I am enjoying my Stockholm visit very much, despite the sticker shock while shopping and dining. The discussions at the Mont Pelerin Society meeting are interesting and thought-provoking, including quite a bit of discussion of the incentive problems, and the moral/ethical problems, of the “Swedish welfare state” model. The Swedish model of health care is also a current topic of debate in the context of the U.S. health care debate. Taxpayer-funded health care is certainly prone to incentive problems, moral hazard and adverse selection, and crowding out of otherwise beneficial private health care provision. I can’t recommend the Swedish health care model for U.S. adoption.
However, I can recommend the Swedish electricity model. While not perfect, for sure, it is far more competitive and dynamic than we have in the U.S. (except for Texas). Particularly with respect to retail competition, Swedish policy incorporates the perspective that competition is a better regulator than an administrative regulatory agency can ever be.
Swedish residential customers can choose their retail electricity supplier. The Swedish residents I’ve talked to this week tell me that they have certain features that are important for retail competition:
- Information and research are easy: competing firms provide information about their various products and services online, making it easy to compare across products and for an individual to evaluate which products and services are most likely to meet his or her satisfaction
- Change is easy: Individual consumers can choose a provider and service online, submit personal information securely online, and view and agree to a contract online; the contract is processed within days
- Rivalry and product differentiation: The low retail entry barriers mean that customers have many differentiated products from which to choose, particularly a variety of time-differentiated products
The transmission and distribution/wires service quality and price are still regulated, and the customer bill reflects a payment for wires access and the transportation of the electricity commodity from generators to consumers. Note also that Sweden participates in what is arguably the most efficient and healthy wholesale power market in the world — the NordPool. Swedish generators participate in a robust wholesale market, and generators outside of Sweden can profit by selling to Swedish customers.
Thus the Swedish electricity model has many valuable and commendable features that the U.S. model lacks. Individual customers are free to choose in robust, rivalrous retail markets. Those retail suppliers are free to offer a variety of different products and services. They are also free to buy electricity in a robust, rivalrous regional wholesale electricity market. These chains of voluntary transactions accomplish something in Sweden that we fail to accomplish in the U.S. — they integrate wholesale and retail markets to communicate individual consumer preferences through the electricity value chain. Individual preferences are not stifled in Sweden as they are in the U.S. The systemic consequences: better capacity utilization, higher resource optimization and energy efficiency, and high reliability and service quality.
We should not adopt the Swedish health care model, but we should certainly learn from and incorporate the competition-based institutional design choices in Swedish retail electricity markets.