Nordic energy crisis overblown?

The Nordic region has not escaped the unprecedented energy price levels seen elsewhere, but according to this week’s guests, remains competitive compared to other parts of Europe and the world.

Listen to a discussion on the outlook for electricity prices and the market consequences of the crisis. Could the region see the introduction of price caps and export limitations?

Guests: 

• Sigbjørn Seland, Chief Analyst, Storm Geo
• Mia Bodin, Head of Analysis, Bodecker Partners

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:05

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. This is an area also hit by record high power prices in some, but not all regions. Norway, one of the first countries to liberalize its power markets in the 1990s has faced calls to intervene and reregulate the market with price caps. As well as restrictions on power exports in neighboring Sweden. There is disagreement over the decommissioning of nuclear plants in the south of the country as it experiences a widening gap in prices between the northern and southern regions. Joining me Richard Sverrisson to make sense of the Nordic energy crisis are two of the region's most prominent experts. Hello Sigbjørn Seland of Storm Geo. Good to have you back on the pod. I hope you're well.

Sigbjørn Seland, Chief Analyst, Storm Geo: 0:56

Yes. Hi, Richard. Nice to be invited.

Richard Sverrisson, Editor-in-Chief, Montel: 0:59

And also a warm welcome to Mia Bodin of Bodecker Partners.

Mia Bodin, Head of Analysis, Bodecker Partners: 1:02

Hello. Hello. Nice to be here.

Richard Sverrisson, Editor-in-Chief, Montel: 1:04

I'd like to start with the situation we're in. I know we are some way off the dramatic price spikes we saw in December, but still the situation is quite unprecedented. So what got us here Sigbjørn. Is it mainly, can we just lay the blame purely on Vladimir Putin?

Sigbjørn Seland, Chief Analyst, Storm Geo: 1:20

I guess some will do that, but for sure. If you should point to one single factor as the most important one behind the situation, it is the high. Natural gas prices. That's for sure.

Richard Sverrisson, Editor-in-Chief, Montel: 1:32

And what are the other factors? There's quite a sort of cocktail of drivers here, is there not

Sigbjørn Seland, Chief Analyst, Storm Geo: 1:36

Yeah. It's a cocktail of drivers for sure. It's, in, in parts of the Nordic region you have a bad hydrological situation so prices wouldn't have been as high as they are if the hydrological situation had been. Normal. That is for the southern part of of Norway in particular. And of course you have close record high prices of the EUA allowances. So to sum it up, it is the production costs in the coal and and nat gas fuel, the power plants. And the weak hydrological balance in, in, in southern Norway. That is, is the main factors or the factors that explains this very high price level

Richard Sverrisson, Editor-in-Chief, Montel: 2:13

And how long do you expect this situation to continue Sig bend? When can we see some easing o of this high prices? Is it when? The taps go on for North Stream two.

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

Yeah, if you look at price expectations in the market for natural gas, that also long term price expectations have increased quite massively, I would say so. So not that the current extreme level, but futures prices being very high up. Until Q1 or including Q1 23 and say, if you look at the TT F futures price for 2024, it is now at 30 euros per megawatt hour. And six, seven months ago it was as at 15. So the market has really changed their view on long-term natural gas prices and obviously that has. Impact on electricity prices in the Nordic region, or first and foremost in, in southern Norway. I think the current situation with relatively high prices in southern Norway, they will last for a long time. That's, that situation is, it's fixed in a way as long as natural gas prices stay high and electricity prices in continental Europe and uk. Stays high, the situation is very different in if you look at other price areas in the Nordic market, the northern nor northern Swedish areas, the N oh three four SE one SE two, where you see very or nor normal prices, I would say relatively very low compared to everywhere else. And, and looking forward, I think you should expect even lower prices in these areas going forward, at least in the medium term, this spring and summer. So that's that's this record, high area price differences that we have seen lately, we might. Very well see that the differences will become even even bigger going forward. So that, that's a very interesting scenario. I think

Richard Sverrisson, Editor-in-Chief, Montel: 3:55

there's a still quite a long way to go before we're outta the woods in some senses. But Sigbjørn, I'll just, if I can stick with you before I turn to Mia would just wanna talk about the public debate in, in, in Norway. Yeah. What is your view here? How do you react? There's talk of, introducing. Price gaps. The government has subsidized end user bills for households. There's been calls to, to cut exports. What is your view of the current level of discussions in Norway?

Sigbjørn Seland, Chief Analyst, Storm Geo: 4:19

I I understand it very well for sure. You can very well describe the situation as a crisis for households that use a lot of. Electricity for heating. And there are many of them in Norway for sure. And the most common is to have a spot price agreement with your supplier. So when you, when they, they receive the December bill and it shows like 2000 euros for sure. That's a shock. Can sort of a crisis for many households and for many small businesses, farmers and guns and whatever. That's for sure. But you also hear a lot of com comp, what I say, complaining from. From industry and maybe not, that's not we shouldn't call that a crisis. Probably, they have they have their hedging strategies and they're not that exposed to the same degree, to the high spot prices. And I guess for industry, it's the competitive situation that matters most. And then it's an interesting point. I would say that electricity prices in the Nordic region, even in certain parts of. No, we have hardly been any lower compared to prices elsewhere in Europe than they are now. So that, that also applies if you look at price expectations going forward. So to, so the mix, so the picture is mixed, I would say. And you must understand why the discussion is is heated. But we have had this system now for many years and it has proven us proved to be a good system, I would say for. For producers a and consumers for a long time and probably the wise thing would be too. The situation off a bit and see if things can normalize.

Richard Sverrisson, Editor-in-Chief, Montel: 5:49

There is a general political census that the model I is working and is functional. But what is the situation like in Sweden, Mia if we can turn it what are your views of the public debate there? Is it more about supply security or is it also about subsidizing household bills?

Mia Bodin, Head of Analysis, Bodecker Partners: 6:06

I would say for quite some time it's been a debate on on the capacity constraints specifically locally. I would say with. And that's not just now the last months with these extreme prices, but also before that with especially around the bigger cities with industries wanting to electrify or wanting to to add production units. And there, there's been a worry that they won't be able to do that because of capacity restraints and so forth. So that's, that, that's blossomed up more during the last months as well. But that's been there before as well, which has more to do with the yeah. Capacity constraints and interconnections that has been there before as well. What has taken off now is, of course, one thing the direct consequences for households and industry where also the Swedish government has decided to compensate. For those with a bit higher electricity consumption. And of course that's been a debate whether that's the right way to do it or not. And yeah, one, one thing is of course how it affects the willing willingness of the understanding of the market and the willingness of of having flexibility when you just get get the payment if you consume too much. That's one, one thing that's been debated a bit. The other probably more important or major thing is the increased discussions on or debate on nuclear versus wind power. That's really blossomed up. That's always been a debate in Sweden. But these last months, of course, many people blaming these high energy prices on the shutdown of nuclear and that we should not have done that and. We should open them up again and we should build more. So that debate really gained force as to say this last month. And it is it's also elections this year. My feeling is that if it hadn't been elections, it might not have been such harsh discussions. I think it has also to do with that. So of course the high electricity prices has really. Affected many people and industries, so easier to gain understanding of that but also I think political act so to say and and then it's an easy way to, to win votes as well to start this from both sides. So

Richard Sverrisson, Editor-in-Chief, Montel: 8:06

absolutely, there's one thing lamenting the loss of nuclear power and maybe increasing prices, et cetera, but there's a quite another. Is putting in place or building a new project in Sweden. I think that they're two very different things. How has the Swedish government handled it in your view, this energy crisis?

Mia Bodin, Head of Analysis, Bodecker Partners: 8:22

Yeah. The same time as we've had the energy crisis with also a new government and and so on. So it's been a lot a lot happening a lot happening here at the same time. So it's a little bit hard to say what is what here, but I must say that, even if we have these high energy prices and we have this debate it's. I would say more maybe on a local level that we have the biggest debate on nuclear versus wind. Of course it is still also government and between parties for, especially as I said before the election, but I would say there's, they are the new government at least when it's just one party, of course, easier to just be just one party than before when you had to have consensus between them. They have been quite clear what the long-term view is that we will we need offshore wind power, we need a lot more wind power. We need everything we can get, but they don't say no to nuclear either. So I think they've handled it pretty well. I would say, it is, has been as I said, it's a bit complicated now with the change change in steering as well at the same time. But, the compensation to, to households. They want to do something. I may think it was maybe a little bit quick and not, probably better if something would have been done with the taxes or at least connected to the actual consumption and not just give this, give everyone the same. It's quite a easy fix. That may not have been the correct one, but so maybe a little bit political act as, as well in that sense. But no, no big complaints on how to handle it.

Richard Sverrisson, Editor-in-Chief, Montel: 9:39

Because you're not really incentivizing a, a cut in domestic product in consumption in many,

Mia Bodin, Head of Analysis, Bodecker Partners: 9:44

no, it's definitely not a good long term solution if I say like that, but

Richard Sverrisson, Editor-in-Chief, Montel: 9:47

yeah, absolutely. Yeah. So Sigbjørn I'd like to go on to the consequences of the current crisis or the period of high prices. EA talked about the debate between, nuclear and wind and what's the situation in Norway? Do you expect that the high prices will, speed up onshore, onshore wind construction in Norway? Or do you think that politicians will choose to go for more, building out hydropower

Sigbjørn Seland, Chief Analyst, Storm Geo: 10:12

that's also related to these the cables to sea cables to the Netherlands Germany. UK when these investment decisions was made, the analysis certainly did not show a severe an effect on prices as we have seen. It, it was not a part of the analysis that it would be a complete stop to onshore wind power in Norway, nor that the Swedish TSO would have to limit capacity. In the main grid. So it shows that big changes have consequences that analysis are unable to describe in advance. So for sure the, so what shall I say, the normal situation I would be that. That you saw a huge interest for building onshore wind power in southern Norway, but the legal framework is not in place, so that is not possible. So in, in that sense, the situation is, as I said, quite fixed there, there is no sort of quick fix now to, to this. Situation. For sure. You will have something will start moving on the supply side. But not anything significant. And that is mainly because the sort of the main thing here is onshore wind power. And that will not happen in, in, in many years

Richard Sverrisson, Editor-in-Chief, Montel: 11:23

because they can't expedite, they can't speed up the legal processes yet to make a possible

Sigbjørn Seland, Chief Analyst, Storm Geo: 11:28

that's not my expertise but as the way I understand it is. Still years ahead before that legal framework is in place. And you will see new investment decisions in in onshore wind power in Norway.

Richard Sverrisson, Editor-in-Chief, Montel: 11:41

If I can turn to you then Mia and ask, I know you're an expert in power purchase agreements or PPAs. Now, do you think this period of high prices will drive or further boost the growth of PPAs in the region?

Mia Bodin, Head of Analysis, Bodecker Partners: 11:54

Yeah. I think they, they will actually, we've already seen quite a big increase in interest from corporates I would say in this, especially in the region where I'm sitting in the south, south of Sweden. And I'm sure it could be the same in the higher priced areas in Norway as well. And part of it is of course, because the sustainability part, it is high up on the agenda for many companies in in the Nordics. But I would say a lot also affected by the higher power prices and the willingness to to secure power future. Future power instead of being a. Being completely merchant there. So that's that, that's definitely something that, that we do. See, on the other hand, we have not seen that many more transactions being finalized because it is a bit harder to agree on prices. It, there, there used to be more of a stab, quite stable price span higher in, in the south. Than in the northern regions but still rather stable. And we kinda knew what was the right PPA price for a 10-year-old baseload of pays produced for solar or from wind in the different areas. And with the higher prices that we've seen now the investors in wind or wind asset owners are of course wanting to have a higher price because that's what you can get from the market for the next years and what but the corporates and the companies are not really. Yet they are more looking at what has the prices been for many years before and what did the forecast look like. And still they've heard what the PPA prices have been before and still wanting that price for long-term hedging. Yeah, so it's both. Interest is higher, but harder to agree on price. And also many more investors willing to take on merchant risks. So not having a PPA at any price. It can be a little bit more picky on that side. So it. Another thing I would say is with the high price differences that ZigBee also talked about before, and that where we actually definitely I agree that there's no ease of fix for this. We'll probably see this high price differences for for quite some one year years and probably increasing as well with all the new wind power coming on in in the north of Sweden at the moment it also affects PPAs in the way that it may be more difficult to. Close PPAs between areas. So having consumption in the south and production in the north, there are more price risks and someone has to take that risk, which will make PPAs hi higher priced or more, more risky, so to say, to have these cross area PPAs

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

Sigbjørn. Do you think that the southern parts of Sweden, southern part of Norway is gonna be a high price area in the years to come?

Sigbjørn Seland, Chief Analyst, Storm Geo: 14:22

Yes, definitely to a large degree due to. The northern areas, the SE one, A two and oh three and four being so clearly defined low priced areas. Yeah and in the short to medium term and also longer term, I think there's a there is some very interesting price development coming. And I think in particular during this spring and summer, we can experience something that we haven't seen before. With this current. Price regime. We see the hydrological balance improving up north and and it, but it doesn't improve. In, in, in southern Norway in particular. So if this weather regime prevails for some time, which is, I would say is in the medium to long term forecast we are heading for a situation where you have an, where water wells will run full or close to full. In, in in the northern areas and with a dito price collapse and spot prices close to zero in periods, but in southern Norway and a one, two, and five there. Water restaurants will be very low throughout the spring and some and the probability increases now that the price here will rise to a level that will stop. The export outta NO two to Germany, Netherlands, and uk. And because if that export were to continue there, there are also many scenarios that give very low water. So filling in southern Norway when we come to October, so this will not be the case. Of course, the price will. Increase to stop that export and potentially turn it to imports in periods. So that you could see, I'm not saying that it's the expectation still, but you could see close to zero prices in the northern areas and around roughly 150 euros in the southern areas and extreme price difference. And this system price, this theoretical system price in this picture can. Can you know if NO two will start importing you have that. That the, this will be price, independent supply in the system, price calculation. So regarding the system price, it'll be it, what we say, a bearish effect, and you and the system price will then often clear close to that very low prices in northern areas because it'll, it'll clear on the price, independent imports, the price, independent production, as the wind, solar, nuclear, unregulated hydropower, and that, that will be, I would say, an interesting scenario. And it's as I said, maybe not the expectation yet but but you have quite a few scenarios showing. That to happen now. Yeah.

Richard Sverrisson, Editor-in-Chief, Montel: 16:55

Maybe that'll ease some of the political pressure, but there, there's one part of the market we haven't already talked about, and that's on the demand side. Mia, I was reading recently that the European Metals Group, for instance, said that aluminum output is down by 30% or fail 30% in 2021 because of the high prices. Have you seen any. Any reduction in industrial outputs in Sweden or even in the Nordic region as a result of these high energy prices.

Mia Bodin, Head of Analysis, Bodecker Partners: 17:22

I wouldn't say we've seen much of that now. We have seen some from pulp and paper, for example, in Sweden closing down, but that has more, has to do with capacity problems and more, more local. I wouldn't, I not to my knowledge, I haven't seen. Production closing down. What is more is the discussions on if many companies want, are looking at different ways of of having better sustainability, of having consumption and from fossil free sources. And and looking at ways to be better, so to say, in, in that sense, and in that, looking at electrification as one part. I know that industries, especially in the southern parts. Are hesitant if they can really electrify their industry due to the, yeah the risk of a higher power prices continuing, but also mainly I would think, but worries about the capacity restraints and that they won't be able to have that what they need, so to say, from the grid companies. Yeah, so not seeing it. So far. But but more worry about the future can be really electrify and and get all the power that we need at reasonable prices.

Sigbjørn Seland, Chief Analyst, Storm Geo: 18:27

I agree. We, you don't see any reduction really from Indu industrial sector, still maybe a bit from the households. They feel it more. And as I said earlier, even if electricity prices are. Record high, at least in parts of the Nordic region, the electricity prices are still or are relatively low compared to basically everywhere else. I don't think they they have, yeah it won't induce much consumption reduction from industrial facilities in these areas.

Mia Bodin, Head of Analysis, Bodecker Partners: 18:56

I think that's a very good point also the, also what we've heard when we had PPA discussions with some corporates with the competitiveness compared to European countries that. It's more important to have kind of the same prices or hopefully even lower power prices than competitors rather than having low power prices in general. So the competitiveness is easier. So that's also a worry of getting into a long-term fixed PPA price, even at reasonable levels. If they believe that the power prices in other European countries will be lower than that because then they will, that, that will create more of a problem than actual high or low prices. Yeah. And also if itself.

Sigbjørn Seland, Chief Analyst, Storm Geo: 19:33

Absolute. And also if you look beyond Europe, energy prices are at least as high in. In May in large parts of Asia. So I don't know. I don't think this is any sort of crisis for industry really. Maybe it's the opposite, at least in the long run. I would say.

Richard Sverrisson, Editor-in-Chief, Montel: 19:47

Just a final question, guy. I, we could talk here for hours. I've only covered half my questions I was gonna put to you, but maybe we'll have to have a follow up discussion. But we've seen in 2021, several sort of trading boutique firms go under, at least one big name. One. Is this something, is this a concern? Do you expect maybe more to leave the market to, to throw in the towel because of the, not just the high prices, but the extreme volatility? And what will that impact be? Liquidity. Can I start with you, Sigbjørn?

Sigbjørn Seland, Chief Analyst, Storm Geo: 20:16

Yeah. I would, I must say I'm surprised really, that we haven't seen more of these incidents because it's been a total some totally crazy days in these markets. So I would've been expecting more companies to run into problems. So I guess now the worst is behind those hour. You never know, but I would guess. If you have survived until now you you are probably safe in a way for the Nordic electricity market for sure. The liquidity for in the futures trading is getting worryingly low. So maybe a couple of years with with less volatility would be in that sense a good thing. So maybe we can hope for that.

Richard Sverrisson, Editor-in-Chief, Montel: 20:55

And Mia what's your view? Him.

Mia Bodin, Head of Analysis, Bodecker Partners: 20:57

Yeah, no I agree. I'm probably the worst part is it's behind us now and I'm also a little surprised we haven't seen more of what we have seen is of course, many companies being rescued by extra guarantees and credit support from from owners. And yeah we'll see if that is possible of course, if this happens many times there are just so many times you can ask for more guarantees. And that's. We've seen also with just utilities lo locally state owned utilities in Sweden as well. Having to ask for extra support or credit guarantees because of the high volatility and the price situation and discussing of course, after that, should we continue doing this? Can we take these risks in the future? We may in the coming years see more of these yeah I either stop doing what they're doing or join forces with some others and see some other constellations.

Richard Sverrisson, Editor-in-Chief, Montel: 21:40

It seems to be yeah, a constantly evolving dynamic market. And it'd be very interesting to watch what happens in, in the months and years to come. So Mia and Sigbjørn, thanks very much for joining the Montel Weekly Podcast this week. An excellent discussion. So listeners, you can now follow the podcast on our own Twitter account at ly 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.