country-specific averages of the structure of household expenditures. For each country, the left bar represents the 1st income quintile, the mid bar the 3rd quintile, and the right bar the 5th quintile. Source: (Menyhert, 2022)

Blake and Bulman (2022) showed that the generally increasing energy prices (between March 2021 – March 2022) disproportionally affected high-income households in several European countries, including Sweden. The ‘disproportionate’ impact refers, in this case, to the percentage increase in energy expenditures in proportion to the disposable income. This means that the compensation schemes for electricity in Sweden are expected to have a slightly regressive distributional profile, since high-income households benefit more from the support relative to their income, than low-income households. In absolute terms, the support favours individuals with high electricity consumption, which are generally high-income households. While the electricity support offers greater benefit to wealthier households which consume more energy, the low-income households are likely those who would need the support more. A recent study on perceived energy poverty shows a clear negative association between household income and whether households have experienced worry or anxiety related to the high energy prices, and whether they have had difficulty paying the energy bills (Holm et al., 2023). Correspondingly, it has been argued that the support should have been directed towards low-income households (Svenska Dagbladet, 2022).

The electricity support measures in Sweden were implemented after the corresponding compensation period. But the early implementation process was not completely transparent for consumers, neither in terms of the time frame, targeting, nor the size of the support. The goal of the measure when announced before winter 2022–2023, was to provide support for coming high winter prices, not to compensate for past high prices. But the Swedish government used the past consumption instead of current/future consumption to avoid problems with disincentivising energy savings. The measure can thus be argued to have been well implemented to avoid increases in electricity use, but not well implemented regarding transparency as consumers didn’t know whether the measure would reimburse retroactively or prospectively.

Potential confusion around the reimbursement period may have led recipients to believe that they would be compensated for their current consumption, and to thus increase their electricity consumption compared to a ‘no-measure’ situation. However, factors such as increased energy efficiency, a decreasing share of flat rate monitoring of electricity consumption, and outside temperature all have impacts on the observed electricity consumption, making it difficult to disentangle the effect of the support on consumption levels. If longer-term compensation schemes were to be implemented to compensate for high energy prices, and with a high degree of predictability in receiving the support, demand for electricity may increase, putting strain on energy infrastructure, and increasing greenhouse gas (and other) emissions.

The electricity support is a part of coordinated EU-measures to lower the energy bills for consumers. A common regulation for tackling the energy crisis was implemented in December 2022 to complement existing EU-initiatives and laws to secure energy provision throughout the union (European Council, 2023). The regulation focused on both measures to reduce the consumption of energy, and measures to decrease the price of electricity.

Financial support targeted towards consumers, counteracting the market price signals from other implemented policies, could be motivated by these parallel perspectives. Ensuring a just transition (see Eurofound, 2023) towards a low carbon economy is challenging, especially in times of external shocks such as post-covid effects and the present situation in Ukraine. Climate policies, such as the EU ETS are long-term policies, and are playing a role in driving up energy prices. We expect the supports to have impacts on the incentives created by other implemented policies at both a national and EU-level, but it can also ensure a just transition. From a just transition perspective, the measure should better focus on targeting economically vulnerable households and businesses in the short-term.

Sweden has also offered support to businesses and legal entities with electricity connections in grid areas SE3 and SE4, with maximum cap of €2 million per entity (equivalent to approximately 22 million SEK). The size of the electricity support, up to the cap, is determined by the consumption between October 2021 and September 2022.

Entities with electricity connections in grid area SE4 were eligible for 0.79 SEK/kWh during the specified period, while those in electricity grid area SE3 qualified for 0.50 SEK/kWh. It’s important to note that no electricity support was offered to businesses and legal entities with electricity connections in electricity grid areas SE1 and SE2. To qualify for the support, businesses and legal entities must have held a valid electricity grid agreement in SE3 and SE4 as of November 17, 2022. Any agreements made after this date were not eligible for electricity support for the respective connection point (Sveriges Riksdag, 2023). Additionally, it has been clarified, that the maximum cap of €2 million per company also applies to corporations that may consist of multiple legal entities. The application period for the electricity support opened the 30^th of May 2023 with an application deadline on 25^th of September 2023. At the time of this analysis, only some of the payments have been administered to the beneficiaries, with no data on actual payments available.

The design of the electricity support for businesses, like the support for households, does not consider income levels, size of company, or other socioeconomic aspects. However, the maximum cap of €2 million, and the exclusion of grid areas SE1 and SE2, makes the support more targeted in who it applies to. Large and electricity-intensive corporations will receive support for a smaller share of their total electricity costs. The two northern electricity grid areas were excluded from the compensation as electricity prices were relatively low in these areas during the compensation period.

As the support is currently being administered, we can say little about the actual distribution and distributional effects. We expect the support to benefit organisations that are vulnerable to volatile energy prices. However, for the most vulnerable, it is likely that the periods of high electricity prices have already had impacts (e.g. on liquidity and employment). The retroactive payment is administered almost two years after the beginning of the chosen reference period.

In terms of the environmental impacts of the electricity support for businesses, the reasoning does not differ substantially from what has been discussed for the household support. The environmental impact of the support depends on the extent to which the support has been predictable and affected the consumption behaviour of the beneficiaries. Our view is that both the household electricity support and the business electricity support in Sweden were implemented with a low degree of transparency and predictability. Throughout the reference period, the support had not yet been established and the transparency of the planned support was very low. We can say little about consumers’ expectations for the support, and to what extent these affected incentives to save energy throughout the reference period. However, the high level of uncertainty and low transparency should have kept expectations down. If that’s the case, incentives to save energy in the reference period should not have been affected much. This may have been one underlying purpose of the chosen reference period for compensation, as incentives for energy savings were little affected by eventual expectations. On the other hand, if expectations around additional future compensation schemes are affected by the support, incentives for saving energy may be altered in the wrong direction.

There is no major difference in the analysis and reasoning around coherence with existing policies between the support provided to households and that provided to businesses. From a second-best perspective, these measures can be motivated by the desire to ensure a just transition, as existing policies such as the ETS, renewable energy targets, etc., are playing a role in the high energy prices. However, if this type of compensation support is to be recurring and with a degree of predictability, we foresee that the incentives for energy savings, through distorted price signals, would impact incentives from other policies aimed at reducing the energy and electricity consumption among businesses.

The reduction mandate for fuels in Sweden is a long-term policy tool aimed at promoting the use of biofuels. This policy has multiple objectives, one of which is to help Sweden achieve a 70 percent reduction in greenhouse gas emissions from domestic transportation by 2030, compared to from 2010 levels(Swedish Environmental Protection Agency, 2023b). Those responsible for fuels subject to the reduction obligation must ensure that these fuels contribute to a specific reduction in their climate impact. This is achieved by gradually increasing the inclusion of biofuels.

Regarding the reduction share provided by renewable fuels, as of 1st January 2022, gasoline must have a 6% reduction in GHG-emissions by increased mixing of renewable fuels, while diesel fuel must achieve a 26% reduction. The long-term emission reduction target from gasoline and diesel use is 28% and 66% respectively by 2030. The compensation measure relaxed these targets, and instead keep them unchanged for gasoline and diesel through 2023. Additionally, there is a political agreement to lower the reduction mandates for gasoline and diesel to 6% from 1st January 2024, through 2026. For aviation kerosene, the reduction level is set at 2.6% for the year 2023. To determine compliance with the reduction mandate, the climate impact of a particular fuel is compared to that of a completely fossil-based equivalent. This assessment considers the climate impacts of all components (both fossil and renewable) throughout the fuel's lifecycle, from production to consumption (Swedish Energy Agency, 2023).

A reduced reduction mandate is expected to impact the fuel price within transport. Mixing of biofuels is generally more expensive than the fossil-based fuels, and a reduction of the mandates therefore should lower the end-user price. In Sweden, the pausing of the reduction mandates means that the biofuel share is held constant in the mix. The main purpose of the pause has been to avoid further price increases due to reduction mandates throughout 2023. Further, the agreement to reduce mandates from 2024 is expected to lower the price of fuels in the future.

Households with a large consumption of transport fuel benefit most from the avoided further price increases. The average driving distance is significantly higher in rural than urban communities in Sweden (Konjukturinstitutet, 2023; Gröna Mobilister, 2019). As Figure 4 shows, mid and high-income households spend a larger share of their disposable income on transportation-related energy use, including fuels (Menyhert, 2022). The pausing, and further reduction, of the mandates is expected to have regressive distributional impacts, providing larger benefits to mid- and high-income households. 

The environmental impact of biofuel mix is debated as there are limits to the global supply of biofuel (due to limitations in land availability, leading to both direct and indirect land use change) (Intergovernmental Panel on Climate Change, 2022). At the same time, we see increasing demand due to the wish to phase out fossil fuels (European Scientific Advisory Board on Climate Change, 2023). Furthermore, most climate change scenarios that reach a 1.5- or 2-degree global warming include an increased use of biofuels, while other studies have shown that increased biofuel demand can lead to higher carbon sequestration in productive forests (Favero et al., 2020). The climate change effect of increased bioenergy use will continue to be debated and is dependent on the bio-feedstock considered and the alternative replaced. Regardless, pausing the policy might lead to Sweden falling short of its commitments under agreements like the Paris Agreement. In addition, the pausing of the reduction obligation may perpetuate the reliance on fossil fuels for transportation, potentially slowing down the transition to more sustainable and renewable energy sources (Swedish Energy Agency, 2022). A secondary effect is that a decrease in demand for biofuels could lead to reduced incentives for investment in research, development, and implementation of sustainable biofuel technologies, hindering the advancement of alternative fuels.

With regard to climate policy, the reduction obligation for fuels is an instrument whereby the party targeted for a reduction mandated fuel must ensure to mix a certain share of biofuel into the fuel. The instrument is aimed at increasing the share of biofuels in transport fuels to reduce the environmental impact, and to stimulate the transition away from fossil-based fuels. It is an instrument/policy to help achieve the national reduction targets for transport. The pausing of the reduction mandates will slow down Sweden’s transition towards a fossil-free and low-carbon transport sector. We do not expect the pausing of the reduction mandates to directly interfere with existing EU-level or national policies to reduce greenhouse gas emissions. However, it is a reduction in ambition and may affect, among others, the incentive to invest in renewable energy sources and biofuels at a market level. This may also put pressure on the realisation of other policy measures in order to reduce greenhouse gas emissions.