Extreme year for Nordic power

Nordic power prices have languished near historically low levels amid a combination of extreme factors, notably an abundance of hydropower supply, and limitations in interconnector capacity and nuclear supply. 

In this week’s pod, experts discuss the outlook for prices going forward and whether 2020 will be a one-off or if market participants should brace themselves for more of the unexpected. 

Host: 

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

Guests: 

• Eylert Ellefsen, senior analyst, EQ, 
• Tor Reier Lilleholt, head of analysis, Wattsight. 

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. This week's pod returns to the Nordic Power Market. In particular, we will discuss the widening differences. Between prices in different areas in the region, amid interconnector outages, limited nuclear availability in Sweden and Finland, as well as a hydropower glut in Norway. We have two of the Nordic region's most experienced and respected analysts Joining us this week, first of all, Eylert Ellefsen, a senior analyst. Also known as Mr. Hydrology at Energy Quantified. Welcome back on the weekly podcast. Eylert. Always good to have you on board.

Eylert Ellefsen, senior analyst, EQ: 1:12

Thank you, Richard. It's nice to be having hydrology comment. I will also focus somewhat on the price outlooks too. So I think this is also on my. Interests.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:23

Perfect. Absolutely. But let's get to it then. Now, let and start us off with the hydrology, what's happening? We see reservoir levels have fallen slightly in week 33, but they're still very strong. Are we still in this extreme situation? How long would it last?

Eylert Ellefsen, senior analyst, EQ: 1:38

Yeah, I think we are still in a very extreme situation. But it's very interesting that we now for the first time since the spring melt started that we had declining as war numbers. But this is after a very dry week and I think. In general that this is not over. I see still some rising several levels to come this autumn by normally weather conditions. Of course,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:07

you expect this locked in hydropower, glut in Norway to continue then yes.

Eylert Ellefsen, senior analyst, EQ: 2:13

Because if you go to. The details of Norway, we currently nine percentage higher than normal, which means about nine terawatt hours. And the normal curve of the GIR is increasing from week 33 until mid of October. And I think this will also then be the case this year if we get normal weather conditions. Of course the export volume means somewhat for the wire curve and the production of hydropower, but in general, I don't expect that we'll get more than three to 4,000 megawatt export as an average throughout, let's say nearly until new year. This means that the production will not be higher than the inflows before mid of October, start of October if we have normal conditions, even by rather strong hydropower production and nearly max output on the export cables.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:15

So this is in effect. It's very bearish, then

Eylert Ellefsen, senior analyst, EQ: 3:18

well by normal conditions it's still bearish. I would say I have looked a bit on the precipitation variations that we can expect from now until end of October. Not looking further ahead, but just until end of October and I see that the variation ban is about plus minus six terawatt hours. So that it can be six tet hours wetter than normal, or six tet hours drier than normal in Norway until end of October, which will be good news. If we have a drier conditions, then we will come much closer to the normal survival curve and we will see increased water values if we get into a dry scenario. But if we get into a normal or wet scenario, of course wet will be very bearish even longer than end of October. But I don't see if we get into a wet scenario. There will be a lot of spilled water outside the power plants. And I think we can see on the national level, the seir number are close to 95 percentage.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:27

Wow. In going into sort of mid to late October. That's quite extreme and we'll see what, as you say, the hydropower producers would then let this excess water run in effect, into the ocean. Eh, but what does this mean for prices? We've had, we've seen the Nordic system price fell. 84% year on year to 5.6 euros a megawatt hour in Q2. Could you say what you expect to happen for the rest of the year in a dry and wet scenario?

Eylert Ellefsen, senior analyst, EQ: 4:56

Of course, in a wet scenario, I think. The low prices will continue as we see now. It's important to comment on the kasir fillings that are a bit different in one region or one price zone. That's N oh four with a multi-year ca so they can still save some water. But in all other price zones, we are now already in the level of 92, 93, 94 percentage filling. They cannot increase the levels so much. Which means that they have to produce what they get into the, and if it get wet and increased inflows, they just have to produce. Or if possible, if the market is large enough, that means if the consumption is high enough or if they have some capacity on the export cables. But I think first of all, by normal conditions, I believe that we will have the low water values until end of September. I don't see any reason for increasing the water values really before end of September, because then coming to October there we'll see declining as our feelings by normal conditions. And then there could be a possibility for increasing the water values and the price zone prices in Norway.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:16

So we could eventually see an upturn from October onwards. But you mentioned in a dry scenario, this would be good news. I presume that's for the hydropower producers in Norway who are suffering very much with these very low prices. But conversely, industry is maybe quite good news for industry, these low prices. So it brings me to my next question about demand and industrial consumption amid the COVID crisis, have you seen a strong reduction here so far in the first half of the year? And do you. What do you expect for the rest of the year?

Eylert Ellefsen, senior analyst, EQ: 6:51

Yeah, I haven't focused so strongly on the consumption in nowhere really, but I think it's about two or three percentage lower than if we didn't have the COVID-19 infection. So I think it doesn't mean so much for the hydro situation. It means something that you have to, you cannot produce as much as by normal consumption. But I don't see that have any effect really on the water values given the large uncertainty we see in, in the precipitation possibilities.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:21

That's the key driver here. Not so much on the demand side. How do you see. Are there elements like wind, maybe increased wind production coming in?

Eylert Ellefsen, senior analyst, EQ: 7:29

That's of course more topic for SA one than SA two, the Swedish price zones. So

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:35

yeah,

Eylert Ellefsen, senior analyst, EQ: 7:36

of course there's, it means something for the Norwegian price zones, but doesn't mean so much. So it's for Sweden, it means something if you have, precipitation, higher reservoirs in SA one, SA two, and strong wind. Of course the prices will be kept maybe even lower than by, so it's it's more comes from Sweden. This problem the next few months.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:59

Absolutely. And I think we'll continue this discussion with our next guest. But in, in the meantime, Melet thank you very much for joining the Monte Weekly podcast.

Eylert Ellefsen, senior analyst, EQ: 8:07

Okay, thank you Richard.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:10

Our next guest is Tor Reier Lilleholt, who's head of analysis at wat site. A warm welcome to you to and welcome back on the pod.

Tor Reier Lilleholt, head of analysis, Wattsight: 8:17

Yes, thank you. How are you doing? I'm fine. Thank you. And hopefully it has been a nice summer now, so we are ready for the autumn for new challenges.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:25

Absolutely. So our previous guest talked a lot about the hydrological situation in Norway in particular. How do you view this now and going forward?

Tor Reier Lilleholt, head of analysis, Wattsight: 8:33

It's, of course it has been a very interesting year. And of course we are very happy that the, we end up with a very good estimates for what we see is the actual numbers. The final answer, I think is the inflow and what we are able to produce in this system. And again, the hydro reservoir forecast is important and the hydro has been extreme during the. Both winter and and the summer. It's okay to see that now we are in our, yeah. New steps now to try to look forward some of the areas have more control now. So we are very on the edge now because we can go. Both ways still in the next couple of months because September, October is a very wet month, especially in Norway. If you have a dry solution or a wet solution, we could still see very low prices and we can also go very fast. But alternative prices like the gas marginal costs. So it'll be interesting still for a couple of months in the hydro situation. You have to mention now that the official numbers in the hydro reservoirs are less uncertain. So a lot of uncertainty is moved away from the market now because it's only soiling groundwater and that is not it's limited uncertainties in those reservoirs.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:46

Absolutely. So Tor Reier, do you think then that the Nordic system price, which you know. Fell massively year on year in the second quarter of the year due. Do you expect it to remain in single digits for the rest of the third quarter?

Tor Reier Lilleholt, head of analysis, Wattsight: 9:59

It could happen but I mentioned here we need a wet scenario because we have now started to get some control and if we continue with normal, maybe a bit drier than normal, we could rather see, prices going up in higher than 10 euros. And the system price is also affected a bit by the what call the very high, more thermal production or capacity prices we see in Sweden and Finland Baltic area. So of course, the southern part of Norway could be below 10 euros for a longer time. But in total, I think we are going to some extent higher than 10 Euros rather quick now. And we are already started this week, I think.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:38

So when you say control, you mean that's when the hydropower producers can judge when to use their reserves or not? Is that correct?

Tor Reier Lilleholt, head of analysis, Wattsight: 10:45

Yeah. I have a very often said in a market that we need hydrological balance in Norway alone below 10 Tera Towers in our numbers to get. The control because then you could have a chance to choose to wait to produce later because that is the very important thing here to have a option to produce later and to see prices at a higher level. You could start changing the water values, but if you see that the hydro reservoirs will be full, but we still see potential for, in some of the areas N one two. Tum is a bit wet and then you have the alternative close to zero again. So it's very digital, but we can go from still very low prices or we could also go up to very high prices that we're not seeing for a while, especially in the southern part of Norway.'cause we will connect to marginal cost for gas sometime in the future here. But it could go faster than we we see in the market at the moment. But it could also go a lot. Slower.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:45

I think we've seen huge price variations internally across the Nordic region this year. I, is this something we should expect going forward or was there kind of anything that made this year more extreme than normal tour? I definitely,

Tor Reier Lilleholt, head of analysis, Wattsight: 11:59

this. Year is extreme. I could just start some of the extreme things we have recognized there. You could start with the extreme temperatures you have in the winter. We followed up with the extreme high snow accumulation especially for Norway. And you also continue with record low nuclear production in Sweden, both due to very low prices, but also due to more maintenance. And we also had the extreme high limitations. Exchange capacity. So that is very important for the price deviations in the Nordic. In the end, extreme spilling of water and also extreme prices. So the prices in both Sweden, I think and in Norway has been more extreme and the deviation between Sweden and then for examples, a three and one is very extreme. Sometimes it's closer together. But at the moment you see this week it's very high and I see that there will be some more maintenance or more production from nuclear in Sweden back from maintenance. Next week we also will see a bit more wind that will help. And you also have, a bit higher or lower temperatures. So the consumption increase that helps the connection between Sweden and Norway as well, so you could get more exchange. So in total I think if we continue with the wet. Whether we see in the forecast now, we might maintain the pressure on the southern part of Norway, but the pressure on the upside on the capacity prices in Sweden or also Finland and Baltic might be a bit lower. So I think the prices will go a bit closer together in the following weeks. But we are still have some pressure in the south of Norway and I think the increase in water values might. Be postponed a bit with the weather forecast we see at the moment if it's delivered. Of course.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:48

So in, when we are talking, both you and Aela talk about the increasing in water values. This is the increase in the potential return for the stored hydropower. Is that correct, Tara? Yes.

Tor Reier Lilleholt, head of analysis, Wattsight: 13:57

Yeah. Yeah. And we need to see the hydro reservoir start declining. So that's why I talked about we need to go below 10 tet hours for a period before we could see more control because it's. On the limit. Now, if it's a wet scenario, wet weather, a couple of weeks, we are suddenly up at the a hundred percent again in some of the price areas. And then we'll maintain the very low prices in some areas.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:21

This is interesting. I think 2020 will probably always be seen as quite a unique year just because of the Corona crisis. But what you are saying to today is also because there are extremes in terms of interconnector outages and also limited nuclear availability in Sweden and Finland. So it's a kind of one-off in that respect as well if I understand you correctly.

Tor Reier Lilleholt, head of analysis, Wattsight: 14:41

Yeah, of course. But you could say also that it'll be the normal, that there will be a lot of things. Happening in the market because it's a complex market always something will happen in both directions on the prices. So it could be new things happening in the next year, but I think the hydro situation was extreme and I don't think that will be the the normal in the future, of course.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:02

Absolutely we shall we shall keep our eyes closely peeled on that. But if we continue talking about price. Differences, the spread between the Nordic and the German front year. Power prices are currently close to 20 euros, a megawatt hour. Do you expect this gap to be closed anytime soon? What are the key drivers here?

Tor Reier Lilleholt, head of analysis, Wattsight: 15:19

Yeah. Have seen lately looking back in, during the summer as well, some periods where the Nordic market. Don't follow the fuel prices. So that is a bit interesting because that is, has increased the deviations because I think Germany the German market has followed the CO2 prices, gas prices very closely. But the Nordic markets has very often not. So you have very often seen a bit more bearish market in a Nordic market, even though the CO2 prices has increased. I believe that sometime in the future now we will connect more to the gas prices and that will happen when the controlling the high dose system is is better, of course. And you see the prices for the winter are up at Euros on the marginal cost for gas. And of course, that is the upper limit we could expect for the Nordic markets. We are. Way off on that. We are down to closer to 20 euros. Of course there's potential there, but we need to see the hydro on a lot better control and maybe down to mi minus in the hydraulic balance that will help the situation. But of course, into delivery. I think we we see this deviation between German market and the Nordic market to be closer together but not much. It'll be up to five to 10 euros. Less I believe so, it's it's has increased a lot during the past month. Of course, you started the year, I think up at 18 euros as well. So we have a maximum up at above 20 Euros on this spread. And we are still close to 20, I think. That is a high number in the future. But we have seen this year that has been the extreme year in Nordic. That is the example that you could get. Up to 20 euro in deviations. But that will not be the normal in the future, I believe.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:01

Interesting. Do you think then that the short run marginal cost of coal fired plants is not that relevant anymore to today? Definitely. It's

Tor Reier Lilleholt, head of analysis, Wattsight: 17:09

relevant for. A lower amount of hours because you still need some cold production. And that it's gas and ignite that are competing with each other now. That is also interesting because gas is taking a lot more hours of the production volumes. Also ignite will be removed already. This summer and last summer you saw that. And that is important for the CO2 volumes again. So that is also why we see a downside in the emissions from CO2. So that is also interesting to see how that will develop because the CO2 market is still very important for both gas and coal margin and cost. And again, I think coal is still in the years. Different price mix.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:50

Yeah. So we still need to keep an eye very much on what's happening in the old dirty fuel markets. But we've talked a lot bit about supply here. What's happening on the demand side? Have we seen much of the impact? I know we talked earlier in the year about the impact on demand from the COVID-19 pandemic, but what are you seeing here?

Tor Reier Lilleholt, head of analysis, Wattsight: 18:08

Then you have to look into future because there's a lot of things happening If you look. 5, 10, 15 years ahead. So that that would be very interesting. But if you look more short term, of course we have seen that the COVID-19 has affected the Nordic market very limited. I think it's a lot more things happening on the European consumption. We see also the industry has been more affected in Europe. So the industry industrial consumption is going down, but that again. Is affecting the Nordic market, but you see the price deviations. Consumption in nor in a Nordic market will definitely increase. We look at a lot of different things triggering that you see new industry connected to Norway. We have to. Type of battery factories that will be established in Norway, for example, using more consumption, all the electricity from electric vehicles and electrification all over in the in the oil sector and different areas. So I think more. Development we see now the higher the consumption will be. So that will also meet the the surprise side from production. Demand is also increasing in this system. I think in the new version of the long-term price focus, we have to increase the consumption estimates and that will maintain a higher expectation for prices also in the future, even though we are building out a lot of new renewables.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:28

It's very interesting to say, because you. That some of the heavy industry, traditional heavy industry in the Nordic region such as, aluminum or paper and pulp their demand may be falling slightly, but these new industries are growing. As you mentioned, new digital in part of the new digital revolution. So that sees the arrows for demand pointing upwards there. Then rah, if that's if I get you correctly.

Tor Reier Lilleholt, head of analysis, Wattsight: 19:48

Yeah, so it'll be very interesting to follow the market in the next five, 10 years because I think there will see a lot of changes. And also new technology will definitely rule this market. We can also go into the hydrogen and the battery technology could be, definitely changing the market.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:05

I think there's certainly a lot to talk about incoming podcasts with you, Torah. So I look forward to discussing these in more detail. But thank you very much for joining us this week Toray and have a great weekend. Yes,

Tor Reier Lilleholt, head of analysis, Wattsight: 20:17

thank you. Same to you. Bye-bye.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:19

That's about all from the Mont Weekly podcast This week a big thank you to tour and Alet for an in-depth discussion on the multiple factors currently driving. The Nordic power prices. You can also listen to Alet and several other speakers at montel's Nordic Energy Day webinar next week on the 27th of August. Remember to keep up to date with all our stories on Montel News. Follow us on Twitter, LinkedIn, and subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.