Electricity suppliers are facing extensive investment challenges as a result of an increasing energy demand, ageing electricity-generation facilities and a political demand to steer away from fossil fuels.
Investments decisions to secure market power
Rönnborg studied the investment processes in the electricity industry and found that decisions are primarily based on the electricity companies’ interpretations of political signals, their beliefs about the future and the desire to maintain market power. Interestingly, this is in sharp contrast to how the companies see themselves; they generally feel they make rational decisions based on ‘long-term price trends’ and objective valuation of economic factors. However, the study shows that it is very difficult to assess investment opportunities in electricity-generating facilities and to forecast the electricity price. Rönnborg concludes that the decisions instead tend to be based on strategic assessments of the situation at hand and that such assessments are made based on perceptions rather than on objective facts.
The study also concludes that the consumers’ choices only marginally affect the electricity market’s power structure. In fact, the market has been divided into a consumer and a producer sub-market, and it is the latter that sets the standard for the market as a whole. In addition, the larger electricity companies have grown increasingly powerful.
Own interpretation of the concept of market
The electricity companies generally feel that the market works very well, that the pricing is effective and that the prices reflect supply and demand. At the same time, the study shows that the companies’ view of the ‘market’ is characterised by a technical norm system that includes a conviction that electricity production should be concentrated to large-scale facilities and that companies must be of a certain size to be able to survive.
‘The industry’s interpretation of the market concept needs to be challenged’, says Rönnborg and points out that the industry talks about the market logic but at the same time strives to maintain the status quo of the system.
What Rönnborg calls for in particular is considerably more owner responsibility:
‘It is largely up to the owners of the electricity companies to affect investment choices. They need to ask themselves whether the short-term profit-maximising objectives, which currently are used to justify their decisions, harmonise with long-term needs and goals’.
Title of the thesis: ‘The market will take care of that.’
Author: Petter Rönnborg, Department of Business Administration, School of Business, Economics and Law, University of Gothenburg