Economic aspects of energy transition: issues for electrification caused by market distortions

Abstract

This thesis examines electricity distribution pricing in Finland. I explain how electricity distributors are regulated in Finland, and how this regulation method can result in market inefficiencies. Then I will show that this is indeed the case, and there is a significant difference between the marginal costs and marginal prices of electricity distributors, and this causes a market distorting price wedge.

I estimate the size of the market distorting price wedge and using this information, I calculate the increase in marginal costs for two products: electric heating in houses and electric vehicles. This exercise demonstrates that the price wedge has a positive effect on the marginal costs of using electricity intensive products, and thus affects consumer choices.

This issue is important and topical, because the market distortion studied in this paper increase the barriers of adopting low-carbon alternatives to carbon intensive products such as oil-heated housing and conventional gasoline powered vehicles. Removing this market distorting barrier would help reduce greenhouse gas emissions by accelerating electrification.