* Norway has stronger winds, but Sweden lower taxes
* Two countries aim to boost wind power by 26.4 TWh
* Each to finance 13.2 TWh through "green certificates"
* Renewable support system favours lowest-cost production
By Nerijus Adomaitis
OSLO, Feb 21 (Reuters) - Norwegian taxpayers could end up subsidising the construction of renewable power generation in neighbouring Sweden because investment under a joint subsidy scheme is cheaper on the other side of the border.
Norway, with a lengthy coastline exposed to Atlantic gales, is ideal for wind turbines. But taxes and financial rules still make it cheaper to take Norwegian subsidies and carry them across the border to Sweden.
The two countries launched a common market to trade renewable energy certificates with the goal of adding a total 26.4 terawatt-hours (TWh) of new power production from such sources as wind, hydro or biomass by 2020.
They agreed to split the scheme with each country's end-consumers financing 13.2 TWh, but the scheme favours the cheapest type of production, regardless of physical location.
"There is a political goal that 13.2 terawatt hours in new renewable production comes from Norway, but if investors choose to invest in Sweden, we can't do anything about it," said Mari Hegg Gundersen, head of the renewable energy section at Norway's power regulator NVE.
Sweden's lower taxes and more favourable depreciation rules make it a better place for renewables investment and in the first year, Norwegian production in the scheme totalled a mere 0.2 TWh in 2012, below the government's indicative target of 1.47 TWh.
As a result, Norway had to import from Sweden certificates corresponding to about 2 TWh of power consumption to meet the quota.
"Differences in taxation for wind power can be decisive when choosing the place," said Dag Christensen, a senior advisor at Norway's power industry association Energi Norge.
And Sweden is expected to take 15 TWh or 57 percent of total targeted renewable production in the scheme due to different tax rules, especially on tax depreciation, according to Oslo-based energy consultancy Thema.
The country which attracts a lower share of the investments will become a net importer of green certificates, supporting new production as well as new jobs in the neighbouring country.
Power suppliers are obliged to buy a certain number of certificates corresponding to a share of their power sales, with the costs passed to end-consumers in their power bills.
The speed of issuing licenses for new renewable production, as well as access to the power grid, were the other factors that played an important role, said Aasmund Jenssen, a partner at Thema.
"A certain number of market players said that the access to the grid is a problem in Norway," he added.
Statnett, the country's grid operator, plans to invest 50-70 billion of Norwegian crowns into grid upgrades by 2020.
Investors in Sweden also had more time to connect new plants to the grid than in Norway, where the deadline was end-2020.
"This is a big risk factor, especially investing into large hydro power projects, which can take 3-4 years to build," Christensen at Energi Norge said.
"We urged the government to change this, but this has not happened yet," he added.
Wind power projects may also need several years to build and connect to the grid.
Lars Granlund, an advisor at the Norwegian association of wind power producers, Norwea, said the industry needed more time to get used to the system, which has existed in Sweden since 2003.
"We expect more wind power plants to be built in 2014-2015," Granlund said. "We have better wind conditions, and if we had similar taxes, there would be more wind power built in Norway than in Sweden."
NVE expects the common market with Sweden to result in 6-7 TWh of new wind production by 2020.
Norway, which already gets over 95 percent of power from hydro, aims to increase the total share of renewables in all energy usage to 67.5 percent by 2020 from 53.4 percent in 2005.
Though it's not a member of the European Union, it signed up to the Renewables Directive, which sets individual goals for countries, but allows them to cooperate in achieving them.
"Electricity produced by plants included in the common electricity certificate market shall, regardless of where the actual production is located, be divided equality between Norway and Sweden when reporting pursuant to the Renewables Directive," Norway's oil and energy ministry said in an email to Reuters.
Sweden, which has had a green certificate system in place since 2003, saw its wind power output to increase ten-fold to 6.1 Twh by 2011 compared with 2002.
It aims to increase power generation from renewable sources by 25 TWh by 2020 compared with 2002, including 13.2 TWh covered by the joint scheme with Norway. (Reporting by Nerijus Adomaitis; Editing by Mark Potter)