In a recent commissioned report for the Swedish Competition Authority, Professor Jerker Holm at Lund University, argues that introducing price regulation in the District Heating market is risky, difficult and a challenging task. Professor Holm stresses that the ongoing political and legal work related to price regulation of District Heating in Sweden must be based on sound economic principles and regulatory caution.
The Government asked the Swedish Energy Markets Inspectorate to, with support from the Swedish Competition Authority, propose a model for regulation of future price increases on district heating. The Swedish Competition Authority contracted Jerker Holm at Lund University to summarize economic theories and empirical research of relevance for the task appointed to the Swedish Energy Markets Inspectorate. The report was published on February 1 and highlights that:
- The Swedish local district heating markets are significantly more complicated than a monopoly market with uniform pricing. The outcome of any type of regulation is therefore difficult to predict.
- Ramsey pricing (price discrimination) may be optimal to enhance welfare.
- A cap on price increases needs to be designed to handle the possibility for firms to charge excessive prices if the cap is set too high and how to deal with firms in financial problems if the cap is too low.
While the purpose of the regulation primarily is to increase the security of customers, the regulation may significantly increase uncertainty and risks for firms. Such an outcome could lead to reduced investments and higher cost levels long term.