
Plugged In: the energy news podcast
Coming from the heart of the Montel newsroom, Editor-in-Chief, Snjolfur Richard Sverrisson and his team of journalists explore the news headlines in the energy sector, bringing you in depth analysis of the industry’s leading stories each week.
Richard speaks to experts, analysts, regulators, and senior business leaders to the examine not just the what, but the why behind the decisions directing the markets and shaping the global transition to a green economy.
New episodes are available every Friday.
Plugged In: the energy news podcast
Is the switch to gas a flash in the pan?
Recorded live at the Montel Nordic Energy Day, this week’s pod addresses key issues including the outlook for CO2 prices and developments in the Nordic region.
Catch the opening snippets from the event, and then listen in to a deeper discussion about the main drivers in the carbon and Nordic power markets for the coming months. Will the switch to gas-fired generation be temporary, or more permanent?
Host:
- Richard Sverrisson, Editor-in-Chief Europe, Montel.
Guests:
- Ingvild Sørhus, Senior Analyst, EU Carbon Analysis, Refinitiv,
- Tor Reier Lilleholt, Head of Analysis, Wattsight.
Conference moderators, Morten Hegna and Olav Vilnes, Montel.
Wow. Ladies and gentlemen, welcome to the Nordic End today, oh 2019. It's a true honor for all of us in motel to have gathered so many people here today. And this is, uh, the, uh, 16th time we are organizing. The, uh, Nordic Energy Day, so very welcome to you all. We hope that this day will be very interesting for you and also that you can interact in the best possible way and have a good outcome of this, uh, conference. I'm Morten Hegna, and, uh, I'm here today with my co-moderator, uh, ness and, uh, we have a quite, uh, extensive program for you today.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Hello listeners and welcome to the Monte Weekly podcast. You've just heard the introductory session at the Nordic Energy Day. My name is Richard Sverrisson and I'm joined today by Ingvild Sørhus, senior Carbon Analyst, um, EU Carbon Analyst at Refinitiv and Tor Reier Lilleholt head of analysis at Wattsight. Um, a warm welcome to you both. Thank you. Thank you. Um, we are here to discuss. Current dynamics in both carbon markets and also in the Nordic power markets. Now I know we're very lucky to have you two experts here who can guide us through the, if we, if we turn to EU carbon. We've seen prices touch, uh, Euro 30 in the European trading scheme, and they've fallen back to sort of 26, 27, although they're around 25 now. We've discussed this in the, in the last week's pod, but could you briefly go into the dynamics, what's happening here? Because normally prices go up in August, don't they?
Ingvild Sørhus, Senior Analyst, EU Carbon Analysis, Refinitiv:Yeah, it's, uh, because of how the, uh. Emission trading system is set up, or the auction calendar for the, uh, EUTS is set up. It's in August. The, uh, auctions are, or supply coming via auctions are haled. Mm. Uh, due to kind of people being away on holiday and lower lower production in Europe. Mm. So to cater for that, the auction supply is halved in August. Mm. But what we have seen in the previous year is that. Kind of prices have been, or that has supported prices in August, uh, this year?
Richard Sverrisson, Editor-in-Chief Europe, Montel:The thin liquidity, you mean? Liquidity? Thin Liquidity. Liquidity, yeah. Or
Ingvild Sørhus, Senior Analyst, EU Carbon Analysis, Refinitiv:at least, uh, low supply coming to auctions. Mm. So not necessarily thin liquidity, but the lower supply coming to the market. So, and that's probably what helped. Pushing up the price in July.'cause then we saw kind of a bit of a rally in prices, again, on the expectations that it was going to be kind of shortage in the market when August was starting with Hal Auctions. Mm. And additions. The, um, the heat wave in Europe also helped kind of, uh, carbon spiking. Mm. Spiking to new high levels,
Richard Sverrisson, Editor-in-Chief Europe, Montel:do you think we are likely to see prices return to 30 again in the coming weeks or months, or are we more likely to fall back, you know, below 25? What? What's your view here?
Ingvild Sørhus, Senior Analyst, EU Carbon Analysis, Refinitiv:Good question. It's tricky to pinpoint if. I mean, if it's going to 30 exact or above 30, or if it's falling back again, we see quite a lot of technical trading now. Mm-hmm. Uh, that it's not necessarily fundamentally driven. The movement we have seen kind of over the last few weeks, it's more kind of technically, uh, driven, also supported by this underlying F factors that, like you have half auction supply coming, coming in August. Gas market is quite bearish at the moment. We have fuel switching going on full speed. We'll return to that. Yeah. But yeah. Yeah, yeah. And I think kind of, so from that side, you're not getting any kind of support to carbon. But I wouldn't say, I would rule out that prices would go, uh, to 30 again. Mm-hmm. But, uh, probably it'll kind of ease a bit, uh, now when auction supply coming back to normal in September. Okay.
Richard Sverrisson, Editor-in-Chief Europe, Montel:So it looks increasingly unlikely. So what do you think toward I, um, I. Obviously the, the price of carbon is an important component in, in Nordic prices. You were at the Nordic Energy Day here, Montel's Nordic Energy Day, and, and you gave a bit of a sort of bearish outlook for carbon. Can you explain some of your reasons behind that?
Tor Reier Lilleholt, Head of Analysis, Wattsight:Yeah, I could just start with the, it's correct that it's very important for Nordic market'cause it's actually the half of the price of the Nordic power prices is connected to CO2. Yeah. So I'll start with the, of course. It's. From start off it's a bearish market 'cause it's oversupply. It's huge in this market. So of course we have this market stability reserve, but we'll help that now for the next couple of years. And on top of that, we have seen a huge change now the past one or two years because of. Maybe it could be due to the very high CO2 prices. Mm. Because you see the GDP GR growth rate is a lot lower now than expected one year ago. You see the industry are struggling more and they will, uh, shut down the industry and that will have a double effect because you produce CO2 when you produce your products and also you use electricity to, uh, to burn when you are in the industry. So it's a huge component. Component. So the industry is one side, and you also have the, a lot more. Scary mark. Work economics at the moment. You have the trade war, you have a lot of the Brexit and the performance in UK and Germany is a lot, uh, poorer than I've seen one year ago. And the other side on the power side, uh, you see also the, um, residual, uh, now the residential consumption is also going down. Uh, you see two to 3% lower now than last year, so that will help. And you also have the substitution price. The gas prices is so low that it's. It, you could, uh, switch to gas with a lower CO2 price, and that could also trigger lower prices. So more or less, we have a more balancing price. Closer to 20 euros. Okay. Where the industry will survive. And also the producers are happy with the level of the CO2 prices. Okay? So, so we are a bit a bit lower, but it could take some time because you need some time to let the physical or the fundamental figures, uh, come out in the market.
Richard Sverrisson, Editor-in-Chief Europe, Montel:To you, you, you mentioned the, the recessionary fears here. Yeah. Um, sort of the, the, the headwinds maybe the, the clouds over, uh, you know, not just European, but the global, um, trade and, and the global economy. England, what could this do to, to, to carbon prices? I mean, tore saying 20, could it go below this? And even much below this, we've, we've seen this before as well, with a re global recession.
Ingvild Sørhus, Senior Analyst, EU Carbon Analysis, Refinitiv:Of course, we, I mean, if you have a recession, uh, you saw kind of how that was. Uh, lowering production in, in, uh, or activity in Europe. And of course if you have lower activity, that will mean, uh, lower emissions in Europe. Mm-hmm. Uh, hence, and hence less less demand, which will have a bearish impact on prices. I mean, will prices crash from the levels where there are today to kind of the law as we. Have previously seen? I don't think so, because we have this, uh, market stability reserve in place. Every area will have the publication of the official oversupply number, which will make the basis for the how much should, uh, go into the market stability reserve. And of course, if you have lower demand, that will mean you have a higher oversupply and then the marketability will respond to that. Taking in more. From auctions in the pre next year. So I think kind of, um, that the risk of a crashing carbon price is much lower than we had in the previous years when, when we didn't have the marketability reserve in place. I. I mean, it will be tighter. It will be tighter going on. I mean, you are going for a 40% target. Uh, possibly also a tightened, uh, 2030 emission reduction target for Europe. And also if you want to go to your, you want to go to a carbon zero in 2050, then emissions needs to go down. And, uh, the car, costal carbon needs to go up.
Richard Sverrisson, Editor-in-Chief Europe, Montel:I was interested, Torah, and you were saying about household consumption falling to 3%. Could you talk a little bit about that and what, what does that mean? Is this a, is this a growing trend? I mean, it it, given the growth of ev certainly the electric vehicles in Norway, that seems to be counter a little bit counterintuitive or counter, um, to what we're hearing.
Tor Reier Lilleholt, Head of Analysis, Wattsight:I think we could separate the Nordics and the European areas a little bit because in the Nordics you have a lot of things are taking a growth in the consumption still. You have the battery fabric. You have the data centers, and you have also the electrical electrification of the transport sector. And you also have the. Oil industry already. Next month we will start a new cable to oop with, uh, 115 megawatts. So it's one of the big oil fields in one of the biggest, yeah, it's new nuances. So, uh, so that will be in the Nordics. You will see a tendency that some of the consumption will increase still. But look to Sweden. The industries in Sweden has. Really been knocked hard by this as well as well. So the, the price or the consumption in Sweden industry in Sweden is going down as well. And one year ago, the, the, um, op it was a lot more optimistic also in, in Sweden. So when we're going to Europe, you see, uh, one year ago, the, uh, it's all very optimistic. It was all, all hours was pointing upwards. But. Suddenly it turned downwards. And for,
Richard Sverrisson, Editor-in-Chief Europe, Montel:for the household consumption you mean? Yes. And also the industry. Industry. Okay.
Tor Reier Lilleholt, Head of Analysis, Wattsight:So I think we have some figures may, maybe the industry is reduced with 50 tett hours in a year. Okay. Across, across your, in, across Europe. That, that's huge. Of course. It's very, yeah.
Richard Sverrisson, Editor-in-Chief Europe, Montel:And what, what does that do for carbon, uh, demand? I mean, if, if people, both industry and households, or households are choosing solar panels, batteries, industries either closing down or, or relocating, what, what's this doing for carbon? The carbon balance.
Ingvild Sørhus, Senior Analyst, EU Carbon Analysis, Refinitiv:Of course if industry is closing down, it's kind of yes, you are having less demand in the market. But we also have to remember that industry is getting a lot of their allowances for free. So, uh, a lot of these allowances will never hit the market that. Should then go to industry, of course, you could reduce activity and still get roughly the same amount of, of eua for free. Um, so I mean, in our modeling, of course we do have, uh, decrease in, in industry out. Put, uh, this year as well. Uh, so, and we do also scenarios for what will it happen if we have simulated a recession again. That will have a bearish impact on prices of course.
Richard Sverrisson, Editor-in-Chief Europe, Montel:So, I mean, if we return to the power markets tour, do you, um. It's quite interesting and, and you brought it up in your presentation earlier to look at the difference between the Nordic market and the German markets. Now the spread between some of the forward contracts is up around 13 Euros. And if I understand you correctly, um, you're making a clear case for the fact that the Nordic market is overpriced. Uh, could you give some of your reasons? Yeah.
Tor Reier Lilleholt, Head of Analysis, Wattsight:Yeah. Some other reason is that since 2015, we have seen a difference between the market expectation and our fundamental calculations. Mm. So it started there and has been there since. And one, one of the main reason is the start building of wind. Okay. We have the, a lot of wind, um, commission now in the next for the past years and we. They have started to sell PPA contracts and the industry is actually. Those who are buying all those, uh, contracts. So you see Alcoa, Hiro, uh, data centers. Uh, you have, uh, Facebook, Google, they are buying all this, uh, new renewables on long-term contracts. So they are actually already out in the market. So you don't see a lot of, uh, consumers. In this market, but you still have a lot of huge hydro producers that will sell or hedge in this market. And that is making a imbalance in the Nordic power market at the moment. And I think the prices in the Nordic market is close to what you will, uh, need to build out the wind power in, in the market. Mm-hmm. With our. Uh, a risk premium or, or a premium for, for the, um, interest rate mm-hmm. That you need to invest. And then they're sold all the power. Mm. So they don't have more incentive to, to go into the market. Mm. So actually the, uh, people or the participant who are gained from risk is. The big industry. Because they have got a lot of cheap power, I believe. Okay. So, so our forecast is, yeah, around 10 euros higher in the looking five, 10 years ahead in, in the market and closer to the German market because we. Connect more already in three years, we will build 5,000 more cables. Megawatt cables to to the neighboring countries out of Nordic.
Richard Sverrisson, Editor-in-Chief Europe, Montel:So that's an interesting question. So despite all the wind, uh, the additional wind capacity, you think prices should rise even further? Um,
Tor Reier Lilleholt, Head of Analysis, Wattsight:it's important that all these power has a way outta the system. Okay. And we believe with the new cables we have. Potential to export it to a, a higher price. Okay.'cause the continental prices are higher,
Richard Sverrisson, Editor-in-Chief Europe, Montel:so they will not reduce prices in the Nordic region, but will maybe equal lower some of the prices in the continent, which will mean a leveling of the two regions. Yes. Yeah.
Tor Reier Lilleholt, Head of Analysis, Wattsight:So of course more power means lower prices, but also more interconnections means higher prices. So, yeah. They are.
Richard Sverrisson, Editor-in-Chief Europe, Montel:That's always been a difficult sell, maybe domestically, politically, but, uh, yeah. But I think for, it's probably good news for, for certain consumers. So I think now
Tor Reier Lilleholt, Head of Analysis, Wattsight:the, the wind power is, uh, in the money without subsidizing. Mm. So of course that is also some mechanism who could Yeah. Make speed up this process. But we also have the other side that there's a lot of resistance against building wind in Norway, Sweden, uh, now. So you will see more resistance, uh, I think for, for the next five years in building onshore wind.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Mm. And that, that 'cause of the political pressure from groups and, and, and nature groups that, that, that will Yeah. Force a, a slowdown, you think? Yeah. Yeah.
Tor Reier Lilleholt, Head of Analysis, Wattsight:But still, we have a opinion in, in the Norwegian people that this 50 50 are building wind, not building wind, but we hear, uh, a lot more from the. Who, who, people who are against, against
Richard Sverrisson, Editor-in-Chief Europe, Montel:it. Of course. Yeah. They scream louder. Yes. Yeah, yeah, yeah. But one of these cables is going to the UK now knowing, well, there's quite a lot going on here in terms of Brexit. It seems to be, we're sort of, you know, we're heading full speed for, for, for no deal. What are the implications for the carbon market in particular, the UK installations and uas from UK installations
Ingvild Sørhus, Senior Analyst, EU Carbon Analysis, Refinitiv:for UK installations? I mean, the uncertainty if. There will be a hard deal or if it's going to be a deal, or when is UK actually out? I mean, you said it was increasingly, it seems to be increasingly the probability of, uh, that, that they're leaving on the third, 1st of October seems in terms of the rhetoric is increasingly, uh, uh, more likely. But for UK installations, it's, they don't know yet. For 2019, they don't know if they have to comply with their 2019 emissions. And that is, I mean, of course when you had the delay in end of March and you had kind of the new deadline and thir 31st of October, that made life a bit tricky for UK installations. So assuming that you have to plan. For the whole year as if you were, I mean, we think that there are a lot of installation that has planned as if they need to comply with the uts, uh, for 2019 as well. Probably, I mean, not to a full extent, but, uh, at least maybe it's a bit kind of been too risky to wait until you have clarity. Um, 'cause suddenly if you have a deal in, in October, then you have only a few months to cover your needs for 2019 emissions. But I think also for the, um, the rest of Europe, it has been, um, I. Um, I mean, you have a UK installation on one side that has kind of maybe this additional demand for UAEs now in 2019. Uh, but no supply is coming to the market. Because the auctions are on hold. You have, uh, free allocation to industries on hold. Then it's, you have this, uh. Supply and demand mismatch, uh, from the uk, which has also kind of been a supportive factor. And we saw kind of that supportive factor, uh, in during April when prices went up, uh, both on optimism that you thought you had the deal, but also this, uh, supply and demand mismatch. Yeah,
Richard Sverrisson, Editor-in-Chief Europe, Montel:I mean, I think, um. Maybe clarity is in a little bit of short supply as well, because, you know, and also the car market could be quite a long way down the list of priorities if you're having, uh, pork blockages, you know, short food shortages, et cetera, et cetera. So, you know, you know, we could be a long wait before there's, um, more certainty for for car market players.
Ingvild Sørhus, Senior Analyst, EU Carbon Analysis, Refinitiv:Yeah. Yeah. And I. And of course the, uh, there is a risk that you will have a set off if there will be a no deal. Um, and of course, when you're approaching the deadline, without knowing this risk will also kind of, uh, be, be priced in. You could have or most likely will have a bear impact if there is an no deal in in October. Uh. Probably yes, but the sell off from UK accounts.'cause the UK players will lose access to their accounts when they're out of the eu and, and kind of how much is this on the day that need to be, uh. On the last day when they, when they're approaching the, the closure of the accounts
Richard Sverrisson, Editor-in-Chief Europe, Montel:to I, another key market for the Nordics is Germany. What, what's hap what happens there? Um, you know, both of you've talked about fuel switching and we've seen certainly a lot of that, across Europe, but in Germany in particular, where Lignite seems to be lignite, producers are, are pretty much outta the production mix. Is this something you expect to continue over the autumn in the winter, or will these come back in? Do you think?
Tor Reier Lilleholt, Head of Analysis, Wattsight:You have to look at the different prices on gas and coal. Mm. Because the gas prices in the market are picking up again. Mm. So. In Q1 already, the gas prices are higher than the coal prices, so definitely we will switch something back again and you will see higher demand for coal and, but of course, if you're looking further ahead, two or three, four years, you'll see a huge. Planned phase out of, uh, coal power plants in, uh, in Germany, but you also have built a lot of ones just recently. So we have a lot of, uh, cheap coal production units that, uh, still will be running, I think if the gas prices are are higher, but they will no compete too much with gas. So that's why they're out of the market, uh, this summer and maybe also the autumn, but. Going into the autumn, you will see higher demand for gas because of the consumption is going up due to temperatures. And then you also will see higher prices for gas and they will come closer to coal. And I think that will line out the two different, uh, production units. I think so.
Richard Sverrisson, Editor-in-Chief Europe, Montel:So this market driven switch to gas or so golden age brief, golden age of gas. Is, is short-lived in your view?
Tor Reier Lilleholt, Head of Analysis, Wattsight:Yeah. Unless you believe in a very bearish, uh, gas market. Okay. Because the gas market seems to be under pressure. Okay. So it's the policy. Yeah. The demand in Asia has been lower. So all the l and g and all the, uh, gas power has pointing to, to Europe. And that's why we are in the situation we have now with low demand. Uh, also in Europe you have a lot of, uh, gas flowing into to Europe, but that will. Probably not be the same case next summer, but it, it's possible.
Ingvild Sørhus, Senior Analyst, EU Carbon Analysis, Refinitiv:One thing on the, uh, coal to gas switch, uh, is also a high carbon price nowadays. So, um, of course, gas is only emitting half of what the average coal plant is doing. Ignite even more so, of course, I mean, a high carbon price, even though kind of gas is recovering, uh, somewhat coal needs to stay quite low in order for, um. The call or the CO2 switch not to take place.
Richard Sverrisson, Editor-in-Chief Europe, Montel:And that doesn't seem to be much of a prospect of. Coal prices rebounding, or I suppose it's very much dependent on what's happening in China,
Tor Reier Lilleholt, Head of Analysis, Wattsight:in our view. It's a bit short term downward trend now, but in the longer run we see upside again for coal. Okay. So more close to 80 maybe. But it's also depending on the macroeconomic mix, so it could very easily change because the Asia is, uh, running cheaper. They have to set the, the, the limit where they are happy with the industry and also the all China, all the, um, mining of coal in China because it's a lot of employees that is affected in, in Asia.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Well, that's about all from us this week. Thank you very much to, to England to arrive. Listeners, please make sure you join us again next week. Remember to keep up to date with all our stories on Monte News and follow us on Twitter and LinkedIn, and remember to subscribe on iTunes and Spotify if you haven't already.