Electricity Delivery Contracts
Geographic Area: Sweden
Focal Question: Effectiveness of environmental labeling of electricity delivery contracts: A case study of Sweden.
(1) Kaberger, T. (2003). "Environmental labeling of electricity delivery contracts in Sweden." Energy Policy 31(7): 633-640.
L. Bodansky, Colby '06
The practice of labeling certain environmentally friendly products has been used extensively in many markets for some time, but only recently has it been used in the electricity market. In 1996 the Swedish Society for Nature Conservation (SSNC) first began operating a system of environmental labeling of electricity delivery contracts in Sweden, and since then the program has seen reasonable success both in the participation of electricity suppliers and Swedish consumers. The program gave electricity suppliers the right to state that the SSNC considered their electricity delivery contracts a good environmental choice so long as they met a list of criteria set by the SSNC.
Environmental labeling is only useful in competitive markets and the electricity market in Sweden became competitive in 1996. The electricity transmission grid is operated by the state-owned company Svenska Kraftnat, and this company is responsible for managing the system¹s voltage and frequency. Since 1996 individual electricity consumers have had the ability to sign contracts with any one of a large, although decreasing, number of suppliers. Internet services have been created which assist consumers in reviewing the market and choosing from among the suppliers so as to get the lowest price and best service.
Swedish consumers have shown support for environmental labeling programs for other products for some time, most notably in regards to paper production using less chlorine and laundry detergents without fillers and dangerous components. These programs were successful because consumers put pressure on the product suppliers to adopt more environmentally sounds practices, and in turn agreed to take on a portion of the costs by paying a premium for the labeled products.
Consumer choices were able to have a permanent impact if one of three situations arose: (1) the new, more environmentally sound production technology proved to be more economically efficient than the old; (2) the existence of the new technology lead to legislation restricting the use of the old technology; or (3) the new technology was so environmentally superior that it became culturally and morally unacceptable to use the old.
The SSNC first introduced environmental labeling in Sweden in 1989, using the label ³Bra miljoval,² or ³good environmental choice.² The notion of applying such a label to the electricity market existed even at the time, although it took several years to become a reality. Beginning in 1995, on the eve of the introduction of competition into the electricity market, advertisements for various suppliers started appearing throughout the country, many of which were based upon environmental arguments. In autumn of 1995 the SSNC first introduced the ³Bra miljoval² label into the electricity market and made it a potential component of suppliers¹ advertising campaigns.
For a supplier to qualify for the ³Bra miljoval² label it must meet several criteria. First, the supplier must commit to annually balance the consumers¹ consumption using electricity generated by renewable sources of energy and meeting a few additional environmental specifications. These additional specifications included the following: The use of non-renewable energy in the production and distribution of the renewable energy could not exceed 10% of the level of renewable energy produced; hydropower plants built after 1996 in new waters could not be included; biomass-fueled plants were ordered to return all ash to the soil and ensure that this ash was indistinguishable from fresh biomass; and that neither household waste nor peat were to be considered renewable energy sources.
In addition to these criteria, the supplier must also submit to an annual audit by the SSNC and the national auditing authority, and the supplier must accept all of the above conditions in a formal licensing agreement with the SSNC. It should be noted, that none of the criteria for qualification discriminate against suppliers located in any country or geographical region. As a result, the label criteria do not include anything that could be construed as a barrier to international trade or anything that is in conflict with the European Union or WTO standards.
The first companies to go after the label were municipality owned firms in Stockholm and Goteborg. Goteborg, primarily an electricity retailer, signed the first environmentally labeled contract with a dairy company, Arla. To locate a supplier which could meet the environmental criteria for the label Goteborg went to a Norwegian firm and obtained its services. By immediately introducing a foreign supplier into the market it became no longer valuable for domestic firms to lobby the Swedish government to set domestic restraints on environmental labeling, and so the domestic firms were forced to embrace the system.
Initially it was corporate consumers who demanded labeled electricity contracts after their introduction in 1996, although slowly private consumers began to follow suit and the number of suppliers offering labeled contracts increased. In 1996 some 11 suppliers held licenses to sell labeled contracts, and by the end of 1999 there were 72. These figures can be somewhat misleading, however, given the low price of the license and the ability of many firms to purchase the license but offer only a tiny number of labeled contracts.
The response of the market to the introduction of the environmental labels for electricity contracts has been slower than in previous markets such as paper production and laundry detergents; however this is most likely due to many consumers¹ unfamiliarity with the relatively new notion of competition in the electricity market.