Return to 2019 prices “years away”

Nordic wholesale power prices are unlikely to return to levels around EUR 40/MWh as delivered last year. 

This week’s episode welcomes back Marius Holm Rennesund with a discussion on the outlook for prices over the coming months and years, with prices expected to stay low with demand side measures and batteries assuming a greater role. Rennesund also provides his view of the future development for PPAs in the region. 

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guests: 

• Marius Holm Rennesund, Partner, Thema Consulting, 
• Olav Vilnes, Chief Editor Nordics, Montel.

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:29

Hello listeners and welcome to the Montel Weekly podcast, bring You Energy Matters in an informal setting. Today, I'm away from under my stairs and in the Monte office at headquarters. I'm Richard Sverrisson. Today we'll be talking about the extremely weak Nordic wholesale prices and what they mean for the region. How long will they last? What do they mean for investments and PPAs are the breaks on now? I'm joined today by Marius Holm Rennesund, senior Analyst at Thema Consulting, and my colleague Vilnes, chief Editor Nordics at Montel, A warm welcome to you both.

Marius Holm Rennesund, Partner, Thema Consulting: 1:04

Thank you.

Olav Vilnes, Chief Editor Nordics, Montel: 1:04

Thank you.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:06

These are fairly dramatic times, so they're not marris. We've seen very, very low spot prices, especially in the, in the Oslo region.

Marius Holm Rennesund, Partner, Thema Consulting: 1:13

Yes, we have, uh, it's a very special situation indeed. We've never seen these levels before and they seem to persist for some time as well. So it's gonna be an interesting summer ahead and also an interesting fall.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:24

Absolutely. So. Can you give us the reasons for the drop? I

Marius Holm Rennesund, Partner, Thema Consulting: 1:28

mean, it's uh, all weather related. Basically. We've had a winter that has been very warm, so consumption's been low. At the same time, we've got a lot of precipitation, especially a snow up in the mountains. And combined with that, we've also had. Windy year, and we've also installed more wind capacity, so the wind power production has also increased. We've got a combination of warm, windy, and wet weather, which is kind of creating the perfect storm in the, in the Nordic markets. Could you put the current

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:58

hydrological surplus in a historical perspective? I mean, some estimates that it's, um, you know, it's at 28 terawatt hours currently down from around 40 in mid-April. How do you see this?

Marius Holm Rennesund, Partner, Thema Consulting: 2:11

No, I mean, we're at levels we haven't seen before. And, and the snow the amounts of snow up in the mountains has been extreme. We've seen 85 terawatt hours at the most which is double the normal. So the the producers have been really struggling to get rid of the water in reservoirs to make room for what's coming down now as this melting period has started.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:33

How long do you think we'll continue to see single digit spot prices?

Marius Holm Rennesund, Partner, Thema Consulting: 2:37

No. I mean, looking at the market now, we must expect to see them throughout the summer months, at least this week in a very special situation. The melting period really started now. We've had outages on cables from Southern Norway during the same period. So it kind of locks in that extreme power surplus we do have. And that has led to prices going down almost to zero. I think we had 1.6 yesterday. That's quite extreme when some of that trade capacity comes. Some is coming up today. We'll also see more capacity next week that will lead to possibility of exporting more, which is a relief for the producers. But still there's an extreme amount of snow that is melting and coming down in the reservoirs now. I mean,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:19

80 watt OTT hours, I mean, that's immense. It's almost the total yearly consumption of Norways now. Exactly. It's not far off. Yeah.

Marius Holm Rennesund, Partner, Thema Consulting: 3:25

No, and that's, we've also seen, I mean, looking at the reservoirs level, we started way above normal. And then, you know, everybody has competed to be able to produce. And, and we went down and, and crossed the normal some weeks ago and almost went, went down to the minimum level because we need to make room for that, uh, water that is coming down during the melting period. And we saw a, a big jump again in, in the rest of our level the last week and, and see that the, uh, the melting period now is actually happening. Because it was delayed a few weeks. It usually is when it's a lot of snow. Then it starts to melt a bit later, and we've had a bit colder weather for, for some weeks. But now the, the warm weather has, has really hit, uh, most of the region.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:08

Absolutely. So what about, what's the likelihood of negative prices in Norway and, and in Sweden, though? There, there was some instances earlier this year.

Marius Holm Rennesund, Partner, Thema Consulting: 4:15

Yeah, I mean, we, I think we still can see them in Sweden, especially in periods with a lot of wind power production as well. We have a lot of flexibility in the hydropower system in Norway. All the producers would like to avoid getting down there and rather restrict their their production. But there's also limitation of more on the regulatory side to prevent flooding, et cetera, you know, may force them to produce even in periods that they rather not want to. There is a chance that we even can get negative prices, but I don't think it's very large.

Olav Vilnes, Chief Editor Nordics, Montel: 4:49

That's also very much a rational choice question in a way that. It's more rational for them to just let the water just run past the power plants than to risk the negative prices. It is,

Marius Holm Rennesund, Partner, Thema Consulting: 4:57

I mean, there, there is a cost of, of producing as well, and you don't cover that cost when you see prices, uh, down towards zero, of course. So they would like to, to avoid that. On the other hand. Flood prevention is one thing. It's also kind of a, a reputational burden with letting the water flow past the turbines. So that's also something that some of them might, might consider as well. Of course, yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:19

We focus very much on what it, what it's, uh, the producer's view, but surely for industry and for the consumers, this is great news. Is it not?

Marius Holm Rennesund, Partner, Thema Consulting: 5:26

It is, at least for those who can, can actually enjoy the low prices. I mean, a lot of the, uh, the large consumers also have locked in power prices in, in long-term contracts, so they don't get the full reward of the very low prices. But for much of the service sector, for households, smaller industries, et cetera, this is a very good period for them.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:44

Well, we're sticking to prices most. How quickly do you think we can see prices return to? To 2019 levels or close to to 40 euros?

Marius Holm Rennesund, Partner, Thema Consulting: 5:52

That's the big question, right? Because right now the situation we've seen, the hydrological situation, the, the weather pattern is, is kind of overshadowing everything else. In the longer term, of course, the effects of the COVID virus will be an important factor going forward. What will happen to to industry demand for power? So far, we've seen almost no effect in the Nordics. We've seen quite, uh, dramatic falls, uh, across Europe. Germany is down almost well around 10%. We've seen weeks in, in Spain and Italy being down 20%, maybe even more growing again now, but still, you know, 15 uh, percent below normal. And my fear is that that will kind of. The Nordic market later on when the auto industry is struggling in Germany and Hydro is still producing aluminum maybe to, to stock up. But if that. Continuous, they might need to to slow production also in the Nordic. But so far the situation up here in the Nordics looks good. But the recovery will be interesting to see and everybody's talking about whether we'll get a we shape or a U shape or an L shape, and that's something that will determine. Also power prices going forward. There will be a few years before we, we see the 40 euro mark again. In any case, I think another important factor is also that, you know, this extreme weather scenario we see in this year in the Nordics will likely see the downside more often than we used to do.'cause we're building up a power surplus and wet, windy years will push the power price further down than they did before. So it's at least before we get the new cables to UK and Germany, that will ease the situation somewhat. But the coming years, the, the downside is definitely larger than the upside on weather.

Olav Vilnes, Chief Editor Nordics, Montel: 7:40

Do you see there, I mean, you have the you also used to have the cold price, like a marginal price set in the Nordic region, which probably also explains this long-term expectations of 40 euros 40, 50 euros. No, the gas prices have collapsed. Are they sort of taking over as the long-term guidance and with the gas price fall is that just doesn't mean we will still have very low prices now for.

Marius Holm Rennesund, Partner, Thema Consulting: 8:00

For years to come. Yeah, I think definitely we'll see that, uh, gas prices will grow in importance. You see that coal fired power is pushed out to the market, you know, on, on market terms, uh, today, uh, and going forward, I mean, the, the regulatory changes will lead in the same direction with, with the coal phase out in in Germany, et cetera. So gas will definitely be becoming a more important fuel also for Nordic power. You have to also remember that. The gas price we see currently it's extremely low and it's also driven by some of the same factor as factors as the the Nordic power price. We've had a very warm winter across Europe. And at the same time we'll build up a lot of LNG capacity. So there's definitely an oversupply and the supply haven't been able to to adjust to the situation we've seen during the winter and gas prices also started to fall. Long before the coronavirus hit Europe. So I think although gas prices may stay low also going forward, they will they will definitely recover from the very low levels we're seeing currently.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:05

And do you think then, carrying on from all of question that, do you think that's gonna be what the Nordic market is going to look to as a price setter rather than, traditionally it's been coal and the marginal cost of coal, but do you think it's gonna. Gas is gonna come to the forefront here and be more crucial.

Marius Holm Rennesund, Partner, Thema Consulting: 9:20

Yeah, definitely. I think we kind of get, we have two steps here. The coming years gas will become more and more important and then going further out on the, on the curve or beyond the, the traded curve, we'll see that the the long run marginal cost of new renewables will will be the price anchor. So from having a situation where coal has been the most important, fuel, gas will be in the medium term, and then cost of renewables or. Different also kinds of flexibility in Europe in the very long term. We've used to a market where demand, no, sorry, where the supply side is really where you have the flexibility, adjusting up and down the hydropower or gas power fire in Europe. I think hydrogen might be play a more important role in the very long term in Europe and also more kind of traditional. Supply flexi demand side flexibility, sorry will be more important, such as being able to switch up and down your regular consumption with batteries. Electric cars, you actually get paid to to slow down your consumption. More infrastructure cables will also lead to that flexibility and I think hydrogen will be, or we at least believe that hydrogen will be important. Green hydrogen, where you can. Produce hydrogen based on renewable sources when you have excess production, and you can bring some of that back to the power sector when you don't produce enough power from renewables.

Olav Vilnes, Chief Editor Nordics, Montel: 10:45

Yeah, you had a good example there in Denmark last week. There's a big project going on in outside of the Bon Hole island. You see more of those hydrogen projects now coming in there. Near 10 year term

Marius Holm Rennesund, Partner, Thema Consulting: 10:56

maybe? Yeah, I mean, it's, it's, it's a question of, of cost, first and foremost. Uh, you need to get the cost down. And there's also a question about the business models to being used. I mean, in new technologies, you, you would like to have some certainty in both your cost and your, your income side. So many are looking at stable power load and doing PPAs maybe. But what's really needed is, is to use some of that flexibility and, and rather use the spot market so you can produce very cheaply when power is virtually zero priced, uh, and then bring it back again into the market at, at high priced hours. So

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:34

if I'm gonna just interrupt them, Mar, I just, I'm in intrigued. To know what, you know, the, the demand side measures batteries, hydrogen, et cetera, even cables. What will that do to prices and price volatility? I mean, will it flatten 'em out? Will it, will it decrease that?'cause now, I mean, some days are crazy volatile. Mm-hmm. Uh, and, and purely on the base of wind and, and solar or hydro production. Yeah. So what, what would the impact be there on this, this increased flexibility?

Marius Holm Rennesund, Partner, Thema Consulting: 11:59

Well, well it's going in a way both ways, I think. I think we definitely will see large volatility going forward. And the different technologies are used in different ways and in different timeframes. I think we'll see batteries most on, you know, the very short timeframes, the intraday to move consumption a few hours. Hydrogen you can store for longer periods of time. There will probably also be a market that is larger than in the power sector outside of the power sector for transport industries, et cetera. So that will serve more as a hydro reservoir in a way, and at least. Way that you can move more energy over longer time periods. It will definitely increase volatility to get all these unregulated new production in forms of unregulated hydro, wind and solar. But. Storage technologies, both in forms of batteries and hydrogen, will kind of lower some of that volatility again'cause you're able to soak up the excess production in hours where renewable production is extremely high. So that will will. Lift prices somewhat in those hours and it will lower the extreme peaks in other hours when you have too little production.

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

So it's a more sort of extreme version or a more permanent solution to what we've seen happening to, to solar. Yeah. You know, the solar in the midday peaks where it's just flattened out those price peaks. So it's, it's, it's a similar kind of idea.

Marius Holm Rennesund, Partner, Thema Consulting: 13:25

It's a similar kind of idea,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:26

you know, I think we'd like to like to move discussion onto ppa, so I think that's a very interesting environment now. But just before we. Do we go there, Maris? I mean, do you think that the low prices now that we're seeing in the Nordic, uh, market are holding back

Marius Holm Rennesund, Partner, Thema Consulting: 13:39

investments? So far we haven't really, really seen that. We expected investments to be flattening out, at least in Norway now when we come to a close on, on the investment period in the L certificate system, although that. Didn't mean that much because prices are so low now. But every, there was a really large push to get online by the end of 2021. We expected it to slow down after that. When we're now also seeing the growing opposition and a revision of the the licensing system that also dampens the willingness to invest. So far we've seen new projects making, you know, final investment decisions both in Norway and Sweden. But it's gonna be interesting whether. These rather short term fluctuations or low price period will mean that you slow down investments. I think it also depends a bit on who is investing. The typical utilities who haven't been very active in, in especially onshore wind. They're more used to handling this wet years. I mean, it happens everywhere every once in a while and has for decades. So they're more used to that, to financial investors. My that. Doesn't know the power market as well as some of the utilities. Might be a bit more frightened. And you also always see that the forward markets is very adaptive. So even, you know, prices three, four years ahead are moving down when you have a we year, which is fundamentally not right.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:04

Yeah. No, absolutely.

Olav Vilnes, Chief Editor Nordics, Montel: 15:05

I also hope some, some talks in the market of, of companies trying to renegotiate their PPA deals because of, uh, this C'S price fall has sort of made some of the long-term analysis also. Getting lower fall 20 25, 20 30. So that there are no, have you seen that, that there are some Rene Renegotiations going on?

Marius Holm Rennesund, Partner, Thema Consulting: 15:24

No. No. Not that I've been aware of. But I mean, nobody wants to show us their, their price in the contracts anyway. But of course we, we read some news that prices have fallen in the PPA market as well. So it's gonna be interesting to see going forward. I think one issue that's been there for a few years is that. Our analysis and most other analyst analysis as well has showed long-term prices above forward market. And now you, you see the forward market even lower. Of course, we've also adjusted down our short-term, medium term price projections somewhat, but they might be more aware of the downside. When they've actually seen it

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

happening, because there's been some, you know, so some voices in the market will say have been critical to the fact that analysts always price, you know, especially in terms of, in the, in the context of PPAs price, way above market prices. Yeah. Or previously captured prices. So, I mean, now what, what's your view there? I mean, I'm putting on the spot a bit here because you're an of course. Some of those, uh, those types of papers that you put up?

Marius Holm Rennesund, Partner, Thema Consulting: 16:22

Yeah, I mean, we we're still about the market then and I have some problems really explaining why the market is so low going few years ahead as well. So I think we still are priced above. We've had interesting discussions with a lot of investors and clients and. There's obviously no clear answer to that. There's different opinions and different arguments, but you know, we feel comfortable with those assumptions we, we make and are open on them and, and the fundamental price level that that leads to basically. Fair enough, absolutely. Fair enough. If I understand it correctly, the

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:51

PPA market, we can call it a market or, or a sector was, was slowing down before COVID-19 struck, but now what's happened during the coronavirus time? Do you expect things to, to pick up?

Marius Holm Rennesund, Partner, Thema Consulting: 17:03

Afterwards or will it take some time? I think it will take some time and I think we will see with or without the COVID-19 virus, we'll see changes to that market. What we've seen so far is a lot of large players on the demand side going in large aluminum companies, data centers, et cetera, and you don't have too many of those. So for some of the large players in key sectors, they may be bought what they need for quite some time. So what we saw so before is. Restructuring or how you do PPAs. If you have a large wind project, which was very attractive a year or two ago now, you would rather make two or three PPAs out of that volume than going towards one customer with a large PPA. What's

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:45

the reason for that? More flexibility.

Marius Holm Rennesund, Partner, Thema Consulting: 17:48

Or more flexibility and the ability also for smaller players to do PPA, the market for the Alco and Facebook and Google may be saturated. So you have to look for different kind of, of consumers. So that might lead to smaller volumes in the PPAs.

Olav Vilnes, Chief Editor Nordics, Montel: 18:05

And you mentioned the level as cost of energy for wind power.

Marius Holm Rennesund, Partner, Thema Consulting: 18:07

Where

Olav Vilnes, Chief Editor Nordics, Montel: 18:08

is it now? Is it like 30 euros or you see it moving down into the twenties.

Marius Holm Rennesund, Partner, Thema Consulting: 18:12

The onshore wind, I mean, is moving fast. The coast is moving quite fast down the last few years. I, I think eventually we'll we'll see a slowdown in that. So it's, it's rather the thirties and than the twenties now we see. We hear about PPAs being done below 30 as well, but most of them are, are maximum 10 years. And, uh, the investors is rather making money on the volume above the PA that they put into the market and the volumes beyond the 10 years of the, of the PPA. Where

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:41

is the main hesitation in PPA PPAs, or where's the main uncertainty? Is it on the supplier side, the utility that. Develop or in the corporate side where do you see, or is it across the board?

Marius Holm Rennesund, Partner, Thema Consulting: 18:51

I think it's across the board. When situations like the one we're in right now happens, of course it increases uncertainty at all levels. We see that projects has been moving forward. The investor or utility starts to hesitate. I mean, what is the new normal is basically what they're asking.'cause they understand that, you know, this is short term period with very low prices, but has something fundamentally changed so that. You will see a new and and lower normal going forward. And I guess the thoughts on, on the demand side is basically the same. If I can do a better deal by waiting six months a year, I'll rather wait. Yeah, of course. I mean, I can go out in the market and, and source really cheap power today anyway.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:33

Yeah, for sure. I mean, what are your expectations of, of future balancing costs? I mean, that's a, that's a maybe important part of any PPA deal. I mean, for example, in Finland. What are you, what would your be assumptions here?

Marius Holm Rennesund, Partner, Thema Consulting: 19:44

I mean, we, we don't have a standard valuation of the balancing markets. I think what's gonna be interesting going forward is back to the technology side again. If you get cheap batteries in. That can even out some of that volatility and be used in the balancing markets. I think we will see price levels much below what we see today. So the question is, you know, for the hydropower, will they get the increased competition from, from other technologies going forward? I think that's, that's one of their fears. And

Olav Vilnes, Chief Editor Nordics, Montel: 20:14

what about financing here? Have the, the negative prices we discussed earlier, I mean, have they sort of scared off banks from, uh, lending monitor these projects?

Marius Holm Rennesund, Partner, Thema Consulting: 20:22

It's difficult to say, I mean. Many of the, of the banks that has been present in, in the market for, for quite some time. Again, they're like the utilities that have been here. They know that, you know, we will see wet years, windy years occasionally and kind of keep the long-term view. But of course, uncertainty again, definitely increases. What is the new normal, I guess, is also the question they, they pose. So it might be more difficult also to get to financing. And that's also one argument that we could see more investments by utilities rather than foreign funds that need project finance. Maybe you will get back to the way we used to finance the hydropower projects. Interesting.

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

This is a fascinating area, Mari, and, uh, we could talk at length about this, but, uh, you, there's, there's certain areas that we haven't even touched upon, but, uh, we'd love to discuss with you again, and it's, it's great to have you on the pod as ever, Maris. So thank you very much for joining us today. We've been, I think we've been adopting very clearly social distancing here. Yes. We kept, we've kept a meter, a meter and a half apart from each other. Just so you know, listeners, we're not, we're not all tucked in here, but thank you, Marris. Thank you all Love. And that's all for us this week. Remember to keep up to date with all our stories on Monte News. Follow us on Twitter, LinkedIn subscribe on Apple Podcast, Spotify, or wherever you get your podcast from. Thank you and goodbye.