Saved by cables?

Cross-border electricity cables are controversial. For some they provide supply security while others believe they increase prices in markets used to low energy costs. Listen to a discussion on the impact the power links had amid a period of extremely cold weather in the Nordic region. In addition, what is the outlook for wholesale prices in the coming weeks and months – could Finland see a return of EUR 800/MWh?

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

Guest: Sigbjørn Seland, Chief Analyst, Storm GEO; Odd Gunnar Jakobsen, Analyst, Volt Power Analytics.

Transcript

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:07

Hello, listeners and welcome to the Montel Weekly Podcast, bring You Energy Matters in an informal setting. Norway and other countries in the Nordic region experienced an extreme freeze at the start of the year. The weather is currently milder, but a cold snap is expected to return. Next week in today's pod, we discuss the outlook for prices. As we may not be saved by mild winter. In the coming once will electricity imports from other parts of Europe come to the rescue and keep a lid on power prices in the region. Helping me Richard Sverrisson to discuss the outlook for the coming weeks is our old friend Sigbjørn Seland of Storm Geo. A warm welcome, Sigbjørn.

Sigbjørn Seland, Chief Analyst, Storm GEO: 0:50

Thank you Richard. Happy to be back on report.

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

Perfect. And we also have Odd Gunnar Jakobsen, Volt Power Analytics, who makes his first appearance on the pod. A warm welcome to you too, Odd Gunnar.

Odd Gunnar Jakobsen, Analyst, Volt Power Analytics: 1:01

Thank you very much, Richard.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 1:02

I would like to start off by maybe talking more generally about 2023 H How would you summarize that year? Sigbjørn, in terms of prices in particular?

Sigbjørn Seland, Chief Analyst, Storm GEO: 1:13

Yeah. Yes. I think there are many perspectives there. If you look back all how like. We and general in general, the market expected 2023 to turn out. Things have been obviously we have seen high prices also in 2023, but luckily much lower than what we feared. In 2022, we are still a very high price level. Could pier to like everything before 20 21. But slowly but surely it seems that we are returning to once more normal levels. But still it's in general a higher price level than we have. Had back in the days for sure.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 1:54

Were there any surprises last year Odd Gunnar, would you say?

Odd Gunnar Jakobsen, Analyst, Volt Power Analytics: 1:57

I would say at the speed of how about how quickly they managed to put into this mobile l and g terminals in Germany helped a lot, 'cause that obviously lower the general price levels significantly compared to what we saw in. In 2022. I think that's the main issue. We also obviously saw a shift in the weather. So it, the high prices were in the south and luckily we got a lot of precipitation in the Autumn 22, and that continued into 2023, which obviously held these high priced areas which we saw down and. Obviously the weather shifting is not a surprise, but it's always hard to predict where it's gonna come.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 2:47

Exactly. Alright, we'll touch more on the weather later, especially the very cold snap we're currently experiencing in, in certain parts of Scandinavia in the Nordic region. But Sigbjørn in looking back again, were there any sort of key policy developments that, that you'd like to highlight or the things that that were important for the market?

Sigbjørn Seland, Chief Analyst, Storm GEO: 3:04

I wouldn't say that nothing that pops up in my mind. I think my main takeaway is that, markets are extremely efficient. You have seen a lot of you know what? Energy markets are global in a way, huge. Market and pricings work slowly but surely things return in a way towards a more normal situation. So I would say that is experience from last year, that the markets are extremely adaptable, flexible, and can cope with basically, any shock that we saw, like late 2021 or early 2022.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 3:41

The key mar market resilience in a way in a light of a very volatile and a very high price situation. But my question was really,'cause we saw a little bit of a trend towards interventionism or protectionism I, is that a concern, do you think? Sigbjørn in Norway or the wider Nordic region, for example? We'll come into talk about it later, but this there's a popular kind of, it seems to be an opposition building towards, say, interconnection. And the cables to neighboring countries?

Sigbjørn Seland, Chief Analyst, Storm GEO: 4:11

And guess in many ways. That is not a surprise in a way, maybe at least in Norway, where average household costumes like 25,000 kilos hours, are really exposed to the electricity price. In Salt Norway, we have seen this, usually high prices for a long time. Obviously people are, or many people are concerned about that and seek for what's, let's say simple answers in a way, or maybe not simple, but, I'm not surprised about that, I would say. And whether that will lead to a market interventions as a change of. Over market structure that depends, can be seen. Obviously from my point of view I would say that as I said already, the main takeaway here is that markets are working fantastically well. Also, from that perspective, I would hope that that yeah, basically the market structure is, that we don't see any significant intervention in the modular structure and keep things more or less asked. They are and hopefully things get a bit more rural. And I, when you then look back at the situation, I think you will see that that what happened would've happened. Basically in any market show, you would've seen high prices regardless. But the market dealt with, I have a very special situation. And from my perspective, it doesn't sort induce the need for any public interventions or.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 5:37

I don't expect you to disagree here Odd Gunnar with what Sigbjørn is saying I think, I feel I'm preaching to the converted in a way, but I, is that, do you feel a concern that there is the pendulum is swinging towards more intervention or more of a kind of maybe not intervention as such, but certainly more driven by politics. So politics is very much aware of what's happening in the market and is clearly eyeing developments.

Odd Gunnar Jakobsen, Analyst, Volt Power Analytics: 6:03

Yes. That we'll probably see maybe. Lessened in Norway as we see in around us as we see now. We saw some auction that failed in UK and and other places around us. And just quite swiftly, the EU then said that this is something we have to look into UK straightaway, increase their the support for for the next auction. And, we expect this to go through. And there will be a massive build out. We see Germany put up a lot of money to, to build out more. But these thing things takes time. Obviously so in that way I think we gonna see less in in Norway in that regard as we have seen around us. But and I don't think there will be. Any interventions on the cables the talk is about, or I also think maybe some of these I don't know, public opinions will soften a bit now that the prices, we expect them to be lowered to more normal levels as, as we expect and maybe they can see that, oh, okay, the country surround us are building a lot and they're actually getting lower prices. So I think the opinion will always change compared to where the situ situation is now and. You always have to think about I've been in for 15 years in this market, and things takes time. It's it's not a, it's not a quick fix here and

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 7:36

things don't happen overnight in these markets. Absolutely not. Odd Gunnar I agree. And I think you, when you're talking about the auctions I guess you meant the offshore wind auctions, right? But yeah. Yeah. So we have been saved by a mild winter. I think it's fair to say that certainly last year, now, this year started with a big freeze temperatures minus 40 even lower in some areas in the Nordic region. O okay. The coming days will be a little bit milder, certainly in the Oslo region. But next week we will see a return of the cold snap. What will be the impact on prices? If I can start with you? I go, now what? With your forecast and then turn to Sigbjørn.

Odd Gunnar Jakobsen, Analyst, Volt Power Analytics: 8:11

Now it doesn't seem like it's gonna be as cold but it still is gonna be very cold and, I think as we saw from Finland, as soon as they get problems with their heating then you need to use electricity to heat on top of the normal heating systems. And then consumption goes up quite a bit and that combined with low wind will lift that region again for sure. But and then. Now they have more power available. Obviously you get very vulnerable in these cold spells when it's this extreme if something will drop out. So saw last time Mepo went out couple of days and they also had some other CHP and gas threats out at the same time. And at. Also a bit critical, so obviously next week can come quite high and be driven high East from from the east if something drops out. I think that we have good control if there's a normal situation under the. The power plants are available.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 9:22

In these situations. Obviously every megawatt counts, really. But do you think then in Finland it's gonna be more critical than, say in Norway or in Sweden?

Odd Gunnar Jakobsen, Analyst, Volt Power Analytics: 9:30

Yes, because we have a good control from the, our hydro restaurants. Also will, we will be affected as we saw in in in Oslo area, N oh one and N oh five. It got pulled up quite significantly from from Sweden. Towards Finland. And so it's it's not a, it's not that, it's not a risk, especially end of the week, maybe Thursday. It looks very cold. Combined with low wind maybe. So that's could, we could see quite high prices also. Next next dose.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 10:03

What kind of high prices are we talking about? Just for, if you can clarify what N oh one and N oh five are for those listeners who aren't aware of the different, the price areas in the Nordic region.

Odd Gunnar Jakobsen, Analyst, Volt Power Analytics: 10:11

Yeah, it's N oh one is Oslo area around there. And no five is Bergen mainly, and the mountains around, but that's the, where people live. Those two are very have a strong connection because of the cables between them. And N five doesn't have any other outlets or help from north or south. They are just minor cables to that goes south. It was star and. Lost Tron, ham. Its this very thin cable. So it's those two are very, have high connections, but they have quite good hydro reservoirs are close to normal and but it's the, obviously the effects. So the capacity they are, so they are dependent on having inputs most likely, and then the weak, lots of inputs from. Southern region in Norway, and, but also they need electricity from Sweden. And that's where the key is that they. The price there. If they have to import from Sweden, they have to have a higher price than Sweden to get in what they need.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 11:16

Are we talking 200 euros, megawatt hour or, and above or less than that?

Odd Gunnar Jakobsen, Analyst, Volt Power Analytics: 11:21

First they would these say we can get hours up to there. Yeah.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 11:24

And Sigbjørn, what's your view here? Do you do you share the views that prices could peak next week on the Thursday?

Sigbjørn Seland, Chief Analyst, Storm GEO: 11:29

Margins are fairly tight in, in Finland you always have the risk for some incidents like nuclear pla or big cold pole pla to drop out during a coastal could, could happen. The main expectation is that the system will cope very well with a cold next week. We have now. I guess most likely it will be not be quite as cold as we had last Thursday, Friday, and we saw that. Basically the system copes very well with that situation without Finland, which had, unfortunately with Metropo also one other CSP path, but for the rest of the system, the, it looks robust, resilient, more resilient than any time before, I would say, because basically, consumption is not, obviously it reach just higher levels during the coldest hours and days. But we haven't seen higher consumption levels before. And, and we have a lot of with 35 gigawatts of wind power in the Nordic region. Now, normally you have five, a minimum, five to six gigawatt of wind power in the system. And, with the mild outlook for continent, Europe and uk basically next week in our. Prices have been decreasing a lot. So import the sea cables will be fairly cheap next week. My expectation is that you will see a moderate price increase in all, areas of the Nordic region compared to this week.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 12:59

That's interesting.'cause you will have the cables will flip. So the standard is that you export to continental Europe and to the uk. But in these kind of situations there'll be more import into the region.

Sigbjørn Seland, Chief Analyst, Storm GEO: 13:10

Yeah. Typ typically, it'll flip ball now. 2D cable roll cable. And then know to Germany and know to the Netherlands and UK, maybe or two towards UK and K one towards uk. That's, that is a bit more on, on the margin, maybe in a lot flip but, other normal circumstances except in Finland, margins are fairly decent, I would say. So I, I would be surprised if we saw very high prices.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 13:44

But would it then be fair to say that the cables have come to the rescue, as I mentioned to the, in the intro, that they've kept a lid on prices or avoided them going that high. Would that be correct? Sigbjørn?

Sigbjørn Seland, Chief Analyst, Storm GEO: 13:55

Yeah. Finally. Yeah. In a way it, that's fair. That's fair to say, flows typically during this cold snap, as it did partly last week, and probably will do again that next week.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 14:10

The public perception is often that the cables will increase prices. Yeah. Yeah. Sigbjørn but how would prices have been, for example, if you look back in, in the first week of January or last week, even without the cables. Is that, I'm putting you on the spot here. But

Sigbjørn Seland, Chief Analyst, Storm GEO: 14:26

if you look at last week if you think average prices with or without the C cables, I think that would've been more or less the same actually days a bit, tires, days a bit lower but that week just looking at that week, nothing else. It, that, that didn't make such a big change. I would say obviously they are the cap, the capacity to import is there and provide this,

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 14:51

but they could have an impact next week because

Sigbjørn Seland, Chief Analyst, Storm GEO: 14:52

yeah, in continent, Europe and UK will be fairly moderate next week likely. So that there's, the import capacity is there and that, that put sort lead on, on the potential price spikes. In nordic region.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 15:07

What? What's your view here? Odd Gunnar

Odd Gunnar Jakobsen, Analyst, Volt Power Analytics: 15:08

Yeah, no, I agree because obviously. Sigbjørn is saying here as the temperature is expected to increase again, this cold now in the continent, but it will increase especially for mid next week again. And normally that leads also to higher wind. We see closer to normal wind levels and there should be a good. Opportunity to import on reasonable prices. So I, when I said 200 I, that's the maximum one couple of hours. I don't expect that to be the normal next week unless something drop out, especially done in, as I said. But so it, but, yes. I don't think the prices would've changed much either if if we didn't have the cables. And when people talk about the cables, they normally refer to the new cables to Germany and and, uk 'cause as the situation is now with the very good control in the Nordic hydro areas they would anyhow price their water close to the fuel prices on the continent. And what they do now is just make sure they export as much as they can on these prices. So they get. Maximum value and import on the prices that drop well below that level. And that's what we are gonna see also next, next week, I assume.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 16:35

Just to turn to the kind of political debate in a way, and I think there's been some pressure on the producers as well to show, should we say responsibility in the way that they produce power, they use the water resources. Have you noticed any change in behavior? For example, especially in the off peak hours maybe that the priests are holding back more than they have done previously in light of this political pressure.

Sigbjørn Seland, Chief Analyst, Storm GEO: 16:59

I would say second half of 2022. I would guess that, the big Norwegian hydropower polices felt a bit the political pressure to be hanging let's say responsibly from from the perspective of the politicians to make sure that they had enough water left in their restaurants for the entire winter. So maybe you could. Can see that they were a bit like conservative with the way they produced and used their water the second half of 2022. But, it's not obvious. And I would say I don't find any like signs of that currently. It's business as usual for sure. From my. Perspective they utilize their resources to their, to the best of their ability to make the most money as possible. And that's the way they should behave and in my opinion.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 17:52

That's what they are doing. Do you think that the cold snap that we're experiencing and the resulting high prowess I is not enough to change? The perception that the cables are, there to raise prices domestically, that there isn't the public is not given the flip side. They're actually coming to the benefit and helping security of supply. What's your view? Sigbjørn?

Sigbjørn Seland, Chief Analyst, Storm GEO: 18:15

Obviously you get both there. And both sides of the cable exposed in a way. After a long time they have been seen as a pure export cable. That they can have a likely co substrate situation benefit, so to speak. But, given the current market situation, the Nordic region in Norway has a very big production surplus. So the old side of that coin is that you need to export the surplus, and that will basically continue for a long time. So they are mainly export cables because that is the system that we are having now. They are obviously the power flips and more and more hours that there keeps also utilized for for input too. To Norway, to and oh, to Southwestern and Norway. And, as electricity markets are changing, the green transition basically means that we probably will see, power flowing more often in, in both directions on these cable. And then maybe they, in a way you can see that then the, also the. The upside or the benefits of the kings are exposed to Norwegian electricity consumers.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 19:29

So that's further down the line, you think than Sigbjørn?

Sigbjørn Seland, Chief Analyst, Storm GEO: 19:31

That's further down. The line basically, the Nordic the Norwegian power production surplus doesn't disappear, so it needs to be expo exported. And that will mainly be on those. C cables out of NO two, at least as long as coal and natural gas prices are as high as they are and giving high electricity prices in. Continental Europe and UK then the export will be mainly be on those secrets. For sure.

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

Odd Gunnar, you, you mentioned the plans for offshore wind in both, in the UK and also Northern Europe. Once you start getting up to, 20, 30 gigawatts of offshore wind in the uk potentially equivalent in other parts of the North Sea, does it not? Make it. Does that not make sense? Does it not make sense then to build more cables to Norway? Is but is that, that, is that politically impossible? Surely that would drive prices down for Norwegian consumers. But now obviously that's very politically difficult.

Odd Gunnar Jakobsen, Analyst, Volt Power Analytics: 20:30

Yes sure. But shouldn't forget that this offshore wind parks is replacing a lot of gas. So it doesn't mean that will. Get a lot of oversupply but it means that they will have a lot of more hours with oversupply, which they need to get rid of somewhere. And obviously that situation, it'll be beneficial for us to import very cheap renewable power from these countries. And that's the, that was the idea. 15 years ago when they planned these cables as well. That was supposed to be a sport in a way for these this shift, this green shift. And and it works. We saw this already in spring. A lot of the solar production came also meeting our, inflow season start of our inflow season. So giving us very low prices due to the solar prices priced very low. And it was so we already seen quite a bit of it. Last year we've never seen so many negative hours as we did. Finland was well on top of their negative virus due to their. Moved from undersupply to Oversupplied country and with lots of wind and solar, and also with finally after 15, 20 years coming online. But so it's we always saw last year that this is what's coming. And we expect the solar build out has been just the same this last year. So we will see the same effect this spring. When it comes on and and then the offshore plants also in the Nordic seed will come and Atlantic seed will come on. Then definitely more and more cheap house will be imported and we will have more water that we can export or will not be as vulnerable for these colds belts or shops in fuel prices, or, which we never can actually. Control because that's a much larger ma world market that we follow the prices for. So it's cables will be very beneficial for us coming years.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 22:46

Absolutely. And that's something that seems to be forgotten often and that long term view, I think it's all very short term is, but actually 10, 15 years ago, you will, it's of course it'll be very volatile. On some days it'll be, you're not windy, not sunny. But on other days, it. Be, it'll be in abundance and that, that's also will hopefully stimulate lots of flexibility providers, hydrogen, et cetera. But Sigbjørn and Odd Gunnar if I can just finish off with what your expectations are for the first quarter for prices the, in the next three months. So we talked about next week, but if we can go a little bit further for the year. You've talked about production surplus, CPN what does that mean? Towards, from now until the end of March?

Sigbjørn Seland, Chief Analyst, Storm GEO: 23:25

Markets now expecting a return to, to like mild weather in, in continent Europe from mid next week. And, gas prices on a declining trend, the CO2 quotas and basically coal prices as well leading to, power prices in all of Europe on a declining trend. You know what honey? That put. Price expectations for Nordic power downwards as well. We see now this January, everything points to this being one of the coldest. January in decades. Three maybe. Yeah, the last three decades or so. So we have really exposed winter cold snaps and we still see, most areas and this price, it's even this situation doesn't clear much above rest of Europe. So that's all basically the upside for prices. Rest of winter a bits, put it a bit simply. So then it depends, on, on the weather area in the Nordic region. If it continues the wheelhouse. Know, the, with a fairly cold, dry situation, lasting now for three, three and a half months, if that should continue for the rest of the winter, we would follow continue Europe fairly close, I would say. But if we should see a change to our normal westerly flows, with higher temperatures, a lot of wind power in the system, with with about 35 gigawatt now installed. In the Nordic region. We could, it's not on the cards right now, i in the weather forecasts. But if we see that change towards Western flows, we will see a dramatic price for immediately because basically production surplus in the Nordic region is record high and growing by the day. Just adding more basically wind powers to the system. Not that not every day, but you still a lot of production capacity, which adds a lot of, like various price pressure. When you have, the weather solars, the warm, wet, windy weather solars that then you would see big price decrease in needed.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 25:36

Potentially around hovering around a hundred if the weather stays cold potentially coming down a lot further.

Sigbjørn Seland, Chief Analyst, Storm GEO: 25:43

Yes. And let's say, if it this is to where the situation prevails throughout, say, yeah, light this or, and if we see this, change over where the pipe that 40 immediately.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 25:57

Interesting. Yeah. Interesting. Sigbjørn, and Odd Gunnar what's your view? What's your take? Where, what's the direction prices could move in, over the coming three months?

Odd Gunnar Jakobsen, Analyst, Volt Power Analytics: 26:05

Yeah. I think what we see now, obviously the cold spell is now and agree with here that he also had a parish view on the fields. As long as. Seems to turn milder again in the continent. So the hundreds now going bit further through the winter and then coming into the spring spring in March, then we, that, that's a bit difficult, but we often see them. Quite high solar capacity in on the continent. So I think we, that could be something we could start seeing already then that we could get very low prices on good solar days from the continent and pushing down the prices here. And obviously if. See a shift here in, in the weather. See, and obviously we half the prices quite rapidly going because the, they, this memory is short also in the hydro community. So they remember last year obviously when they were saving a bit too much water maybe during winter and then suddenly. They got a lot of imports due to wind and solar and the storm hunts came in and just she ended up everything in Nolo region and also best of us. So it's I think they will be very eager to produce now. And then they eager to produce, then the chances of prices going down is is definitely higher, but then it's going up.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 27:42

Absolute. But as ever, it all depends on the weather, gentlemen. But Sigbjørn and Odd Gunnar Thank you very much for being guests on the Montel Weekly Podcast this week.