Something's in the Air: Exploring Wind Power Investment Incentives in Sweden

Sammanfattning: Swedish wind power generation levels have shifted materially over the last decade, nearly accounting for 20% of the total electricity supply by the end of 2021. Along with rapid infrastructure development, industry ownership structures have changed, and foreign equity in wind power is estimated to increase from 36% in 2016 to 66% in 2024. As wind power production is associated with reduced electricity prices, incumbents may be less motivated to invest than domestic and foreign entrants due to price cannibalization effects on existing output. To determine if such incentive dynamics can explain the investment patterns of firms, we estimate the price effect through a regression analysis and develop a marginal profitability model with two bidding areas. The results show that during 2018-2021, a 1% increase in Swedish wind power was associated with 0.05-0.19% lower wholesale electricity prices. A short-run analysis finds that entrants, particularly foreign firms, are more inclined to expand wind power, and sufficiently large incumbents are distinctly disincentivized to do so. However, data reveals that incumbents still expand. Using a long-run equilibrium analysis with strategic decision-making of potential deterrence, we outline the conditions that could justify such development. These conclusions have several implications relating to both production prediction and foreign policy, and extend the existing literature on intra-regional electricity price effects related to renewable production in Sweden.