Green shoots may light up gloom

In the last episode before a summer break, we round up the past six months and delve into the key drivers for the remainder of the year. Gas will continue to be the pressing issue, with a squeeze on supply likely to remain the single most important issue for 2022 and 2023. Listen to a discussion on why Nordic firms will be praying for rain and the urgency to solve permitting bottlenecks for green energy across Europe. And much, much, more.

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

Guests: 
Olav Vilnes, Editor Nordics, Montel
Andres Cala, LNG Correspondent, Montel
Tasmin Chowdhary, Environmental Markets Reporter, Montel

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:05

Hello listeners and welcome to the Montel Weekly podcast, bring Your Energy Matters in an informal setting. In the second pod recorded at the E-World Trade Fair, we take a look back at what has happened so far in 2022 as well as a look forward to the second half of this remarkable year. The gas squeeze following Russia's invasion of Ukraine has been the central part of not just the any energy crisis. But also the current global macro economic woes. Our guest this week will talk us through the key drivers in LNG Gas, the Nordic, and the environmental markets. So joining me, Richard Sverrisson, to discuss these issues. Olav Vilnes editor of Norway. A warm welcome to you Olav.

Olav Vilnes, Editor Nordics, Montel: 0:44

Thank you.

Richard Sverrisson, Editor-in-Chief, Montel: 0:45

Andres Cala, our LNG correspondent, and welcome to you and Andreas.

Andres Cala, LNG Correspondent, Montel: 0:50

Thank you. Good morning.

Richard Sverrisson, Editor-in-Chief, Montel: 0:52

And last but not least, Tasmin Chowdhary, environmental Markets reporter. Hello, Tasmin.

Tasmin Chowdhary, Environmental Markets Reporter, Montel: 0:58

Hello, Richard. Thank you.

Richard Sverrisson, Editor-in-Chief, Montel: 0:59

Excellent. So I'd like to start off maybe talking to, to, to you Olav and asking you about the past six months. How would you summarize. What's happened so far since the start of the year?

Olav Vilnes, Editor Nordics, Montel: 1:09

Extraordinary is probably the best word to use. It's been extremely price levels have never, you've never seen anything similar across European power markets. And I've been following particularly the Nordic market, which have seen prices closely following what's happening in Germany. Germany is leading the way due to the gas problems. And then you have the Nordic prices, averaging at least in the southern part of that region very close to the say, price levels in Germany. I think we have an average this this year so far of 115 Euros in at the Nor Port Nordic system price level. And if you look at this sudden price zones, you have prices that are around 160 Euros. That's quite unprecedented. It's very unprecedented. We just, a few years ago we talked about the 2030 euros,

Richard Sverrisson, Editor-in-Chief, Montel: 1:48

so that's quite some difference. Yeah. And what are the main reasons for this, Olav?

Olav Vilnes, Editor Nordics, Montel: 1:51

The main reasons is, of course, the the scars of gas or the threat the possibility of a of a Russian export stop, of course, which has pushed up prices since the early winter, since the war in particularly started in, in Ukraine. And of course that is driving into oil prices. And if you look at the Nordic market, this has been compounded by a low reservoir levels that they had. We came into the winter with we had a very dry winter and we also had low reservoirs coming into the winter. So at coming into May, I think we were close to record lows in certain parts of Norway where most of the hydropower reservoirs in the Nordic market allocated. And that has also pushed up prices and I, and it sort of triggers imports to the region to meet demands.

Richard Sverrisson, Editor-in-Chief, Montel: 2:30

And the Russian crisis or the sanctions on Russia, the cuts in flows of both gas and power to some regions in the Nordics have also had a major impact on prices, haven't they?

Olav Vilnes, Editor Nordics, Montel: 2:42

It has an impact. And particularly if you look at the Finland, where Russia stopped in May, they stopped import of export of electricity to Finland. They also stopped gas exports. And that coincided with the problems that this new old three nuclear plant, which was the, you thought, okay they will lose the import from Russia, but then they have this new nuclear plant. But then since then, the nuclear plant has not been in operation because they have technical problems. And now the start has been pushed forward to December. The commercial startup and I think they will start re resume tests maybe in July, late July at the earliest. And of course it, there is, there are some worries now in Finland that it, this could even turn into a sub security supply crisis next winter if they can't fix the nuclear act by then. Since they can no longer rely on the on the Russian electricity imports, which has been very important on, on, on cold winter days.

Richard Sverrisson, Editor-in-Chief, Montel: 3:28

But there are some areas which have much lower prices, aren't there? I'm thinking in particular Northern Norway, Northern Sweden, which have maintained, certainly double digits and low double digit prices and which have. Encouraged or are providing an incentive for industry. I know Tasman will talk later, something about PPA activity, but it's certainly been an area in the Nordic region, which has seen a lot of interest in terms of wind developers, but also industry and tech companies.

Olav Vilnes, Editor Nordics, Montel: 3:55

Yeah. And if you look at the it, it is almost, you can almost divide Norway, Sweden in two, and you have northern parts of those two countries, and then you have the sudden part. And in the north you have high prices of 20 euros. Don't sometimes close to zero. And and that's because of, there's a local hydro, a lot of hydropower supply and demand is quite low. And there's also reduced capacity, transmission capacity to bring that surplus power to the south. So of course it is very, it looks very attractive now for the industry, but it's also quite, it's not a huge surplus. So if you have, if you build a big hydrogen factory or green steel factories that they plant in northern Sweden, and suddenly this surplus could also disappear

Richard Sverrisson, Editor-in-Chief, Montel: 4:30

in terms of deficits in a few years.

Olav Vilnes, Editor Nordics, Montel: 4:31

Yeah. And there has, there have been a debate now in the north that they should, you should not develop the grid any further because we want to keep this small prices because it makes us attractive for the industry. But what they miss with that argument is that they can have a dry air. They have also this problem. Of course, if there are more industry coming, then they sometimes need import as well. So I think over time there will be more equal prices, but it can take a few years. I've seen analysts say that it will take four or five years. You would still have this even from four or five more years. You will have huge area price differences within Scandinavia.

Richard Sverrisson, Editor-in-Chief, Montel: 5:01

We've talked about this several times on the pod before with other guests. How much of a challenge that is for both the utilities producers as well as companies, but industrial companies? But Andres, if we ask you, we turn to the gas market that, what's happening in the global gas market is essential to everything at the moment, pretty much in energy, but in the wider macro economic picture. But is, are we now facing a mad scramble for LNG in terms of Europe trying to. Get supplies to cover the coming winter, both to fill storage and, primarily in, in the short term.

Andres Cala, LNG Correspondent, Montel: 5:33

Yeah, most certainly. It's not just a question of European filling. Its Europe filling its storage. It's also a question of Asia needing to do exactly the same. We haven't had a, a really strong competition coming from Asia. But that's gonna change and it will inevitably change. Our analysts tell us that it'll probably happen after summer, so Q4 and it's gonna be mad competition. There's no way around it. And, but that just, that doesn't mean that. Our supply, our LNG supply will will come in will could be threatened. No, we will still get the LNG. It's just a question of price. It's gonna be to say at least very expensive. It's gonna lead to demand destruction. It already is all over all over the world. Developing countries Pakistan. Today, Thailand announced that it was also cutting its LNG imports. Europe will not it cannot, it has no choice but to keep importing it. But it will just have to do it at a very

Richard Sverrisson, Editor-in-Chief, Montel: 6:25

steep price. And Thailand and Pakistan, they reduce, they're reducing imports purely on the base of price.

Andres Cala, LNG Correspondent, Montel: 6:31

Basically. It's demand destruction. Yeah. It's way too pricey and it's it's they obvious it's politically unpopular, but blackouts are the. The alternative for many developing countries and even yeah, wealthy countries like Thailand and there's, as much as Europe will keep importing the other, a lot of countries will not be able to import as much challengee it's happening also in Argentina. Which is having a strong winter at as we speak. And they're being forced to buy really expensive LNG, and they're, and countries are literally going in into very steep debts to just because Europe is competing very aggressively and will continue to do

Richard Sverrisson, Editor-in-Chief, Montel: 7:09

so as long as you have the money, you get the gas. If you don't have the money, that's it. And that, that could create some, a lot of problems further down the line and let alone for those countries who need those, that kind of commodity to keep the lights on. So

Andres Cala, LNG Correspondent, Montel: 7:20

That's certainly the case. And you have ricochet effects. Of course there's more coal burn, but then again, coal is very expensive as well. Blackouts, as I said are, yeah the unfortunate. End game for a lot of developing countries, but for Europe yeah it's gonna be a question. We're gonna get demand destruction as well. We cannot turn our gas fired power plants on, at at LNG prices. We're talking about 30 37 MBTU, which is about 120 euros of megawatt hour. It's priced out. Just l and g is certainly priced out.

Richard Sverrisson, Editor-in-Chief, Montel: 7:53

Absolutely. And I think. As we're recording it, this at the E World Trade Fair, which your listeners may sort hear that some of the background Hub and the noise. But I, what I'm hearing here when I'm talking to some people is that there is a fear and a Nord Stream one is going offline for annual maintenance in a couple of weeks. I think it's the 10th or 12th of July. And there is a fear, strong fear, certainly here in Germany that this pipeline actually won't return. What are you hearing from the analyst that you are talking to?

Andres Cala, LNG Correspondent, Montel: 8:21

We get the more than the analyst. We're just getting ver versions, official versions from both the Russian side. We're getting versions from the German side or the European side. It, it's being used as a weapon naturally. And this is why we're getting to the extremes where that, where we're getting at where Germany has to re reopen or restart. Its coal fire plants. Will, it, will, will it be Corte Cortel, further cortel nor stream one? Yeah. This is in Putin's advantage to his advantage. This is the moment to do it. Not in winter. This is when you want. And if you, by doing simple math yeah. They export half the gas through Nord Stream one. But prices doubled. So he's getting exactly the same amount of money, just half the gas. The it's a it's a quest. It's a question of it's a game of chicken almost. See who's gonna budge first? And in this sense. Europe has a higher, yeah. More trouble coming than presumably Putin does, or Russia. What Russia can survive for longer. At this stage, how will Europe cope with it? So that's what we're trying to determine at the end of, at the end of game and. E even we're gonna get to a point where there's gonna be intra European competition come December. We're gonna have a lot more capacity or some more capacity especially in Germany, but also the ne Netherlands through the floating reification terminals. And. All our, all of our buyers will be competing simultaneously for the same amount of limited LNG. Because if Asia's buying, and you, and several, and all European buyers are competing as well will it be will we, how will we survive that? That's the bottom line question.

Richard Sverrisson, Editor-in-Chief, Montel: 9:58

Absolutely. And that kind of contra means what's the solidarity that the EU commission wants to have in terms of a common platform for gas purchasing. It'd be interesting to see how this develops. But Tasmin, if I can turn to you and, my first question would be, surely green energy would be the answer here. It lessens the dependency on Russia and also aids the move towards net zero. But especially crucial in these very very tight times.

Tasmin Chowdhary, Environmental Markets Reporter, Montel: 10:25

Yes, exactly. And we've seen from the EU side with their Repower EU program that they have definitely stepped up their ambitions in the renewable target renewable expansion. So yeah, an aim now for 45% of renewable. Generation by 2030. So there is, and in Germany as well, they've stepped up from a 65% share of renewables to an 80% by 2030. So there is definitely ambition, but it's just putting that, being, letting that being implemented and how that will translate into policies. And on the PPA side, the government, the eu European Commission has. Definitely advise governments that they should unlock regulatory barriers to signing new PPAs because they're seen as in this sort of post subsidy world which we're in where government subsidies aren't accounting for the larger majority of or perhaps should not account for the majority of new renewable build out, given the steep decline in costs of renewables. There, there is more of a focus on merchant, renewable build out and build out finance by PPAs.

Richard Sverrisson, Editor-in-Chief, Montel: 11:41

Absolutely. So have we seen a flurry of activity in the last sort of six months and in which areas? Are we seeing the largest amount of developments?

Tasmin Chowdhary, Environmental Markets Reporter, Montel: 11:50

Yeah, that's a really interesting question because I've heard very mixed opinions from different participants on in terms of PPA activities in renewable procurement. Because some have said that corporate strategies are less focused on energy. On renewable procurement, given the extreme volatility in power and gas markets it's really difficult to set a power price for the next 10 years or even five years, given the extreme,

Richard Sverrisson, Editor-in-Chief, Montel: 12:21

probably even the next five weeks. Tasmin, to be fair. Yeah,

Tasmin Chowdhary, Environmental Markets Reporter, Montel: 12:24

exactly. So how can you negotiate a or set a price at a certain level? So that is harming negotiations.

Richard Sverrisson, Editor-in-Chief, Montel: 12:32

Okay, so the vol extreme volatility is maybe. Leading to a hesitation in companies signing long-term deals. So they're withholding until they maybe see the volatility levels drop. Is that what you're saying? Tasmin?

Tasmin Chowdhary, Environmental Markets Reporter, Montel: 12:44

Yes, exactly. And I think the whole uncertain macroeconomic environment is also having an impact. If corporates, Don Dunno how. Their core business will be performing in the next few months. It's very uncertain times.

Richard Sverrisson, Editor-in-Chief, Montel: 12:57

Absolutely. What, in terms of the length of the deals, given the very high prices, as you mentioned the volatility are people looking to secure shorter term power purchase agreements? Or are they looking, to hedge, longer term?

Tasmin Chowdhary, Environmental Markets Reporter, Montel: 13:11

So I think that's an interesting question on the producer and generator side. There has. Been more interest in signing short to PPAs before they had to sign long-term, 10 year PPAs, maybe even longer, 15, 20 years. Because that was the requirement from the financiers of the renewable project that they needed this stable income for the next 10, 15 years. But now given the high market prices. Some of them are trying to capture the short term premium on the forward market for the next four, five years maybe two to three years on the forward market. So there is a trend in shorter PPAs of maybe up to five years, which is something new that we've seen in the last few months in you.

Richard Sverrisson, Editor-in-Chief, Montel: 13:57

No, that's interesting. No, I, there was a recent story on Montel. About how the percentage of deals that actually fail, which is quite interesting, that the vast majority of deals that get started don't actually reach completion. Yeah. Is that likely to be the case going forward as well, Tasmin?

Tasmin Chowdhary, Environmental Markets Reporter, Montel: 14:12

It's quite difficult to say, but I think we will see it in the new announcements for sure. Whether there has been a, there will be a slow down next year because PPAs take you, around a year to negotiate. It's a lot to agree on. So yeah, we'll have to see. But perhaps maybe a slow down the next year.

Richard Sverrisson, Editor-in-Chief, Montel: 14:34

Absolutely. I'd like to then take a look forward and see what to discuss with you three. What are gonna be the key drivers in the next six months, probably very much the gas squeeze is gonna be most prominent here. But Tasmin, if I can start with you and say, what, in, in, in the, in renewable energy, in the environmental markets, what are gonna be the key movers for the next, the rest of this year anyway?

Tasmin Chowdhary, Environmental Markets Reporter, Montel: 14:58

As I mentioned we. Definitely seen increased ambition on the political side. So it will be a factor of getting that implemented and seeing hard concrete policies, which will enable the build out of renewable projects. Removing the bottlenecks in permitting and for example, is a major issue. I think there are a lot of big issues on the supply chain side as a sort of legacy effect from the COVID-19 pandemic where industrial production was shut down to components for solar and wind project. And yeah, the impact on inflation is having a big

Richard Sverrisson, Editor-in-Chief, Montel: 15:38

it's increasing costs massively, isn't it? Yes. And also, and I think it's interesting, everybody wants, there's certainly a huge demand for large scale solar, for wind, for offshore wind. And everyone's after these parts. Is everyone going to, everybody gonna get them.

Tasmin Chowdhary, Environmental Markets Reporter, Montel: 15:51

Right? Yeah that's another thing that is slowing down negotiations and the. Just general build out of renewable projects. I think it is a concern.

Richard Sverrisson, Editor-in-Chief, Montel: 16:00

Tasmin, thank you very much. Olav, if I can turn to you and ask you the same question of the key drivers going forward for the rest of the year. Is it all about are Nordic players just praying for rain at the moment?

Olav Vilnes, Editor Nordics, Montel: 16:12

I think they're praying for rain. They, they usually don't need to do that in Nordic region. Everyone who's lived there for a while know that the rain will come. But I think the, even there, I think the main concern is about what happens in Russia, what happens to the Russian gas flows. I think there's also a big eye on the French nuclear plants, which is also very important for the whole price formation in Europe. But of course if you have enough rain, then you're not, then the link between Nordic power and European power weakens. So you can have a, because there's only a certain capacity on the ink connector, so if you have a local oversupply, then you can isolate yourself a little bit more with lower prices. So I think yes, definitely a wet summer. We would help on the supply situation and and then of course they need to also to fix this new nuclear plant in Finland.

Richard Sverrisson, Editor-in-Chief, Montel: 16:55

I think that's absolutely crucial. Yeah. Yeah. What about the interconnectors? Certainly they've been very important both for Norway as an exporter, but also at times of imports. So how do you expect that the flows to, to pan out for. The next six months.

Olav Vilnes, Editor Nordics, Montel: 17:08

Yeah. And they're also quite politically controversial because many politicians want to tie the restrictions to make sure that we have enough power at home at all times. I think if you trust the market participants, they will say they are they will save power over the summer because they need, they know that they need to have enough for the winter. So you would expect lower net maybe net import. If it stays dry, you would've maybe net imports on these cables. From the UK for example, we've seen quite a lot of import and surprisingly much import this spring may related to lower local gas prices in the UK than in continental Europe, which is also depressed. Or not the pressed power prices, but they've made UK power prices less expensive than they were earlier in the air. And then that has given some imports, so I think there will be flows will go in both directions, but of course what happens with these cables is they make it easier to drain the Nordic system quicker and faster. So that, that's a concern for some people that also the link to supply security if there isn't enough power available at affordable prices in continental Europe.

Richard Sverrisson, Editor-in-Chief, Montel: 18:08

And you mentioned the, how politically controversial it is sometimes with the links to the continent and to other parts of Europe, but. At the same time, we at Montel we write about the imports from the uk. But has that been a part of the national media? Have they looked at that at all? Has that's been talked about that actually the UK and other parts have come to the rescue of Norway at times.

Olav Vilnes, Editor Nordics, Montel: 18:27

Had stories, but it's not dominant in the political debate. I think the political debate is more these cables. We are exporting our hydropower to continental Europe, and in return we get continental power prices. That's the debate, social media debates. And that's also li lifting these demands from some people to want to restrict export. Like having a trash threshold, for example, for when you can how high, how low the reservoir levels can be before you are allowed to, or yeah, you can put the ban on exports if the trash, if the reservoirs fall below a certain level what they miss then is that average price will rise over the year. So it's it's a bit tricky.

Richard Sverrisson, Editor-in-Chief, Montel: 19:03

And do we've seen, if we stick with the sort of political side of things. A lot of calls for intervention across Europe and Reregulation and the Nordic region hasn't been immune to that. Do you expect this to maybe the voices and the pressure to grow as we go through the year?

Olav Vilnes, Editor Nordics, Montel: 19:20

Yeah, they have come around come around it by handing out compensations like in nor, and Sweden households are given some they are, they have been given, compensation for the host builds without really interfering in the market mechanisms. They just get a rebate, which is financed basically by the state. If this lasts for a long time, then maybe you will have more of a debate because people know that why should we pay 200 euros when we have a hydropower plant that it only cost a few Euro cents to produce? So it doesn't, so I don't think it's publicly acceptable over a long period with this kind of crisis.

Richard Sverrisson, Editor-in-Chief, Montel: 19:52

No, absolutely. Yeah. So Olav thank you and Andreas, so it's all about getting the LNG cargoes in for the next six months and overcoming the winter. Would you say?

Andres Cala, LNG Correspondent, Montel: 20:00

It's that and of course tied into that picture is storage. The bottom line are we gonna be able to reach our target on time of filling up a European storage to 90% before winter? It according to the analyst, yes we are on track. We should be able to do it. Again, it's a question of price and competition. But that is what where the price debate and the filling ratio of the, lemme start again. Yeah. How quickly we fill. That's gonna be de determined by that. Ultimately we have Q4 prices at a very close level. Prices throughout the curve along the curve are, yeah pretty much along the same level, which means that filling is not being incentivized right now. It is a period of low demand. But if we don't take advantage of summer to fill up our storage, we're gonna have a yeah a very, a very bad winter. And if. If temperatures, if we get a beast of the east, come again. It's gonna be a really tough winter. And storage is, yeah, storage is gonna be the bottom line.

Richard Sverrisson, Editor-in-Chief, Montel: 21:01

Absolutely. Then you ain't seen nothing yet. I think it's gonna be the message there. If we get a beast from the east in the winter, that's gonna be very hardcore. But if, you're saying prices aren't at the moment incentivizing storage. Would you then expect to see more mandatory regulatory intervention to to say you have to, this is obligatory, you have to fill the storages before you do anything else?

Andres Cala, LNG Correspondent, Montel: 21:22

It certainly, I think yeah, I think Europe, its policymakers have made it very clear that we need to fill up our storage to a certain. Why? Simply because we don't know when Russia will cut the rest of the the, of the supply, whether it will or not, but we need to be ready. There are obviously millions at stake, not just money, but millions of lives at stake. It's gonna be millions of jobs. It's gonna be inflation. It's, anyway, it's the, it's a really bad picture and we need to be ready for it. And I think that's what that's, yeah, it will be, if it needs to be mandated, if we need to introduce, if the EU needs to introduce new mechanisms to buy l and g to, to to buy to, as you mentioned earlier, the, so solidarity. Yeah. I think the EU will. Regulate as needed to make sure that Europe is ready for a worse scenario.

Richard Sverrisson, Editor-in-Chief, Montel: 22:13

Absolutely. And I, Tasmin mentioned the supply chain issues. Is that something that also is affecting LNG immuno, a rush to build these FSR, the floating storage and reification unit? Is the, that is everybody be able to get these facilities in time, to prevent a further squeeze.

Andres Cala, LNG Correspondent, Montel: 22:32

The main issue is not infrastructure at this point. The main issue is where does the, whether we have the supply and at what price, but do we have the infrastructure? Sure. There we have enough reification capacity in Europe. We will be getting more in the where we have bottlenecks specifically, yeah, as I said Germany and the Netherlands. But there are close, there are solutions that we could that Europe could implement. And yeah, going back to your earlier question, will the the U European Union could end up intervening? One of the examples is of course Spain and France Spain has the biggest regasification capacity in Europe, yet we our ability or Spanish ability. To export into France is very limited. And what can we do? We can expand that pipeline instead of thinking of North Stream two or or pipelines to or new pipelines to Algeria, or we just need to build our interconnection capacity. And overcome the resistance that has Yeah, for. For decades bogged down these projects and that, that's, that, that would be a quicker solution. But again it's not infrastructure. It's where will the supply come from? Are we gonna have another outage? We're in the, we're in the middle of a the Freeport outage. It's a US plant. A one of the biggest ones. It's 20% of us MG production that is hurting and that's why prices on the. Front end of the curve. That's why they're rising higher. That's why we have back ration in some of the contracts because Europe lost about one BCM at least one BCMA month just because of that. Will we get another average? Will we have a strong hurricane season? As a lot of the weather predictions suggests any, all of these factors will weigh in on what's, how much supply we get in. And that's gonna, it's not gonna be an infrastructure issue at the end of the day.

Richard Sverrisson, Editor-in-Chief, Montel: 24:12

Absolutely. I think let's hope that it rains in the Nordic region that, Nord Stream one comes back and that some of the bottleneck issues are solved as well. We've got a very. Should we say a remarkable winter in store? So fingers crossed that it all works on those fronts. But in the meantime, Tasmin, Andres, Olav, thank you very much for joining the Montel Weekly podcast this week, reviewing the year so far, and providing us with a bit of a crystal ball. So thank you. That's all for this week listeners, and that's the final podcast ahead of the summer. We'll be taking a break in July, but we'll be back in August. Thank you very much and have a good summer. So listeners, you can now follow the podcast on our own Twitter accounts at ly 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.