Nordic power squeeze

In a tale of two regions, southern Norway will continue to experience very high wholesale prices while they will be much lower in northern parts of the country and Sweden, for a long while yet. Listen to a discussion on the market outlook in the Nordics amid the wider energy crisis, Finland’s power squeeze, and why companies are deserting the forward market. In addition, what’s the likelihood of a supply crunch in the coming winter?

Host: Richard Sverrisson, Editor-in-Chief, Montel 

Guests: 
Sigbjørn Seland, Chief Analyst, Storm Geo
Marius Holm Rennesund, Partner, Thema Consulting

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:06

Hello. Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in an informal setting. This week we discuss the Nordic region. Some areas continue to be hit by record, high wholesale power prices, while others, particularly in the north have some of the lowest prices in Europe. What does this disparity mean for companies and consumers in the region? What is the outlook going forward? Amid ever grown calls to Reregulate the market and government intervention? Joining me, Richard Sverrisson, to talk about the most pressing issues in the Nordic energy market are two of the region's most prominent experts. Hello. Sigbjørn Seland of Storm Geo. Always good to have you on the pod. I hope you're well.

Sigbjørn Seland, Chief Analyst, Storm Geo: 0:47

I'm fine, thank you. Hope you're well. I'm glad to be back. Thank you.

Richard Sverrisson, Editor-in-Chief, Montel: 0:51

All good. And also warm welcome to Marius Holm Rennesund of Thema Consulting. How are you Mariuss?

Marius Holm Rennesund, Partner, Thema Consulting: 0:56

I'm good. I'm good. Thank you very much, Richard.

Richard Sverrisson, Editor-in-Chief, Montel: 0:58

Excellent. Excellent. Let's start by talking about the war in Ukraine and the wider energy crisis. Has it made a tight supply situation even worse?

Marius Holm Rennesund, Partner, Thema Consulting: 1:08

Yeah, the the tragic war in Ukraine definitely creates an additional uncertainty in, the gas market, of course, is extremely important for the price development. We we see across Europe. What's happening with the gas flows from Russia going forward with directly impact the power prices and and we see just a few days ago that that gas from stop to deliver gas to ata. So I think. The uncertainty is there and it definitely means a lot for for power prices the coming months and coming year or two as well.

Richard Sverrisson, Editor-in-Chief, Montel: 1:39

I think we, we'll return to that, those areas in particular the implications and the outlook. But in the Nordic region, little or no power is produced from gas fired generation, yet it's a key price driver as you've already said. Marius so has this, has this led to calls in, in some Nordic countries to reform the wholesale power market as there have been, as we've seen in France, Spain, Italy Sigbjørn, if I can ask you there.

Sigbjørn Seland, Chief Analyst, Storm Geo: 2:05

No significant changes. You have the household electricity bill is subsidized in Norway and I guess in Sweden as well due to the extreme high prices. But there is no. Sort of reform of the electricity market that I would say has has served us very well for decades now. We see obviously unusually high prices, but yeah, that's it in a way.

Richard Sverrisson, Editor-in-Chief, Montel: 2:32

That's, it says, 'cause in, in France and Spain in particular, there've been calls to, to look at or reform, the marginal module in the wholesale power market as more and more power is gonna be produced from renewables or non-fossil fuel based stuff. But this is not an issue in the Nordic R region. Then yeah,

Sigbjørn Seland, Chief Analyst, Storm Geo: 2:47

there, there are always voices arguing for such a change. But as I see it it's not really on the agenda and, and I would say it is not really called for either. It's the market the market works serves us well, I would say so. So there is no. I wouldn't say there is a broad call for any market reforms.

Richard Sverrisson, Editor-in-Chief, Montel: 3:10

Yeah. What's your view here, Marius? What are you hearing out there?

Marius Holm Rennesund, Partner, Thema Consulting: 3:13

No, I think it's it's changing a bit. The industry is not too happy in our course. And they would look like to look at different options. I think the politicians. Feel a bit pushed to do something. And what that something is it remains to be seen. In Norway we now have the energy commission that will work over the the coming year. And they have quite a broad mandate that to, to look at different things. Right now, I don't see foresee any large changes over, over the coming in, coming months or so. As you see, for example, in, in Spain where they put the cap on gas prices.

Richard Sverrisson, Editor-in-Chief, Montel: 3:51

How about, you mentioned industry and then they're struggling. And the Nordic region is home to, very big aluminum producers, steel producers, et cetera. Paper and pulp. Are these companies struggling at the moment? Are they maybe urging, putting pressure on politicians or policy makers?

Marius Holm Rennesund, Partner, Thema Consulting: 4:06

Most of the really large aluminum players, large industrial companies do have PPAs and don't feel that price increase directly as we speak. I think it's rather the kind of medium sized companies that haven't been able to fix their power prices that struggle more with with the price development we've seen over. Over the past six months or so. So I think the push will rather come from then than than the big the big aluminum pop and paper, et cetera.

Richard Sverrisson, Editor-in-Chief, Montel: 4:37

No. Interesting. Sigbjørn, if I can turn to you, there's a constant discussion in the Nordic region about the price areas, the differences in prices, and the difficulty to hedge and the impact on liquidity. How is it working at the moment? How are companies coping with this massive variation in price difference?

Sigbjørn Seland, Chief Analyst, Storm Geo: 4:55

Yeah, I think that's a big challenge for many companies and more and more companies saying that they're now opting out of the no stock financial market. It doesn't serve their needs. And this system price that has served the market for many years as a hedging tool. That's not the hedging tool for no one. So obviously there is there is challenges and players. They seek, PPAs and bilateral contracts and that that turnover in the financial market is just decreasing from month to month and has reached really low. Lower level. There is no quick fix to that solution. Everybody in the market expects this big area price differential to continue for years. And yeah, that, that's definitely the most likely situation. So obviously you need to find, otherwise other ways to hedge your future production or con consumption. If you. Decide that is still what you would like to do?

Richard Sverrisson, Editor-in-Chief, Montel: 5:58

When we just when you think liquidity has hit the bottom, then it falls even further. I, what are you hearing? What's your view here? Marius?

Marius Holm Rennesund, Partner, Thema Consulting: 6:05

No I totally agree with Sigbjørn here. It's been challenging for quite some time. We've seen liquidity basically going down over the last decade or so. And what's also challenging, I think for many of the of the market participants is. The system price is one thing, but the liquidity on the EPAs the area prices is also very low. And it's, it is difficult to to, to use them for hedging purposes. So many are struggling with that right now.

Richard Sverrisson, Editor-in-Chief, Montel: 6:32

Would you advise some of your customers or your clients to, to go more look to bilateral deals and PPAs as is going rather than use, use the system price and the forward market?

Marius Holm Rennesund, Partner, Thema Consulting: 6:42

Yeah, I think at least you should be very aware of what you can use the system price for and not and we've seen a push towards PPAs. Over the last few years that's been driven by other things. We've seen that most PPAs have been connected to specific projects with the model we have in wind power, where we have a developer developing the the site and selling it to, fund or a financial owner that really needs a PPA there to do the project financing. We now maybe see a shift out from that as there's basically a stop to to wind onshore wind power in Norway. But we'll definitely also see more PPAs done with Stut Craft and other hydropower producers against their full portfolio and less projects specific PPAs I would think.

Richard Sverrisson, Editor-in-Chief, Montel: 7:32

So are these kind of deals taking liquidity outta the forward market? Is that quite clear? Is that quite could, is that what you can say here, Sigbjørn?

Sigbjørn Seland, Chief Analyst, Storm Geo: 7:39

Yeah, absolutely. The liquidity is is about to disappear completely from the Nasdaq, system price futures market. I, I guess overall, hedging volumes are. Much lower than they used to be, but but some volumes obviously shifts from the NASDAQ financial market to PPAs and and bilateral contracts. But overall, the volumes are much lower than they used to be.

Richard Sverrisson, Editor-in-Chief, Montel: 8:06

Let's talk a little bit about prices now on average. Electricity prices in southern Norway have been around 160 euros, a mega hour so far this year. Is this a level you can see continue for the rest of the year, Sigbjørn?

Sigbjørn Seland, Chief Analyst, Storm Geo: 8:20

Yes. Absolutely. I would say most likely they will be even a bit higher for the rest of, the year and through Q1 next year, you know what the rest was in, in southern Norway are very low inflows to the restaurants, be below and below normal for the rest of the summer. So it means that poor prices in Southern. Norway, Southern Scandinavia will be strongly affected by prices in mainland Europe and also in UK for a long time. And we all know how high they are. Absolutely. There are no sort of relief in sight in, in that sense for electricity consumers in southern Norway and southern Scandinavia, I would say.

Richard Sverrisson, Editor-in-Chief, Montel: 8:57

Do you share this view, Marius? Could one say that the electricity produces have been guilty of emptying the reservoirs too soon really?

Marius Holm Rennesund, Partner, Thema Consulting: 9:04

That's difficult to say. With the the new interconnectors we have, you can export more, but you can also import more, right? So that gives an additional flexibility. Also, if it turns out to be dry throughout the summer, you have the possibility of importing more from continental Europe as well. But as. Sigmund points out. That would push prices in southern Norway above what you say see in continental Europe. So you've got increased flexibility. I think they've been using that by producing more now, exporting to the continent, but you're also able to import more if that is needed. But it comes at a price.

Richard Sverrisson, Editor-in-Chief, Montel: 9:42

Of course. So we return to that later and talk about the interconnectors between Norway and its neighbors. But is there a real threat to security of supply in the coming winter? Sigbjørn? There has been some slight warnings from start net, from the TSO.

Sigbjørn Seland, Chief Analyst, Storm Geo: 9:56

Yeah. They raised they have this one to five scale where five is rationing and one is normal conditions, and now they. They went from one to two. But I would say that principally there is no danger to security of supply. Next to interest module said the import capacity is huge. It's large enough to ensure that there, that it's only a matter of price really. Obviously prices can be high, but prices can can solve it. But you can have a, the dry summer and the dry autumn and. And very high prices, but as long as you could utilize the, the cable capacity, I would say there is no danger to security of supply. I think the reason why Starnet went from one to two is. Due to the special circumstances we have are having now with a war in U Ukraine. If you have this general energy shortage in Europe, it potentially could not be possible to import power from mainland Europe or at least you cannot say that. That's totally outta the, question. Yeah. But I would say under normal circumstances, I would say that there is a fairly low probability that there will be problems with security or supply.

Richard Sverrisson, Editor-in-Chief, Montel: 11:08

And Marius this concept of rationing, is that realistic or is that quite a kind of, almost a little bit of scarem mongering?

Marius Holm Rennesund, Partner, Thema Consulting: 11:16

I agree with SBE on hair, under kind of normal circumstances I don't think we will see that. But there are openings in the regulation if there security of supply is threatened in continental Europe, that you could actually curb flows on the interconnectors to the Nordics, and. If that happens there might be a probability although small still for a rationing. And and you can also have faults on one or more of the interconnectors as well. And I think also that start that pointed to that when they raise the level from one to two some time back. So again, if. If the market works I'm not too afraid, but if you come into a situation where you you curb the flows from continental Europe then the situation obviously will be more, even more strained than what we've seen. And I think that's the risk that is there.

Richard Sverrisson, Editor-in-Chief, Montel: 12:05

That's quite dramatic. You obviously, Starnet has said has talked about the problems with the NorNet. There's NorNet cable between Norway and the Netherlands is now off. And there's, there, there's some kind of deep underlying problem that they can't, it's quite hard to solve. So that's the risk here with these cables. I think they're all deep subsea and quite hard to maintain if something goes seriously wrong. But sig b, if I can. If I can ask you now, do you think the sort of controversial nor Nord stream link that interconnects Norway to the uk will that come to the rescue here? We've seen weeks of net imports in the past and electricity prices in the UK are actually now lower than on, on the continent.

Sigbjørn Seland, Chief Analyst, Storm Geo: 12:42

Yeah. You have seen quite significant volumes flowing from UK to Southern nor during May, but what should I say? I'm afraid to say that it's probably quite temporary. UK they have, due to the low natural gas storage capacity they have in the UK now, after Rug Rough was was closed. There are, they have had much lower natural gas and power prices than the rest of Europe. But this will be. Temporary and natural gas and power prices in the UK are expected to approach mainland the level in mainland Europe, say during October November. And, for coming autumn, winter, you should expect power prices in, in, in UK to be, at level with the mainland. Europe. So if it's it's a part of the security of supply. But if you, if Southern Norway would, is would continue importing from UK throughout the year and into next winter, it will be expensive for sure. It is not cheap rescue.

Richard Sverrisson, Editor-in-Chief, Montel: 13:41

Exactly. So there's a rest of your sorts, but but a very dear one. That, that's fair enough. I think. If I can turn and look more Eastwood and turn to Finland in particular, Marius how serious the cut in Russian power exports to Finland. What are the implications for supply security in the region? Even price and even prices. Sorry.

Marius Holm Rennesund, Partner, Thema Consulting: 14:02

Yeah, it constituted roughly 10% I think, of the consumption in Finland last year. So we co of course it is a certain volume, it depends a bit on, on the atory reactor as well. That's a reactor we always say. It's a few months ahead and it's proven to be again. We expected it to come in now, and I saw it was postponed until June. If it comes online, that's a significant volume coming into the market and that will ease the situation. If not, of course short term it will be more difficult in Finland as well. We'll definitely definitely influence prices in in, in the short term, in, in more of the medium and longer term. We now finally see that Finland is. Really get their wind investments going. Historically they have had very good support systems with a feed in tariff some years ago, I think 105 Euros, and still we didn't see investments. But over the last year or so we really see more projects coming online. We see more focus from investors on Finland, and that will ease the situation in the coming years. I think.

Richard Sverrisson, Editor-in-Chief, Montel: 15:10

But that's like from 20 24, 20 25, or, yeah. Yeah. So a few years down the line. But so Sigbjørn, if I can tell, what are your expectations for Alka Luta three? When do you, see it coming back online?

Sigbjørn Seland, Chief Analyst, Storm Geo: 15:21

Yeah. When it comes to power prices in Finland, going forward, I would say Ulta three is the main thing. It's much more important than the import from Russia. O obviously it's not a very small. Thing that, that the export was halted. But O ulu two three is the big thing. And as Mariuso say, it's foolish to say that anything is certain about Ulu two three, which w was supposed to be in operation in 2009, remember that. Again, today, the 2nd of June, it was a new delay. Maybe just one week, but still it's still a lot of uncertainty regarding ULU two three but it's I would say still that stable operation from ULU two three is the most likely. Development for this autumn and coming winter. You should you again, you can never be certain about it but it looks still to be the most likely situation. And then, Finland is okay, or more than that. Finland can you will see power prices in Finland dropping sharply immediately after all Glu two, three comes into operation again, which is not today. Expected for the 21st of June. That for sure can be delayed. But that, that's the delayed information today.

Richard Sverrisson, Editor-in-Chief, Montel: 16:36

So probably safe to say Q4 will be definitely online, but maybe Q3 sometime. Yeah,

Sigbjørn Seland, Chief Analyst, Storm Geo: 16:43

I think that's the general expectation out there.

Richard Sverrisson, Editor-in-Chief, Montel: 16:46

Yep. Yeah, absolutely. So is there a, is there a chance maybe that Finland will need to import power from Estonia, which is there, which is producing power from oil shell with very high CO2 emissions? Is that a likely scenario maybe in, in the coming weeks or months? Sigbjørn.

Sigbjørn Seland, Chief Analyst, Storm Geo: 17:03

No not coming weeks or month. If import from Russia stays at zero and all cloud to three is out of operation, I would say you probably would see Finland need input from Estonia. Periods not substantial amounts but but basically there's also a lot of wind power coming in in, in Finland going forward. So I would say a lot needs to go wrong. To use that word before you, you would see Finland in need of heavy input from Estonia going forward.

Richard Sverrisson, Editor-in-Chief, Montel: 17:33

Yep. And these very highly polluting plants. But Marius, if I can turn to you and ask, we've discussed these very high prices in certain regions in the Nordic area. Does this indicate to, a certain level of profitability for nuclear power. And is, do you, could that make a comeback in the region?

Marius Holm Rennesund, Partner, Thema Consulting: 17:49

It's, it is, it's difficult to say. In Finland you now see the opposite with the the reactor that was planned for for the late twenties or early thirties. Were owned by ton partly. And that's now been shelved. We see that all these projects, Otto is extreme, but anyway, all nuclear projects take time to complete. What we've seen in Sweden is that when we've been more talk about. Those smaller reactors where you can build everything in a factory. Small in nuclear is a couple of hundred megawatts. So it's sizable, but that's more closed system and hence more safe as well and easier to build. So that's an option you can see. Don't foresee that for for the coming 10 years or so, but long term could be an option.

Richard Sverrisson, Editor-in-Chief, Montel: 18:36

Because, especially given the outlook for demand i in the region. If I can just round up or come to a close here by asking you about, we've talked about the very, very high prices, certainly in, in Southern, Southern Norway. But, northern parts of Norway and Sweden have very low prices. And what are your expectations here? Will they continue to see the prices around 20 euros a megawatt hour in the coming months and into Q1 next year?

Sigbjørn Seland, Chief Analyst, Storm Geo: 19:00

Yeah, maybe may twenties. Maybe a bit too low, at least when you look into the autumn and winter. But the overall situation is that power prices will remain. Most likely will remain low in the northern zones for for years. The power. Surplus is big and growing. It's still quite, or a lot of wind power coming into operation in Yeah, in northern Sweden. Rest the next say 18 months. This power surplus will only grow and and there is still years until you see this increase in transmission capacity. But from north to south. In Sweden. So I would say it's. Quite clear that prices in the Northern Songs will remain low for years. And you, as you mentioned, consumption and slowly but surely you'll see consumption growth, eating up the production shop, but surplus. But that takes time. I would say yeah, still 3, 4, 5 years with low prices in the northern zones, it's the most likely situation.

Richard Sverrisson, Editor-in-Chief, Montel: 20:01

Marius, do you share this, do you, and maybe this could provide a very good signal for industry to, to relocate or?

Marius Holm Rennesund, Partner, Thema Consulting: 20:07

Yeah. I totally subscribe to that and I think, in, in our forecast we foresee price differences between northern and southern parts of the Nordics until late, the late twenties until we actually. Get that we strengthened the net the grid from north to south in Sweden and the same in Norway. Of course, that can also be delayed. And we definitely see that. I don't think we will see relocation of industries, but we will see more new industry located in the northern part of Norway, in the northern part of Sweden as well. We've seen a lot of projects already. Of course, the uncertainty is large on, on what you know, which of these projects will actually be realized and how fast. But I think we, we will definitely see and and growth in demand in the northern zones. Both in Norway but also in Sweden where you have the fossil free steel, for example, that could could be in a lot of TVH extra consumption. And with the system we have with price areas, that's the signal it gives and should give. And hence it it's wise to, to locate there at least for now. But you have to have a long-term view as well. If you, establish a battery factory or a fossil free steel plants. You are thinking 20, 30, 40 years ahead.

Richard Sverrisson, Editor-in-Chief, Montel: 21:19

Certainly. So it's very much a tale of two different regions in the Nordic area. Gentlemen, thank you very much for joining them on Montel Weekly podcast this week. So listeners, you can now follow the podcast on our own Twitter account, aply named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.