Hydropower Policy and Energy Saving Incentives

Many Norwegian local governments are affected by hydropower production. A law passed in 1917 mandates that hydropower plants sell up to 10 percent of their power basis to local governments affected by the production. Historically, this concession power was meant to ensure the small rural local governments supply of electricity, in competition of the larger cities. Today, many local governments resell their concession power when prices are high and generate large revenues. However, the actual transferred concession power is restricted to general electricity consumption in the community. As a result, local governments with a positive gap between potential concession power and general electricity consumption have reduced incentives to save electricity. In other words, the concession power system has adverse effects on incentives for energy eciency. In this study, a simple two-period model to study energy efficiency is developed, and the model's predictions are supported by empirical findings. The results underline how misspecifed and outdated laws can reduce incentives for energy economizing projects.