Norway export cut controversy

Plans by Norway to impose restrictions on electricity exports if the country’s hydropower reservoir levels drop below critical levels have created uproar at home and abroad. Listen to a discussion on what is currently on the table, the reaction from market participants, and the choices facing policy makers ahead of a difficult winter. What are the repercussions of limiting power flows, and is the proposal a sign that some countries are retreating into isolationist energy policies? 

Host: Richard Sverrisson, Editor-in-Chief, Montel
Guests: Marius Holm Rennesund, Partner, Thema Consulting, 
                  Geir Brønmo, Principal Afry, 
                  Johanees Bruun, Director for Electricity Markets, Energinet. 

Transcript

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

Hello listeners and welcome to the Montel Weekly podcast, bringing You Energy Matters in an informal setting. This week we turn to the energy crisis in Norway and in the wide and Nordic region. In a story that Montel broke, Norwegian energy minster, Teddy Oslan said that the country was considering cutting electricity exports to its neighbors, in the event of very low hydropower levels. The minister was clearly prioritizing the country's domestic consumption, but his comments. Caused uproar both at home and abroad, helping me, Richard Sverrisson to discuss the reasons why Norway would conceivably cut power flows to its neighbors and what such a move could mean for the wider market. Marius Holm Rennesund of Thema A warm welcome to you, Marius.

Marius Holm Rennesund, Partner, Thema Consulting: 0:51

Thank you very much, Richard.

Richard Sverrisson, Editor-in-Chief, Montel: 0:53

Geir Brønmo of Afry, a warm welcome to you as well, Geir.

Geir Brønmo, Principal Afry: 0:57

Thank you very much, Richard.

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

And last, but certainly not least, Johanees Bruun of the Danish system operator Energinet. Hello and welcome to the Pod Johanees.

Johanees Bruun, Director for Electricity Markets, Energinet: 1:06

Thank you very much. Looking forward to this discussion.

Richard Sverrisson, Editor-in-Chief, Montel: 1:09

Great. I'd like to start off by looking at the background and if I could turn to you to Marius. So what is being considered by the Norwegian government and why?

Marius Holm Rennesund, Partner, Thema Consulting: 1:20

To be honest it's difficult to to see exactly what is being considered. They are saying that they. Are considering some kind of mechanism that restricts exports. We don't know exactly what they're thinking about how they will do it and when but of course the background is the the extreme pricing we see all over Europe that that is also affecting southern part of Norway. And which is driven by the energy crisis we see across Europe with extremely high gas prices. Adding to this on the Norwegian side is of course that we've had a very dry spring in southern part of Norway and reservoirs at, is at record law level. So of course, that's created and, roar and public uproar in, in, in Norway and the politicians are trying to respond on that.

Richard Sverrisson, Editor-in-Chief, Montel: 2:09

What's your view, Geir, you also based in Oslo you are aware of the public debate in the country and that enormous pressure that policy makers are under, but still is this just politics? Is it an empty threat or is something that the, that Norway could actually push through, do you think?

Geir Brønmo, Principal Afry: 2:24

Yeah, absolutely. This is a very serious consideration and I believe the authorities are performing a lot of discussions and analysis in the background that is not popping up in media. It's quite extraordinary that there is so little communication around what they're actually planning to do. Their, I read this article this morning, Thursday that, that's browsed through all the news that has been on this particular measure about the reducing the exports. And it's been mentioned as a, in long interviews, as a one sentence here and one sentence there. So small kind of pieces of information are being leaked out but no real practical practical considerations as we speak. But we'll probably come soon. And also to be said that in as a kind of a soft already reduction going on in the market the Norwegian government has asked the producers to, to hold back their production. Not as a kind of a direct order, but as a yeah, they, they have asked them carefully which, which of course has been responded to by, by the, the producers. So at the moment there is a kind of a warmup going on in the market. And what, as I understand what the government is considering is to formalize it and attach it or connect it directly to something that is measurable in the market as the price area, reservoir levels or something like that. And of course it remains to be seen whether it's going to be a. A constraint on the production or a constraint on the the actual exports. That's very exciting to see the practical measures that's going to be taken.

Richard Sverrisson, Editor-in-Chief, Montel: 3:59

Absolutely. Is there a precedent here, though? Geir Has this happened before that exports have been stopped due to low reservoir levels?

Geir Brønmo, Principal Afry: 4:06

No, this is, this would be something new and a completely new structure from the Norwegian government. It's of course there is measures that can be taken in situation of crisis when you have the rationing when the reservoir levels are extremely low and you actually need to save the water as a, in a crisis situation, we are not there yet. It's only. Talk about that we might end up in a crisis situation during the winter in a unfortunate circumstance where we keep on exporting and we keep the rest of our levels at the minimum or even below minimum, as we see in the N oh one and N oh two in southern Norway at the moment. And we face very low inflows. Combined with the cold winter, things can go wrong potentially. The Norian authorities are sending signals that the risk is higher than normal. And we have been in a yellow situation considered a Binet for some months. So it's a signal that crisis can be coming up. But and when the if the crisis is there, there are measures and they can be quite extreme really controlling what's going on. And this what is. On the table now is a structure that can be used before there is a crisis to avoid the crisis, which has not been done before by the Nor.

Richard Sverrisson, Editor-in-Chief, Montel: 5:24

Absolutely. I sorry. To, but in there gay. But before I turn to Johanees, I'd just like to ask you Marius what's the lowest the reservoirs have ever been in, in southern Norway? And are we rapidly approaching that kind of situation?

Marius Holm Rennesund, Partner, Thema Consulting: 5:37

Yes we are, for this time of the year, we are at the lowest level scene. So we are making records week by week right now and unfortunately also this week, the reservoir levels came came on Wednesday. And we saw that it was actually going down in, in the southern parts of Norway. So we, we are in a situation we've never been before.

Richard Sverrisson, Editor-in-Chief, Montel: 5:56

Okay. So I suppose we're praying for rain at the moment. Yeah.

Marius Holm Rennesund, Partner, Thema Consulting: 6:00

Yeah, definitely. What's happening over the coming eight to 12 weeks is extremely important. After that we, what's, what's coming then is in form of snow. And you can't use that for power production before next spring. So the coming weeks will be be extremely important for the situation throughout the winter and early spring in, in the southern part of Norway.

Richard Sverrisson, Editor-in-Chief, Montel: 6:21

Absolutely. But Johanees, what I'd like to have your reaction to this discussion in Norway. What are what's your view here?

Johanees Bruun, Director for Electricity Markets, Energinet: 6:30

First of all, I represent A-A-T-S-O and therefore security of supply is always in focus. I have sympathy for the Norwegian concerns as such, but I have to be honest and say I'm very frustrated by this proposal. Unclear as it still may be. And I have difficulty to see. First of all, whether this is at all legal, I know that the Norwegian regulator is currently looking into, shall we say, what are the legal possibilities? What are the boundaries that needs to be respected here? So first of all, there is a substantial legal obstacle to implementing export restrictions. That's one thing. Secondly. Even though, as I said, I have sympathy for security of supply concerns, I think it is simply the wrong tool that they're applying. In my view and in the ginette view security of supply is enhanced through our interconnected and it is never to anybody's benefit to impose restrictions on the trade and the and the market. So at this point in time we are on the one hand, curious to see, as Gaia said, that what is actually in store. We're also curious to see whether this will legally fly and at the same time we are rather frustrated. Maybe I can phrase it in the way that we have invested the Danish electricity consumers together with the Norwegian electricity consumers have over the years invested in. 1700 megawatts of Interconnectors between Norway and Denmark. In our way, we, the way we approach curative supply is very much reliant on our ends, interconnectors. And then this infrastructure that we jointly invested in is now certainly being cut off one sided. Potentially by the Norwegian government. That is of course, a frustrating situation to be in, that they are through their actions if implemented, they're actually reducing security supply in Denmark.

Richard Sverrisson, Editor-in-Chief, Montel: 8:41

What's the level of debate, the public debate about the energy crisis in Denmark? Is it on the front pages? Will the newspapers as it is in other countries, for example, Norway,

Johanees Bruun, Director for Electricity Markets, Energinet: 8:50

if you had asked me last week, I would've said that there isn't that much debate yet. But, currently it is very much on the front page. Just this morning, one of my employees was in the national broadcasting news, speaking about the energy prices. So it has come to the attention also of the general public and the political level in Denmark, but less so in Norway. And I think also that has, comes from the fact that if you look at the consumption per capita in Norway, it's probably four or five times higher than in Denmark. So as such a price impact is more severely felt. In Norway, but it is getting everybody's attention in Denmark as well.

Richard Sverrisson, Editor-in-Chief, Montel: 9:28

Other TSOs in the Nordic region have also been very critical of this. This plan proposal from the Norwegian government Yuko Ru and from the TSO finger, it also was very critical publicly about it. But what could be the repercussions if, we're in the realm of speculation here. I can see that, but I, what would be the repercussions if this were to be followed through Johanees.

Johanees Bruun, Director for Electricity Markets, Energinet: 9:51

First of all, I think it's difficult for me to speculate on such a matter. I know that the policy from GUI is that we want to keep our interconnectors open, and if we are, as we are criticizing Norway for potentially cutting the export capacities, I think if we would. It would be strange if we were to do the same thing. So we are not planning, at least not from the Guinea side, and I don't want to speak for the Danish government in this, but I don't think that we would, as such have repercu precautions or if you like retaliatory measures or something like that. But I do have a concern on a more general level that the. Energy crisis is a European thing. Actually it's a global thing, but in a sort of our perspective, it's a European thing, and I think the solutions had to be found at the European level, and I don't think we will benefit. I don't think anybody will benefit if this is tried, if this is handled through national measures.

Richard Sverrisson, Editor-in-Chief, Montel: 10:52

I mean that, that would be my next question and ask, turning to you here, mais, is there a danger here that we see certain countries moving into more isolationist and national energy policies and they're not thinking about the region or Europe as a whole. Is there a danger that some areas of the, of Europe or some countries could retreat into that kind of a move.

Marius Holm Rennesund, Partner, Thema Consulting: 11:14

Yeah, I definitely think so. And security of supply is of course on the top of everybody's agenda right now. And and in, in a way I think that's also the Norwegian government's fair in a way. Because we've been exporting, to Europe for some time. We have very low reservoir levels. We might need imports going forward, and I think their prime fair is that Germany can't deliver on that import during the winter. And they will make sure that we're not ending up in, in that situation. And that shows you, you're thinking more about your national concerns. And I think also other countries in Europe might do that going forward. And I totally ag agree with johans. Trade and keeping the interconnectors open increases security of supply, right? For the whole system. We might end up in with a more costly system across Europe with less security of supply if this plays out. And more countries think more about their national supply, demand balance and than the trade as well.

Richard Sverrisson, Editor-in-Chief, Montel: 12:13

Okay. What do you think here? Is there. Is there a concern that the principles of solidarity or corporation, of interconnectivity of regional security of supply are lacking here?

Geir Brønmo, Principal Afry: 12:26

Yeah, I think that there should be some kind of some kind of aftermath or maybe also, as soon as possible that the Nordic countries, at least as a group, should cooperate on measures to handle this type of situation where there is a huge demand from the from the European side that can threaten a very particular security of supply concern that is very Nordic in its nature. The emptying of the hydro reserv. Ours, it's not only a Norwegian concern, it's a common Nordic concern. Of course, Norway has 100% almost hydropower, but the Nordic hydropower percentage is also extremely high. So if Norway runs dry water, it has repercussions for the full Nordic system. And I won't go into specifics but. There would probably be possible to find measures that could protect the security of supply from a Nordic perspective in cooperation between the Tezos and the politicians, rather than going into national specifics.

Richard Sverrisson, Editor-in-Chief, Montel: 13:31

Absolutely. Johanees, are you in dialogue with your colleagues both in StatNet Kernet and Fingrid around this issue?

Johanees Bruun, Director for Electricity Markets, Energinet: 13:38

Yes, we are. Yes, we are. I think at the moment I speak. With my market colleagues on a daily basis. Again, I don't want to speak for them in any detail, but I think it's fair to say that we all see better solutions through the markets and keeping the markets open. As such, the idea or the notion to. To have export restrictions, say it's not a flower that has grown in our yards. I think part of the problem in Norway is it's a little bit about narrative. I think the narrative in Norway is that Norway has export cable and just Thursday morning yesterday. Norway was importing through the North ceiling, through NFL cable to the uk. And if you, through the political debate or the public debate, constantly refer to these ca interconnectors as export cables, then you basically present the wrong picture. And I think you, we may at some point face the security of supply situation in Norway, but. In all fairness and maybe a little bit provocative, there is no security of supply issue in Norway at the moment. There is high prices in Norway and the political level are responding to them, I believe, more than the actual security of supply. And the funny thing is that when. Norway during these past weeks are exporting to the continent. That may, that means that the prices are higher on the continent than in Norway. So even though it's presented as very high prices in the, in southern parts of Norway, the prices are higher on the continent. If there was in fact a supply crisis in Norway, the flow would change and all these quote unquote export cables would turn into import cables and they would actually help security supply situation in Norway. And the good thing about all these interconnectors is that they actually feed into the areas of Norway where they have the issue.

Richard Sverrisson, Editor-in-Chief, Montel: 15:42

I think that's very true, and I think

Johanees Bruun, Director for Electricity Markets, Energinet: 15:43

that's can I, yeah.

Geir Brønmo, Principal Afry: 15:44

Can I have a comment on that?

Richard Sverrisson, Editor-in-Chief, Montel: 15:45

Sure. Ga yeah, please. If you got something to add. Yeah,

Geir Brønmo, Principal Afry: 15:48

I think probably Johanees also followed a little bit the Norwegian debate and it's extremely fierce and should be grateful to the Norwegian government for not considering seriously some of the proposal that has been on the table that are quite much more extreme than, than just when you see a high risk for security of supply issues, then you do some kind of export restriction that could be relatively soft. Let's see. But the the proposals on the table has been things like putting a very low maximum price in the spot market. For instance which is a completely different and much more dramatic market measure. And that being said I've, I I understand any GI net and denmark's frustration on this this particular point because throughout the recent years, there has been a lot of export restrictions from quite some partners where Denmark has interconnectors you can see the situation in Germany where we had a lot of a lot of grid works in Northern Germany, and there has been. A lot of restrictions on the export from Denmark to to Germany by the German TSO tenant. One of the German TSOs and also from ska cnet has been in the past and everything with reference to the security of supply. This is not new for Denmark, and I believe the frustration is is building.

Richard Sverrisson, Editor-in-Chief, Montel: 17:07

Absolutely. It's been until Denmark been in the firing line over, over many years in terms of import export, but, mo is Johan's point here that the narrative the narrative in the public domain I is at fault here? It should, we should be talking about import cables as well. Is this, does it reflect the fierceness that gay said about the public debate in Norway when you have these extremely high prices and very pressured politicians what's your view here?

Marius Holm Rennesund, Partner, Thema Consulting: 17:32

I agree with that, but I see. The difficulty for the politicians to explain this. It's a complicated market. And when we built the cable and the debate around that, it's always been said that you, in a dry year, you will get import. And that will help the Norwegian situation. And. You will do that at even higher prices during the winter. But to explaining to people that now we're in a very dry year, but prices and the crisis are even more severe in Europe, hence we are still exporting. That's very difficult for people to grasp and understand. So I. For the politicians to be able to change that narrative. The way the discussions now have developed in Norway, which as Gary said is very fierce is difficult. And adding to this is, is very, when you're not into details on the power market and you see the the two additional cables coming in and prices skyrocketing after that, it's very simple for people to point to that. Of course the last two interconnectors means somewhat higher prices, and they mean more now than in a more normal situation because you have extreme pricing on the continent. But that's what people see. And that's the narrative that is out there. So in a way, I think politicians feel that they have to react in some way and let's hope they do that in a way that doesn't ruin the market functioning. I think that's that's what we have to hope for and have to. Try to help them with.

Richard Sverrisson, Editor-in-Chief, Montel: 19:05

Absolutely. Johanees we're, we are at, in certain regions in the Nordic area, we have prices of five, 600 euros a megawatt hour. We've seen this week, prices up at 4,000 for some hours in, in Lithuania. And this is, we're in August. What are your concerns ahead of the, autumn, winter months?

Johanees Bruun, Director for Electricity Markets, Energinet: 19:27

At the moment, we are facing the perfect storm, and it's just a storm that keeps getting more and more perfect, so to speak, through low river levels in Germany, low availability of nuclear and France. We all know the, these factors that factor in. So as such, we are in a, in, of course, in a very dire strait. And I think if we look at this in a market perspective, we need to look at what. Is to be done short term and what is to be done long term. I understand there is a political need to support consumers, businesses, et cetera, who are suffering. I think those measures are completely legitimate and valid. I just would very much like them to take place outside the market. I think, as a basic rule, you should separate your social welfare policies from your energy policies. So those short term measures that are probably needed from a political and economic socioeconomic point of view should be made outside the market then and I don't think price caps or splitting the market in a renewable market and a fossil market, and some of the others have shaped more. More, more strange proposals that we've seen. I don't think they're the way forward, but I think we need, and that we need to have a look at the current market model, the target model that we have been developing over the past, not just years, but even decades, where we have a solo model in marginal pricing. I'm not saying that needs to be changed, but I think we have to have. A proper analysis of whether this market model that has in fact served us very well for the past decades, whether that is a sustainable model going forward. I'm not necessarily looking so much at the current crisis because I think it is a, although the duration may be long, I don't think it's a permanent situation, but I think we have to have a look in a longer perspective on a market design that is perhaps more designed for a market where an increasing amount of electricity is produced through variable renewable sources. This model was based was founded or I developed in, in a market that was dominated by fossil fuels. And I think we, we owe it to ourselves and to the market, and ultimately to society and the consumers to have a thorough look at the target model, whether that needs to be adjusted and I think particularly important, and that is that we are looking at this in a European perspective, not just national, and not just regional, but look at it in a European perspective.

Richard Sverrisson, Editor-in-Chief, Montel: 22:05

What's your, should we have is it time for a rethink of the market design move away from the marginal pricing model, for example?

Geir Brønmo, Principal Afry: 22:14

I don't have any strong views on on, on that. I believe that the current market design is being challenged. Absolutely. And is being constantly developed on by authorities. And, the but but an observation is that the power system is getting more and more political and less economic in a sense. We we need to go for decarbonization. And to achieve that, we need a strong political consensus in Europe to to go. For that. And it's really tricky to design a market that can support that without any interplay between the economics of the market and the the the will, the strong will of decarbonization from from the politics side. And precisely how the kind of the day-to-day market should then be organized to facilitate more and more renewables coming in. That's a very complicated and interesting issue to debate. I believe. We cannot land that one in, in, in this in this conversation. But very interesting times coming up. But I believe that this crisis will spark. Will spark renewable ambitions in Europe since we are showing such vulnerability towards towards certain aggressors. That probably in hindsight could have been avoided. But but of course, Mr. Russia has shown it's more, it's true nature than we would have that we managed to expect. And the long term security of supply. For Europe will probably be an issue that that will be discussed for some years to come.

Richard Sverrisson, Editor-in-Chief, Montel: 23:43

Marius, finally unfortunately we're running out of time, gentlemen, but a final comment from you about the potential, redesign of the market model. What's your view here? We. We're at five, 600 euros a megawatt hour in August. Should prices go even higher as we go into the ottman winter, the pressure can only mount on politicians to do something or to be seen doing something. What what's your view?

Marius Holm Rennesund, Partner, Thema Consulting: 24:06

It's it's a difficult question and we see that right now everything is up for discussion. Basic. Hopefully we can get through this winter and the coming year as well with some of the short term measures that is already in place with helping households and potentially also industries coping with the high power prices. Prolonging nuclear for months or a year in Germany would help to get those through the situation we see right now. And if we can get through that I think, we can turn to more the long term developments in the power system. And as guy said, I think it will definitely spark the the investments in renewables that is good climate wise and we need more capacity and more production into this market. And that's also what we see see in Norway. So hopefully we can get the offshore wind developments going as well. And improve our supply demand balance.

Richard Sverrisson, Editor-in-Chief, Montel: 25:00

Hopefully there is light at the, at this very dark tunnel at the moment. But gentlemen, thank you very much for a fascinating discussion. And thank you for being guests on the Montel Weekly podcast. Thank you. 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.