Another annus horribilis

Continued oversupply, mild weather and a massive growth in wind power capacity, will keep Nordic power prices low for the coming year at least. Further out, increased demand thanks to the electrification of the heating and transport sectors could provide a shot in the arm for power producers.

Host: 

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

Guest: 

• Sigbjorn Seland, Chief Analyst, Storm Geo. 

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 Energy Matters in an informal setting. This week we turn to the Nordic market. We have seen a collapse in prices, even negative prices. The market is oversupplied and the mild weather is showing. No sign of abating. Companies are struggling to post profits in this environment. How long will this last? Helping me to answer this and many other questions is Sigbjorn Seland chief Analyst at Storm Geo. A warm welcome to Sigbjorn Seland and welcome back to the pod.

Sigbjorn Seland, Chief Analyst, Storm Geo: 1:04

Yes, thank you Richard. Happy to be back.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:07

Excellent. Now I thought we could start by current prices and current market development. What's happening here? We are seeing very low prices on some days even negative. What's going on?

Sigbjorn Seland, Chief Analyst, Storm Geo: 1:15

Yeah. It's, it's a combination of very strong hydrological situation for sure. And also this very significant growth in wind power production in the Nordic region. The combined effect seems to give record low prices this year.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:30

How about COVID? Has that had an effect at all on the markets or is it all fundamentals?

Sigbjorn Seland, Chief Analyst, Storm Geo: 1:34

It's let's say 99% fundamental. It maybe on 1%. COVID ha has if you look at electric consumption right now, I would say it's more or less at the same level as one year ago. So in that sense, it seems that. The effect of of COVID is has disappeared. Maybe in, in Q2 and Q3, we saw some negative impact on electricity consumption. Maybe it's some three to 4% year on year decrease, but that consumption is now back again. Weather is much more important than COVID for sure, for the Nordic power markets.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:06

The weather's always been very important for the Nordic market, but certainly crucial we'll return to the wind power development in the no market. But I think if we can look at what your expectations are for next year, will this an Haus, will we see a repeat of this

Sigbjorn Seland, Chief Analyst, Storm Geo: 2:20

in a way we all know how volatile prices are in a hydro power system as the Nordic. This year system price will be around 10 euros per megawatt hour. Last year, 2019, it was around 39, but for sure the odds have developed very significantly towards very low prices also for next year and coming few years for sure. The main reason for this is mainly wind power which is growing. Very fast. And just to give some figures again, in 2019, the combined wind and solar power production in the Nordic region was 47 TT hours. And in 2021 we expect 78 terawatt hours. 20 22 93 TT towers. It's a very massive growth, I would say, and the investments behind this growth is. Almost entirely in decided investment decided. So that growth is more or less given, I would say.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:17

That's incredible. That's almost a doubling over two to three years.

Sigbjorn Seland, Chief Analyst, Storm Geo: 3:21

It is. It is. It, I, and I think to be frank, it's a bit of a surprise to everybody. I would say if you go back 2, 2, 3 years, I don't think anybody expected growth to be so massively. And and it's in a market with no. Electricity consumption growth. At least for now, we don't see that. So the power surplus is growing very fast. It no matter what happens to consumption the next few years, we are developing towards a very large power surplus. For sure,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:53

but this onset of wind will then, in a sense, just drive prices lower. That's a fair assumption. Unless there's a very dry year. Of course. Yeah. But then, isn't there a bit of a cannibalizing effect on the prices here, on of these projects? Maybe you could talk a little bit about that

Sigbjorn Seland, Chief Analyst, Storm Geo: 4:09

for sure. It is that's a natural. Factor in this and a new invest investment in wind power cannibalize on all previous investments. But that effect is at least up until now, very slow. I would say. You still see that a marginal wind power project typically achieves. Above 90% of the base load price in the price area it is located. But there is a trend towards or you see this cannibalization taking place. But in this sense it doesn't impact this enormous power surplus. The energy is already built. And as you said, other things equal. Obviously it means lower prices. Yeah,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:50

absolutely. So if we look at next year, can things get worse in terms of prices?

Sigbjorn Seland, Chief Analyst, Storm Geo: 4:54

Yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:54

For the producers, maybe from the the consumers. It's a very positive sign that prices are very low, of course, and we mustn't forget industry.

Sigbjorn Seland, Chief Analyst, Storm Geo: 5:00

Definitely. It can become much wor worse, I would say, are starting or ending this year. With a close to record, strong hydrological situation. So if next year turns out to be another wet year, we will definitely see lower prices next year than this year. So in our analysis, it's close to 50% probability that we will see even lower prices next year.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:27

Wow. And even more instances of negative prices as well, Ian?

Sigbjorn Seland, Chief Analyst, Storm Geo: 5:31

No, I don't think so. That said, I really didn't. Expect to see negative prices in the system price at all. But we had the first incident a few weeks ago. It was a Monday morning, and I suspect that has, let's say some markets, some hydropower producers were a bit off guard or lazy or whatever. But when we have seen it in a way you can say it's a sure thing that it will happen again. It will be a very rare happening occasion. And it could be. Years until next time

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:06

we've become used to them in, in, in Germany and maybe in Denmark. But it's, and for the system price, that's as you say, it's a very rare and it's

Sigbjorn Seland, Chief Analyst, Storm Geo: 6:13

as long as you have hydro power in the market clearing, there's no reason to see prices below zero because they don't have negative margin costs.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:23

Absolutely.

Sigbjorn Seland, Chief Analyst, Storm Geo: 6:24

It's as easy as that, and it still, there will be market power. In the market clearing for many years to come. So in that sense, I would say that it takes another incident or it, it shouldn't happen, but it, but I guess since it has happened, it'll happen again.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:43

Yeah, absolutely. What's the impact on the power producers here? We've seen in the Q3 numbers that have come out from the financial results that a lot of them are really struggling here. If what you're saying is correct that you know there's a high probability of even lower prices next year, then the situation could get worse for some of these power producers.

Sigbjorn Seland, Chief Analyst, Storm Geo: 7:00

Absolutely. For sure. Some are better off than others. Those with active hedging programs can probably survive a year or two with these low prices. But I guess. Many hydropower producers have not hedged too much of their production and for sure it's they will have very bad numbers this year and coming years, no question about it.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:22

It seems to be, 2020 won't be remembered very fondly then, will it? You've got very low collapsing prices as well as the COVID situation.

Sigbjorn Seland, Chief Analyst, Storm Geo: 7:31

Let's hope, let's hope that 2020 is a low in many aspects, but prices are volatile in the Nordic power market for sure. But I wouldn't be too optimistic if I was an unhedged hydro power producer to be frank.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:45

No, absolutely. This year, next year we'll see Interconnectors coming online. We're seeing the Nord link, which is, recently. Said it would be delayed by only a week or so. But and then next year, the the Connect the North Sea link to, to the uk. What impact would these have on the market here? Will these come to the rescue of the producers so they can export out of Norway or what's your view here, Seland?

Sigbjorn Seland, Chief Analyst, Storm Geo: 8:07

I think for those who hope that those interconnectors will be a rescue I think they will be disappointed in a way, at least regarding a nor link. Because we know now about the minimum capacity that will be applied fairly often, now you have the internal bottlenecks in, in Germany and you have also bottlenecks in southern Norway. In our analysis it's a very modest sort of relief from nor link isolated. We do not expect to see. Very much energy exported through northlink the next coming years. But on the margin it will be a positive thing. But related or in comparison to what happened? It's happening on the supply side with all this wind power, it's peanuts in a way for the UK sea cable. It things look, a bit better for sure. Prices in in general are a bit higher in UK and you don't have or at least it doesn't seem to be the same problems with bottleneck in, in uk and so you do not expect to see a. We expect to see the capacity available for the market in general on the UK sea cable as opposed to, to so power will flow more out of NO two there. But as we see in UK you, you have quite a lot of numbers, hours, so hours over a year would be very low, close to zero negative prices in Germany. Where you will not see. Export from NO two to Germany anyway. And you, there is a tendency towards the same in UK prices are more volatile. You, you build a lot of intermittent production capacity in UK as well. And there's a growing number of, with very growing number of hours with very low prices also in, in UK where you won't see export from NO two in those hours. So definitely you should expect. I would say a significant energy export on the UK cable, but far from like maximum capacity. And again, even if there will be several T hours exported on the UK cable, it's relatively small numbers compared to this wind power.

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

This pod is being recorded with, it's obviously the challenges of the COVID times. We're hearing your assistant in the background here. Si but it's that's fine. That's only natural. I often get interrupted by my daughters here, but it's just for the listeners who maybe,

Sigbjorn Seland, Chief Analyst, Storm Geo: 10:22

sorry. Sorry,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:25

highlights very much the fact that we are, we're true professionals doing this from our kitchens under the stairs. We're still talk, being able to talk about the power flows between these countries. But do you think then these cables will be used for imports primarily, or, or I'm not primarily, but there'll be more, people will be surprised at how much will actually be potentially imported from Germany in the uk.

Sigbjorn Seland, Chief Analyst, Storm Geo: 10:45

It's difficult to know really what is the sort of general expectation to. To power flows. But the Nordic region and NL two is a surplus area. So it will be mainly export, but there are many factors limiting the potential for energy export. So I'm just saying, I wouldn't be too optimistic regarding these cables to be the big relief for the market. Yeah,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:09

absolutely. So you've talked about the wind, the huge growth in the wind power in the Nordics, but you talked about two, three year timeframe. What happens in the medium term here? Super. Do you expect this to. To continue even despite the background of maybe challenging prices?

Sigbjorn Seland, Chief Analyst, Storm Geo: 11:23

No, I don't think so. There will be a supply growth until 20 23, 20 24, I would say for sure. But we see that, the investment decisions are fewer and fewer. So I think the investors are definitely impacted by what's going on in, in the market and investment decision is harder to reach. So the growth will slow down for sure. Or I would expect that because the market is over. Supplied already. So if we see a continued stream of investment decision, it will just prolong the period of a very our power surplus being problematically large and just in inducing. Very hyper realty of extremely low prices. So the natural thing for sure would be to see that supply side growth slowing down. For sure.

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

Are there any growth areas? I know that in Norway it's quite challenging politically. There's a lot of a sort of a grassroots opposition to this, but but there are maybe Finland or northern Sweden that are more areas where you could see more growth.

Sigbjorn Seland, Chief Analyst, Storm Geo: 12:25

Yeah, absolutely. There is, I guess there, there is still more than 30 terawatt hours with investment decisions, decision or under construction regarding onshore wind power, and most of that is in Sweden and Finland. For sure. There will be. Quite a lot coming into production next year in Norway, but beyond 2021 with this let's say strong NIMBY factor in Norway is not in my backyard factor. And and this new licensing regime that is put on hold or not in place, you will not see probably more onshore wind power in Norway for. 10 to 15 years. That's what we expect at least, but you don't see the same obstacles in, in Sweden and in Finland. So there is definitely a significant potential to continue building wind power there. But beyond what we see. Already decided we expect to see things slowing down.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:23

And what about floating or offshore wind here? Do you expect this to be a growth area?

Sigbjorn Seland, Chief Analyst, Storm Geo: 13:27

I see that like the financial community is is arguing heavily on, on floating offshore wind power in particular to become a sort of a growth industry for Norway. It might be, but both the bottom fixed and floating relies still quite heavily on subsidies and will be as we see it for many years. So that's more, in a way, a political discussion than whether you should see growth there or not. The market in itself. At least in the current circumstances will not start building offshore wind power

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:00

and an issue that's often discussed together with offshore wind or even onshore wind is green. Hydrogen seems to be a bit of a hot topic at the moment, maybe a bit of hot air. But how do you see this developing in the Nordics?

Sigbjorn Seland, Chief Analyst, Storm Geo: 14:12

It's a hot topic for sure, and I guess hydrogen probably will. Be a game changer in the long term, but it's still quite quite a few years into the to the future, but for sure it's a massive potential. And we just yesterday could read about this LK bs estimates of more than 50 AWA towers of new electricity consumption during the next two decades. Due to the use of green hydrogen and this hybrid project being a part of that, which I guess you should expect to see realized and that has a potential of some 23 terawatt hours. Hydrogen is for sure in the long term potential rescue, factor for an oversupplied market. And I think mo most factors point towards hydrogen becoming very important and sign significant for sure. But years ahead.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:05

Yeah. I think you have what, EOR for example, they're becoming more and more involved in, in, in offshore wind both in the uk on the continent and then they have all the infrastructure, the gas infrastructure. So in a sense, that's a. That's a perfect fit for some companies like them to develop green hydrogen. But I thought that I could then ask, to, to follow in from what you're talking there about the potential growth in electrification. An increase in consumption demand in the Nordics that comes from electrification electrifying even, or the electrification of the heating and transport sectors. Is this gonna be a game changer and absorb some of this extra surplus that you're talking about Ian?

Sigbjorn Seland, Chief Analyst, Storm Geo: 15:40

Yeah, I think so. But again, that's. In the long run if you look at figures that there currently is no consumption growth going on and it hasn't been for decades. Again it's a fairly consensus in a way that this green shift will induce massive electricity consumption growth. The electrification of sectors like, yeah. You mentioned transport and oil and gas and hydrogen and it's easy to point to. To, to triggers for electricity consumption growth. But the big question is how fast will it develop? And so far it's it's all forecasted, nothing hard facts or more or less, nothing yet. So we need to see consumption growth picking up, very soon, I would say unless otherwise this this supply side growth will be too big to handle even in normal hydrological circumstances.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:36

A final question, Sigbjorn, you mentioned wind and solar earlier. We don't really think of the Nordic region as a very sunny regions. What do you mean? Does solar have potential here as well?

Sigbjorn Seland, Chief Analyst, Storm Geo: 16:45

It's still small. May, maybe in energy terms maybe two tet hours of solar power production in the northern region now, but it's close to one tet hours with finally investment decision for solar power. And even if numbers are small, growth rates are very high and conditions are not bad. And when you look at. Investment cost for solar power, how fast it is decreasing. We is actually in our analysis already from 2027. We see more investments in solar power than in wind power in the Norwalk region. So it's definitely a major factor in not many years into the future, I would say.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:24

Excellent. So should I install solar panels on my roof? Sigbjorn? Here in Oslo,

Sigbjorn Seland, Chief Analyst, Storm Geo: 17:28

prices will decrease for sure. So when to do the investment? Yeah, I haven't done that calculation myself, but I think I would wait a year or two. But at some point I'm sure I will have solar panels on my roof exactly.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:41

To charge up the electric car in the garage. Yeah.

Sigbjorn Seland, Chief Analyst, Storm Geo: 17:44

Yeah.

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

Sigbjorn. Perfect. Thank you very much indeed for joining the Montel Weekly podcast this week.

Sigbjorn Seland, Chief Analyst, Storm Geo: 17:50

Happy to join you.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:51

That's all for the podcast this week. Listeners, you can now follow us on Twitter on the Monte Weekly podcast account. You can direct message any suggestions or questions. You can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in the energy markets on Monte News. You can subscribe on Apple Podcast, Spotify, or wherever you get your podcast from, and please rate us and leave a review if you can. That helps us to improve. Thank you and goodbye.