Geographic Price Granularity and Investments in Wind Power: Evidence from a Swedish Electricity Market Splitting Reform

I evaluate the effect of the 2011 Swedish electricity market splitting reform on the allocation of wind power, exploiting a unique data set of all Swedish applications for wind power since 2003. By comparing investments in each price zone before and after the reform using a difference-in-differences estimator, I find that 18 percent of all projects constructed by large developers after the reform were allocated to the high price zone due to the reform. This effect is not driven by geographic differences in approval rates, suggesting that the estimated effect also captures investors’ locational choices. Small, sometimes locally owned developers, did not react to the reform. A likely reason is that the locational choice set of small developers usually only includes one of the price zones. A nearest neighbor matching estimator comparing areas with similar prerequisites for wind power, largely confirms the main DiD results.