Bullish cocktail

Nordic wholesale electricity prices have soared in recent months on a combination of low hydropower stocks, grid congestion, forecasts of dry weather and the start-up of the NSL cable linking Norway to the UK.

Listen to a discussion on the reasons for the price surge, the outlook for the months ahead and the implications for the region’s heavy industry.

Guests: 

• Sigbjorn Seland, Chief Analyst, Storm Geo
• Ole Lofsnaes, Nordic Energy Director, Alcoa

Transcript

0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:11

Hello listeners and welcome to the Montel Weekly Podcast, bring You Energy Matters in an informal setting. This week we turn our attention back to the Nordic region, in particular to developments in the wholesale power market and the impact on industry. In our previous episode, we talked about very high gas prices. This time around, we'll focus on the reasons for very strong power prices in the Nordic region, the outlook ahead for the winter, and the impact on heavy industry. Joining me, Richard Sverrisson to discuss are two experts who will share their extensive knowledge of the Nordic Power Market. Hello, Sigbjorn Seland of Storm Geo. Good to have you on the pod again. I hope you're well.

Sigbjorn Seland, Chief Analyst, Storm Geo: 0:50

Thank you, Richard, I'm well, thanks for the invitation. Happy to be back. Excellent,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:54

and a warm welcome to you Ole Lofsnaes of global aluminum firm Alcoa. It's your first time on the pod and I'm looking forward to hearing your views on the state of the market.

Ole Lofsnaes, Nordic Energy Director, Alcoa: 1:03

Very good. And thanks for having me. Whether or not this is gonna be the last time

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

we'll see. I'm sure it won't be. Sigbjørn. Last time we spoke, prices were very high and they've continued and they continued to be very high. What, what's going on? Yeah. Are we at a different place than we were in May when we last spoke, or are the fundamentals pretty much the same?

Sigbjorn Seland, Chief Analyst, Storm Geo: 1:23

Yeah, we are we are in a different place. We have record high or close to record, high spot prices all over Europe. We have th this very high short-term marginal cost for coal and gas, na gas fuel coal plants, which again, is due to the very high prices for coal natural gas, and the CO2 quotas. The EEA. And for the Nordic market, of course the hydrological balance is crucial and we are approaching, say, in a couple of weeks a deficit of about 20 TT hours, which means that the hydropower production in this, in the next, let's say 18 months, will be about 20 terawatt hours lower than what you normally would. Expect so yeah it's the two factors together pushing Nordic spot prices to record high levels

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:12

and what's the weather outlook? CPN, is there any, is what's the likelihood of rain or the, of the the very important neurological reservoirs to to fill in the coming weeks, months?

Sigbjorn Seland, Chief Analyst, Storm Geo: 2:21

No. It doesn't look too what shall I say, too good? We are heading for a fairly dry. Two weeks and then we are well into September. Regarding the filling of the water resource, it's. Beginning to look a bit strained for sure. It's not too much time left to, to start filling up the reservoirs now. And as I said, it doesn't look too promising in that sense. For the coming weeks and for September as a whole, I would say.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:46

So we can expect very high prices to continue. Yes. For how long is my basic question there, Ian?

Sigbjorn Seland, Chief Analyst, Storm Geo: 2:52

Our simulations show that the result from the simulation is that the very high power prices will continue for the next yeah, for the coming autumn and winter in particular but for the next 18 months. And actually I don't. Recall, I think to see that our price simulations are that high compared to cur to current market futures price levels that we see right now. We are, what should I say, very bullish to power prices going forward and just a bit of the background there, it to a large extent hanging also on the high coal and gas. Prices and things might change rapidly, but it seems that the main driver here to high coal gas prices is this huge growth in electricity consumption in, in, in China. It's it's a very strong driver there and I don't think it's reasonable to expect coal and gas prices coming down very much as at least in the short to medium. And e EWA prices are high, close to record, high driven by for sure the heightened ambitions for emissions reductions. The 2030 target. And also by the coal, gas prices for sure. Have the natural gas to coal switch in the European power sector, which is all. Obviously driving CO2 emissions and EUA prices.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:09

I want to return to some of those areas or some of these issues, but I think before we go there, the market seems to be pricing or expecting price to fall from Q2 next year, but you are talking about 18 months of. Of high prices.

Sigbjorn Seland, Chief Analyst, Storm Geo: 4:23

Absolutely, for sure, you should expect lower prices from Q2 22 onwards but still to remain relatively high. And as I said, our simulations indicate that that prices will remain Yeah, significantly higher than what you could see from the futures market right now. But the highest prices will be this fall and coming Q1, Q1 22. That, that's for sure. Or that, that, that's, probably

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:48

and then of course we heard the news of Olu three being delayed again. So that's add another, that adds another very bullish factor into the pink mixture here, doesn't it?

Sigbjorn Seland, Chief Analyst, Storm Geo: 4:56

Absolutely. It's a lot of bullish factors around the Olu three for sure. Being one of them. It's what shall I say, it's catastrophic, the whole project and the reason for the delays are maybe a bit different every time but I think it smells like. Further delays the way they yeah. Developing this.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:16

Ole, what's your view here? What is the impact of these very, what's your reaction when you hear that? These very high prices are likely to last for another 18 months. At least

Ole Lofsnaes, Nordic Energy Director, Alcoa: 5:24

you should have seen my face as was talking. It was getting more exasperated by the second. Bad news after bad news. I'm sure their power producers are thrilled about this. We're not particularly thrilled, as I'm sure you can imagine. I work for a company that has two aluminum smelters in Norway and their combined consumption, annual consumption is give or take five T hours, and that's roughly 3% of Norwegian. Very electricity intensive process. If you take all the costs that to a, to an aluminum, it's a bunch of different things. The major cost component is the cost of raw materials. That's the aluminum oxide that we buy, but those prices are set in a global market, so when the prices of IDE goes up, that applies to everyone. The Norwegians, the Chinese, the Malaysians, the Russians, all of us. But on the cost side, the one distinguishing factor is the power price. That's what separates us. That's what drives our competitiveness. And in Norway we are usually blessed with. Let's call it relatively low power prices then not all of our competitors, but a lot of our competitors, and the power is renewable. So that is a combination that works for us pretty well. And when we get into situations where power prices increase it brings a bit of worry to us because that basically pushes us outta markets. Not necessarily for long periods of time. We're used to being in a weather dependent power system. We're used to prices going up and down. We're used to dry periods and the impact that has, and of course we do mitigating efforts. We secured a lot of power on long-term contracts, but not all of it for many reasons. A lot of power is bought on either short term contracts or sometimes even in spots. And when these things happen, it obviously has an impact on us. So we do, we feel the pain we certainly do. And obviously we hope that it's short-lived. So the current situation where you've got ridiculously high power prices and an outlook that you know, it's probably going to remain that way for a year, maybe even more, is definitely not very encouraging. That's not all the factors we take into account. We also have a bit more sort of a fundamental long view. And another thing that sort of makes us a little bit uneasy is that as far as we can tell, power consumption is set to increase and it's increase by quite a bit, and there really isn't happening much on the supply side. We mentioned just now. Sooner or later it's probably gonna come to operation just but stand supply. The critical thing for us is really to unclog that and make sure that we start building power again. Because if we move into a situation where we're fundamentally more unbalanced than we're in a surplus, that does not bode well for us.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:31

But PPAs are quite interesting for Alcoa. Are they? Not all. The companies signed sign a few to few Wind, PPAs. Yep, that's right. So that's an option. Obviously that's where you are maybe contributing to increasing the supply side.

Ole Lofsnaes, Nordic Energy Director, Alcoa: 8:44

Yeah. But yeah, we do we've got three wind power PPAs and we're very glad that we have them, obviously. And if we do make the decision that will be adding to it, let's say another wind power PPA or a hydropower PPA or a mix, then you know, that would be good. But this is not a very good time to approach companies because obviously the hydropower producers, they're gonna. They're gonna use the market as benchmark wind power producers, maybe a bit less but then it'll become an issue. Whether or not the project is project finance. So if we were to step in and secure more wind, we would probably prefer doing it with a project that's being developed. And at the moment, there isn't really much of that's happen. In Sweden, but ideally it would be located in Norway.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:27

Industry in Norway is certainly given some kind of carbon compensation, isn't it? Olle. Does that help the picture here, does that ease some of the burden for industry?

Ole Lofsnaes, Nordic Energy Director, Alcoa: 9:35

Yes, it does. Which is its intention.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:38

And is this something where you pleased that there were no changes? In that sort of fit for five package that came out of the European Commission in July.

Ole Lofsnaes, Nordic Energy Director, Alcoa: 9:46

We don't know that yet. It's currently sitting with aa we're going to review, is going to review the government proposal. I believe that's scheduled for September. I may be mistaken. And then there'll be a notification later on, and then there will be an internal political negotiation in Norway, and then it'll hopefully before the new year. It turned into law and approved by the U Commission, and then we will know, but only then will we know exactly what the carbon compensation is gonna look like up to 2025 when the whole thing is gonna be reviewed.

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

Okay. Se if I can turn to you again, you've also seen later this year the cable linking the uk to Norway will be in place and will be operational. What do you expect to happen then in terms of prices?

Sigbjorn Seland, Chief Analyst, Storm Geo: 10:36

Yeah. I think the consequences of the UK cable now looks to be much, much bigger in a way than what we expected. Maybe only, yeah, like nine months or in the beginning of the year, and it's it shows how complicated in a way things are but as it looks now with a startup of the UK cable approaching and given the very low water restaurant feeling in southern Norway, and a very limited opportunity for power imports from Sweden, it seems, I would say. Quite obvious that prices in southern Norway will rise towards, towards, or to the price level in Germany for, let's say from this autumn and Yeah. Throughout the autumn and the winter. And I don't think this is reflected in the market at all really,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:25

so that we're talking around a hundred Euros, where at the moment we're around 60. So there's a jump of around 40 to come. Sure. That's not gonna be music to all its ears.

Sigbjorn Seland, Chief Analyst, Storm Geo: 11:33

Yeah. May, maybe not but significantly higher for sure. But just a short comment. We know how where how fast things are turning in the Nordic markets. And nobody know what the future will bring. And the deficit of 2012 tower in the hydrological balance can turn into a dito surplus in, in three to four months. Suddenly things look quite different. So the uncertainty is, I would say, as always big, but everything considered it looks very bullish going forward. And for southern Norway in particular, definitely both

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:07

of you mentioned strong outlook for demand growth in the region. We've seen very bullish forecasts from industry associations, the electricity industry associations, and TSOs. Is there an issue that if prices continue to stay this high, you drive large industries such as the aluminum or the smelters out of the region? Is that a danger?

Sigbjorn Seland, Chief Analyst, Storm Geo: 12:27

If they re remain very high. For a long time for sure. But the industry is used to live with with volatility. So I wouldn't be too concerned in the short term. And they for sure have hedged parts of their needs. But that said, for power intensive industry in southern Norway, things. Definitely doesn't look as good now as it did in the beginning of this year. And and Ula mentioned, that that the window for developing new wind power in Norway is closed as we know. And we'll, and you will not see new developments for probably seven to 10. 10 years. And another factor, which is very central topic is how you see that this Swedish TSO limits the transmission capacities between the Swedish price areas and towards the neighboring. Countries and its Swedish. DSO has been doing this for some months now but during the spring it's surprised, I would say all of us how extensive these limitations turned out to be. And this has really big consequence for the Nordic power market in both in the short and the long term because. Sw, TSO they indicate that they have no short term solution to this and have indicated that limitations to transmission capacities can go on for years, for many years. And this is again, is a significant limitation for the development of new wind power in, in, in the Nordic. Region, with the UK cable in operation and limitations to distribute the wind power in the Nordic region. It doesn't make sense really, or it doesn't make the same sense to, to develop more wind power in the northern parts of in, in the. In northern Norway, in northern Sweden and southern Norway, where you obviously now, or from a financial point of view should develop more wind power. It's impossible.

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

Yeah. It's a very bullish mix here. A few spanners in the works such as the grid limitations from Sweden. But all, when you listen to this and you think, for Alcoa you're a global firm. Is there a real risk that companies such as yourself will say we've had enough. We can't take this even though we're in the long for in, in the, here for the long term. Picture, but we, we may just move our production elsewhere.

Ole Lofsnaes, Nordic Energy Director, Alcoa: 14:43

As said, and I said earlier on, we're used to volatility and we're in a high price situation right now, but these things change. They always do. They go up and down and it depends on the weather and that's going to be the situation also in the future. It's, the weather impact is going to be mitigated by, amongst other things. The interconnector is going to Germany and the uk Speaking of the UK cable, it couldn't have come at a worse time. But we have owners within the states who know basically at least the basics of how the Norwegian and the Nordic power market works. And they also know that there are opportunities to get around this. The big concern, I guess is the, let's call it the overall perception that Norway is a low price power market. It's attractive for industry, and it's attractive for electrification elsewhere too. If this situation that we're in now doesn't go away if prices stay high and it keeps compounding with more and more effects the real concern is if what happens if that perception changes? What if Norway is no longer considered a low price country? And that may have a long term impact. I'm not gonna take anything for granted here and I do think that things are going to look better eventually, but obviously we do have some fundamental developments that suggest that perhaps unless we can get more renewable power into the system, we're going to have to get used to. A little bit of a different price levels than we've been used to in the past.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:13

We've seen in some countries. For example the Spanish energy minister calling for intervention into markets. Do you think this is the way to go? Some people are calling for price caps.

Ole Lofsnaes, Nordic Energy Director, Alcoa: 16:23

I can understand the political appeal of it, but I'm not really opinionated about that. We have a power market and the market works well, and there's a full good explanation for why the prices are what they are at the moment. And even though policy can certainly influence that there are other ways that you can influence the power market than a direct price cap, for instance. One thing is that you take a very close and scrutinizing look at the impact that power cables have. And the other thing of course, is well. Maybe this isn't the right moment to put a lid on. Developments of power supply, their intentions may be perfectly okay in that sense. But, if, the competitive advantage of Norway is really that we have, we usually have more power production than we consume. And it needs to stay that way. And that's something that everyone knows. So I would definitely go down that route first before you start intervening directly into the market.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:23

Ole, I'm sure we'll we'll invite you back and we're gonna keep a very close eye on developments in the region and on the fundamentals and the price outlook. So thanks very much for coming on to the Montel Weekly podcast and thank you si bian for joining again. Thank you. Thank you. If you would like to follow more discussions on the future of the Nordic Power Market, the outlook for power prices in the region and what's happening to PPAs, then follow the link on the Montel Group website to the Nordic Energy Day. That's about all from the Montel Weekly podcast This week, you can now follow us on our own Twitter accounts. Aptly named the Monte Weekly podcast. Please direct message any suggestions, questions, or if you think of a potential guest that would be very good for us to speak to. You can also send us an email to podcast@montenews.com. Remember also to keep up to date with all that's happening in the energy markets across Europe and beyond on Monte News. Lastly, you may have noticed that we've changed the look of our webpage and logo. This is part of the broader Monte Group refurbishment, but you can still find us at the places where you get your favorite podcast from, whether it be Apple, Spotify, or wherever. Thank you and goodbye.