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
Cables, congestion and complexity
Nordic wholesale electricity prices have soared compared to last year amid cold weather and exports to Germany, despite high hydropower stocks.
Listen to a discussion on the huge internal price differences in the region's 12 price zones, and the reasons for the spread with Germany in forward prices. Is carbon the key driver, and why are Norwegian hydropower producers saving water for use later in the year?
Guest:
- Eylert Ellefsen, Senior Analyst, EQ
- Tor Reier Lilleholt, Head of Analysis, Volue
- Sigbjorn Seland, Chief Analyst, Storm Geo
Did you know Montel uses artificial intelligence and machine learning to forecast spot prices, inflow to reservoirs, wind, and runoff river production. We can improve forecast for your individual power plants anywhere in Europe. Contact us at ai@motelnews.com for more info.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in an informal setting. This week we turn closer to home and look at the Nordic region and developments in wholesale electricity. As we recently said, in a pod on the gas market. What a difference a year makes. In May, 2020, spot prices struggled to get into double figures while this month they were settled on some days close to 65 Euros and have averaged around 42 so far this year. What's happened? Meanwhile, forward power prices in Germany are currently around 30 euros, more expensive than those in the Nordic region. What are the reasons for this? Is it very strong carbon prices? Germany's reliance on coal and gas fired power, or is low liquidity in the Nordics having an impact too? This week has seen the high level inauguration of the nor link interconnector linking Southern Norway with Germany. Has this increased prices in Norway, particularly in southern areas, and load those in Germany, or is the situation more complex than that? Joining me, Richard Sverrisson, to discuss these issues and much more are several eminent experts who will share their expertise on the Nordic power markets, and we'll give the pod a bit of an a Southern Norwegian flavor. Hello and welcome back. Tor Reier Lilleholt of Volue. How are you doing Tor Reier?
Tor Reier Lilleholt, Head of Analysis, Volue:I'm fine, thank you. And I think it's exciting to be an analyst in this market. You show there in one year, it's moving a lot and it's changing in all types of markets. Not only the hydro, it's a lot of different things are happening here.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Absolutely. Hello Sigbjørn Seland of Storm Geo. Good to have you back on the pod, so I hope you're well.
Sigbjorn Seland, Chief Analyst, Storm Geo:Thank you. Nice to be back.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Excellent. And finally, Eylert Ellefsen of EQ. A pleasure to welcome you too, Alet. All well with you, I hope.
Eylert Ellefsen, Senior Analyst, EQ:Yes. For me it's in fact a couple of years, some years ago since I lost focus so much on the Nordic market. I've been mainly for the European market for some while. But now it's interesting to be back studying in more details in the Nordic market. See there are more factors being important now than for a period ago.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Excellent. I hope we'll have plenty to talk about. But before we start, I think you guys know each other, don't you?
Tor Reier Lilleholt, Head of Analysis, Volue:Yeah. Yeah. We are actually from the same hometown Arendal is a big city here
Richard Sverrisson, Editor-in-Chief Europe, Montel:okay. All three of you from Arendal in southern Norway? Yes. Excellent.
Eylert Ellefsen, Senior Analyst, EQ:I think I can, invite you, Richard, to the next podcast we could have in Arendal.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Okay. That sounds lovely. Yeah. In a southern nor idyllic surroundings in Southern Norway. Except Sigbjørn is based in Oslo. Of course.
Sigbjorn Seland, Chief Analyst, Storm Geo:Yeah. If it's during the summer, I will be down there.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Perfect. I think that's a deal. Anyway, let's get on to Nordic spot prices. They're very high. Different scale compared to the sort of last year. They're a little bit lower. 10 euros lower than the German prices. But what's going on Tor Reier?
Tor Reier Lilleholt, Head of Analysis, Volue:Yeah, we're working with big numbers now, looking at the different price deviations, and I think we'll start with the Germany. And of course they are very good linked to the fuel prices and also the big price in CO2 prices. So 70 euros in Germany is easy to explain due to this. I could come back to why I believe this German prices also is a bit too high. But if you go to the southern part of Norway, who is a very important part of the system price of the Nordic prices I think they are 20 Euros. If you're looking at the Thursdays prices as an example, they are at 50, Germany at 70, and you could go to the northern part of Norway. They are down to 20, no to 30 and 20. So there's a huge deviation here and most of this is important to recognize, but. The level here between nuclear short amount, cost of 10 euros to 70 euros, you see the short amount cost for gas in the continental area. It's a huge area where the hydro area, hydro production and the wind production is has their playground. So there's a huge volume of of prices here. That could be placed in different levels. And that is what's happening in the northern part of Norway. There is more pressure from wind and hydro and in certain parts you see a very narrow price curve to connected to the con continental prices at Pecos. But you also have more than 30 Euros deviation between. The peak hours in Germany and a certain part of Norway. So definitely there's a huge potential here to lift it further. So we are not ready with the, or finished with the price movements. So far. I think so there could definitely be new movements and in, in the weekend of 17th of May, we saw a huge shift in many of the water values and especially in the parts around southern part of Norway. It could be some lift could certainly happen in days, but you could also take a month ahead before we could lift it further to the continental crisis. But there's potential definitely.
Richard Sverrisson, Editor-in-Chief Europe, Montel:What's your view here, Sigbjørn?
Sigbjorn Seland, Chief Analyst, Storm Geo:Yeah. As you stated in the beginning this year is very different from last year. And it's another good example of how this market really is. How attractive, in many ways. It is. And the main reason. You should point, point to one factories, obviously. The weather, we had this very big hydrological surplus end of last year and reaching in mid-February, we had a deficit in the hydrological balance. The reason why we had. Collapsing prices last year versus high prices this year is mainly the weather. Low inflow, high consumption, unfavorable wind conditions. For sure in that sense I would say spot prices are. It's not difficult to explain the big difference from last year until this year, but obviously as been mentioned with continental European spot prices at 70 Euros, you have this price range from say zero, which we visited last year up to 70. It's a huge price range and you just have to accept that prices will change quickly and a lot. In these circumstances For sure. Yeah, I think it's you just have to be careful to get a fixed view of the price development in these circumstances. But for sure you have to develop a price expectation and yeah, also to us or to us. It seems that at least when we look, say. One year ahead. Current future market price level seems a bit too low, I would say.
Richard Sverrisson, Editor-in-Chief Europe, Montel:We'll get back onto that a bit later in the pod, I think. So I want to hear your guys' views on that. But what's happening with the hydrology? What's the outlook here? Eylert? It has been mentioned that, there was a deficit in February. What do you see happening in, in the weeks and months to come?
Eylert Ellefsen, Senior Analyst, EQ:Yeah, I see. Just lately when as it's getting drier now the hydrological balance is more or less normalized. So we came from a level by new, by first part of January around maybe 20 Tet hours surplus, which has now been reduced or normalized in the last few weeks now, and the next few weeks, we will see a rather normalized situation. And so I think really when you look on the how the price differences Nordic and the German market has developed since New Year. It's rather strange as the price difference has increased between no Pole and Germany while the hydrological balance has been reduced. Also during this period has got confirmation of the effect of the Nopa link, which has coupled the Nordic and the continental market closer to each other. But somehow the price difference in the forward market has increased. And I think there are some reason there, but this is very strange, unexpected development, I would say.
Richard Sverrisson, Editor-in-Chief Europe, Montel:We'll get back to that ala, but I think, we've seen that, that. You mentioned the split in prices or the wide spread, but prices between the north of, north of Norway, even north of Sweden and the southern regions. Do you expect this to continue?
Eylert Ellefsen, Senior Analyst, EQ:Yeah, I suppose they could be a bit closer to each other. Later this summer, the Nordic system price, which is the trade able product. I think players just have to be aware that the water values that is not, let's say, shown in the area prices in northern Sweden and Northern Norway are paying apart for the system price settlement. So I think as I've seen lately, I think the NO two price is what I look on as the, let say water value general important water value level for the system price.
Richard Sverrisson, Editor-in-Chief Europe, Montel:For those listeners out there who don't, are not familiar with NO two, that would be what? Yeah.
Eylert Ellefsen, Senior Analyst, EQ:Southern part ofNorway, I would say N one, N oh five and A one. They are quite close. Yeah.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Coupled. What's your view here, Tor Reier? What do you think, you mentioned the widespread in prices. Do you expect this to, to narrow them going forward?
Tor Reier Lilleholt, Head of Analysis, Volue:I think this will last for a long time because if you look at the northen part of Sweden and Norway. They have seen higher hydro resources for many years, especially N oh four have never seen high hydro reservoirs for many years, and they are not used to have this extra pressure in addition to the all install installation of wind. So I think they. Price areas in the north will be a lot more volatile due to wind. But in the certain part of Norway, we will be more stable with the core long-term hydro reservoir, setting the prices so that could be more stable. I also see into our simulation that as long as next year, you could also see huge deviations in the north of North Wind, Sweden. Due to the fact that we have installed a lot of wind and we also have a more volatile power balance to be more affected by the wind and volatility in the market.
Richard Sverrisson, Editor-in-Chief Europe, Montel:And of course that makes it very difficult to hedge, isn't it? This has one, been part of the, been part of the issues in the Nordic market, too many price areas. Yeah,
Tor Reier Lilleholt, Head of Analysis, Volue:I could just comment to say too, this week. We had at the same production volumes. So
Richard Sverrisson, Editor-in-Chief Europe, Montel:where's SE two? That's Southern Sweden?
Tor Reier Lilleholt, Head of Analysis, Volue:No, it's in, in the middle of Sweden, mid Sweden. Just below the northern part of Sweden. But you saw on the same production hour, 4,000 megawatts. And in one day we had 85 euros, and in another day we had five euros. The exact same production. So is the non-controllable hydro or is it the win who take the volumes? That is very important in the setting of the prices.
Richard Sverrisson, Editor-in-Chief Europe, Montel:If we can, I can turn to you here. What will happen once the UK cable comes online, producers in Norway, are they, saving water and expectation of higher prices later this year, do you think is that's what's happening? That's also causing, having a sort of bullish effect on spot prices so far this year?
Sigbjorn Seland, Chief Analyst, Storm Geo:Absolutely. I think that's clear and, you see it in the bidding curves for NO two or for the entire Southern Norway. So for sure, hydropower producers are optimistic about the price impact of the North Sea Link, which is what they should be. Should basically expect a steady flow of power out of NO two. For sure. These the price location spreads have turned upside down in, in a very short time. And I think a key factor to study here is capacity between the Swedish price areas and also between SE three and Finland and SE three and Eastern part of nowhere. And we see that this this, swedish TSO, they what should I say, struggle to keep trading capacities available to the market. And the capacity from Stockholm area to, to the Oslo region is limited throughout the entire summer. And you could speculate what happened if that continues during autumn and into next year with this the UK cable. In operation, and that will be extremely positive for water values in, in the southern Norway. So I think definitely you can see that hydropower producers in southern Norway, they, they really expect southern Norwegian area prices to remain above system price, above system price for a pretty long time. So I think it compared to what we have been used to over the years, things are just. On the upside down now.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Mainly because of the cables. Super.
Sigbjorn Seland, Chief Analyst, Storm Geo:Yeah. It's related for sure to the X or what shall I say, what seems to be a bit too fast and too much wind power build out in northern part of Sweden. So that sort of stresses the Swedish TSOA bit and they have to limit capacities and then that link to the new cables you see. I don't know, we're now looking to be the highest price or could be the highest price errors go era going forward.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Absolutely. Very good news for Southern Norwegian hydro producers and maybe not so good news for Northern Swedish wind developers or producers and as well as Southern or industry in southern Norway. But you wanted to interject here.
Tor Reier Lilleholt, Head of Analysis, Volue:I think have some other aspects also to this, because I think if you're looking at the spot prices in the south of Norway, southern part of Norway, they add 50 euros. That is the highest price in the whole forward curve. You can't save water on that prices because if you're looking to the forward curve and you could see at, in May we have 50 euros as a spot price, it's in middle of the melting period and we have come from a wet scenario. So definitely this give me optimistic prices also for the whole forward curve. So it's something wrong with the forward curve, so you can't use the forward curve to say water. In this market. So I think there is also, of course, our simulation also show that you save some water to UK cable, but the market is not allowing that. And I think there is a fair, if you lift the water values now you will lose volumes. I don't think the hydro producers dare to do that. That's why you are at 50, not at 60. But you could very easily lift the prices at 60 without losing volumes.
Richard Sverrisson, Editor-in-Chief Europe, Montel:So how would they do that, SORAY, if you can explain that?
Tor Reier Lilleholt, Head of Analysis, Volue:You could gain the same volume to export, because the prices in the continental area is higher. It's up at 70 or high 60, and you could have the same volumes exported. Same production volumes with higher prices, but the first producer to lift the prices might lose the volumes because the other neighboring producers take the volumes. So that is fair. So you try to find a balance here to how high you can take the prices, as long as there's no resistance and alternative. Before you go to the continental prices, it's possible to lift the water values so there's no speed limit at 50 euros. I think they could be even higher. But again, it could take time and it could also be a lot of other things that high wind. You have seen that very often that for example, when you are at 70 Euros. When you get wind in Germany, you suddenly fell down to zero or negative prices, and that should affect the average prices in Germany because falling from 70 Euros two to three hours could actually change the average for one week with one Euro. Yeah. So if you get a lot of wind definitely have another A game in the continental prices.
Richard Sverrisson, Editor-in-Chief Europe, Montel:You, you may want to add something here, Alet, but we mentioned this Nordic German spread in, in the forward curve. What are your expectations going forward there? Alet?
Eylert Ellefsen, Senior Analyst, EQ:I think the trading at the moment, they're more or less fixed on this 30 euro difference. So the question is how could this be reduced? If it makes sense. And I think then it is the hydropower producer and the water values as to is mentioning that could lift the spot price within the next step could lift the forward prices. So I think that must be the way to reduce this difference. I think that's the main way to reduce the more or less obvious large difference between the Nordic and the continental market. That's how I see it. But I must also mention something about the price differences that we have been discussed. Now. I would also focus on what will happen in the Finnish market when the Olu to three is coming online. This really, of course, increase price differences on that part of the Nordic market, which will influence probably Sweden one, Sweden two, and also Sweden three. So this will be a huge, that will be a huge change now in the power flow when we have the UK cable and you have all three. That's means about 13, 1400 megawatts that will change direction when we have heard what, how trans CNET is struggling this year. With the power flow in SA three, I wonder how it'll be with ULU two three online.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Absolutely. So added complications. Yeah.
Eylert Ellefsen, Senior Analyst, EQ:Yeah. So that's the just one for the price difference price area discussion.
Richard Sverrisson, Editor-in-Chief Europe, Montel:It'll increase the complexity of the hedging. Those there then, I think then, but, ala you, you mentioned the UK cable there as well as El Qto. Three. Do you expect prices to rise to UK level or will renewables growth as well as ellu dampen prices in the Nordics?
Eylert Ellefsen, Senior Analyst, EQ:Yes, I think as I see it now, it must be Q3 Q4 when, uK cable is online and EUO is not online. And then after some time during Q1, seems like EUO will be up and running, and then they will more or less equalize each other. But maybe the power flow will mean something for the net let's say price effect. But if you put this into just a couple grid, then they should equalize each other. But when I look to forward prices in Q4, I think seems like the German prices are quite high for Q4. It seems like Germany has a risk premium there because of reduced hardcore capacity, maybe. From experiences that we have seen during q1.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Absolutely. And it's also, it's having both, a combination of very high carbon prices and also capacity squeeze in terms of nuclear and coal fire plants. But if I could turn to a slightly different subject, I think we've noticed, recently the indications for wind, the pipeline for wind in Norway specifically is coming to a bit of a stop next year. What's your view here toured and what could be the consequences of this?
Tor Reier Lilleholt, Head of Analysis, Volue:I think we have a lot of volumes coming into the online, even though we say that it's flattening out. In my numbers for 2021 and 22, we have installed 12,000 megawatts of wind in the Nordics. In the next following three years, we will install four to 5,000 megawatts more, but one third of them will be offshore. So we are turning around from onshore to offshore as well. So of course the more environment struggle in the onshore wind installation is of course obvious here. So we will lower down the volume, but due to this both for next year and then the year after, we will actually add 2000 megawatts, more average production to the system. Every hour. So both 21, 20, 21, 22, 23 will add a lot of volumes. I think we will still see this in for a couple of years. The increase in wind,
Richard Sverrisson, Editor-in-Chief Europe, Montel:is this your view as well Sigbjørn?
Sigbjorn Seland, Chief Analyst, Storm Geo:Yeah. I think that picture is absolutely clear there. It'll be added a lot of wind power going forward. And there are also a lot of wind power projects in the pipeline that has not made any final investment decisions, but. Are certainly probably quite close. So even if the window is closing in Norway, there will be a lot of wind power investments elsewhere going forward. And if you look at at the Nordic region as a whole, it for sure the production surplus will just grow quite significantly. The next few. Yes, because yeah, consumption is basically flat and Wipo will grow fast. And regarding the market trading the next five to 10 years at 30 ish. I think that, that has to be, or it is related to the cost of developing new onshore wind power for sure. And as long as the market knows that there are a lot of wind power projects in the pipeline, I think it will for sure that will limit the upside potential for futures. Prices in that perspective, say for, if you look beyond the year 2022. So if prices start to increase more you will see more investment decisions being made. So the futures market is a different game in that sense. Spot prices for sure. They can be high, they can be low but the general price level, I think there are significant res resistance on the upside there due to this wind power potential. And also regarding. The price level going forward as this production sur is growing so, so fast. So the availability of the transmission capacity, internal and external is very important. You need to see growing, export and we see now that there are bottlenecks more or less everywhere. And bottlenecks basically is varies for the system price. That hasn't changed. And there are uncertainties regarding new link. Next year they will open for counter trade. How will that impact flows? Will we see more physical flows from Germany into NO two because of counter trade, if that happens? It is definitely negative for what the values then and prices. And if sv the Swedish TSO continues to limit capacities, it is it'll limit also. Export on the UK cable. So there, there are many factors to consider for sure.
Richard Sverrisson, Editor-in-Chief Europe, Montel:It's a web of complexity. Yeah. And I'm, I'm sure we wanna come back to, to discuss with you guys when the cables are online and also what happens with the TSOs in the region, but. If I can just close today's discussion by asking you about what your demand outlook is for the next sort of nine years. I seen with some very bullish figures coming from the regulator, from several reports from TSOs up to figures of 40% increase. What's your view, AERD? Do you see this increasing by this much by 2030?
Eylert Ellefsen, Senior Analyst, EQ:In fact, I must admit that I haven't studied all this. Estimates so closely, but I just recognize what I read on the Montel stories.
Richard Sverrisson, Editor-in-Chief Europe, Montel:That's all you need, Eylert. That's all you need. So
Eylert Ellefsen, Senior Analyst, EQ:I think we'll say that is closer in the months to come.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Okay. Excellent. And what about you Tor Reier? What's your view here?
Tor Reier Lilleholt, Head of Analysis, Volue:I think it's big numbers, but I also see that it's a lot of uncertainties and we see that for example, taking one special thing of industry is the battery factories. We have a lot of battery factories in pipeline, but is not in our. For the future consumption. So they could very easily be 180 Tet Towers of consumption in Norway in that period. But we have around 71, 75, so we are a bit lower. But of course there is a lot of uncertainty and the consumption would be a very important factor to, to stabilize the prices, especially in the north because you invest in the lowest price areas very often. So low prices could also be a trigger of more investment of consumption.
Richard Sverrisson, Editor-in-Chief Europe, Montel:What's your view Sigbjørn on, on Nordic Power Demand or Norwegian even.
Sigbjorn Seland, Chief Analyst, Storm Geo:Yeah. I, everybody's talking about all this consumption coming and for sure the basic idea is correct. It, it's a part of the green transition, but I think the question is how quickly it'll come. There are infinite. Number of plants and very few investment decisions. And there are factors pointing down as well as they keep closing paper mills, still and if you look at consumption here and now it's not growing. Yeah. It's very easy to point to higher consumption in 10, 20 years, but in the next, say five years. I think sure, you should expect the consumption to grow, but you shouldn't be too impressed by all these plans because the fact still is that the volumes related to it is very small. You need to see more real investment decisions being made before you can be really bullish on the consumption, say for the next. Three, three to five years.
Richard Sverrisson, Editor-in-Chief Europe, Montel:So these companies need to put their money where their mouth is, as it were, yes. Yeah. And then we need to see the concrete plans. Absolutely. Guys, a fascinating discussion. Thanks very much for clarifying, explaining some of the complexities that that we've seen this year and what we expect to see in the coming months and years. So thank you very much, Tor Reier
Tor Reier Lilleholt, Head of Analysis, Volue:Thank you. And we will see next six months we might be as much changes as we saw the past six months. It could be interesting.
Richard Sverrisson, Editor-in-Chief Europe, Montel:Absolutely. And thank you Sigbjørn. Thank you Eylert. So listeners, you can now follow the podcast on our own Twitter account, aply named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.
