The Short-Term Price Elasticity, Temperature Elasticity, and Wind Speed Elasticity of Electricity: A Case Study from Norway

Abstract

Energy production using hydropower has a 150-year history in Norway. High mountains, lots of rain, and a well-developed technology laid the foundation for low and stable electricity prices. The Norwegian electricity market is unique and different from any other country. Nearly all electricity produced (98.3 percent) comes from renewable energy sources and 75 percent of the energy used for heating is electricity. From autumn 2020, major changes have been observed in the electricity market in Norway. In 2021, Norway opened two transmission cables, one to Germany and one to England. Both cables have a capacity of 1400 MW. The average price per MWh was NOK 263 in southern Norway in the period 2013–2020, which more than quadrupled to NOK 1192 per MWh in the period 2021–2023. We have investigated how the market reacted to the large price increase. We found that price elasticity is low even when the price is very high. It is the temperature that controls the consumption. When it is cold—below zero degrees Celcius—the temperature elasticity is close to zero; the temperature elasticity is not constant. When the temperature is above zero, the temperature elasticity is about −0.7. Price variations or changes in wind speed only lead to minor adjustments in electricity consumption. It is the variations in temperature that result in the observable fluctuations in electricity consumption. Since Norway exports electricity to Sweden, Denmark, Finland, Germany, the Netherlands, and England, knowledge of the Norwegian electricity market is relevant for many market participants. The Norwegian electricity market differs from those in other countries. Therefore, there is a risk that conclusions drawn about the Norwegian electricity market based on research conducted in other countries may be incorrect or inaccurate. Our contribution with this case study is to deepen the knowledge of how the electricity market in Norway operates.