Picking winners

Even for the best power projects, gaining electricity access from grid operators is far from straightforward. Amid an every lengthening queue of applications, how do TSOs decide what projects to approve and which to reject? Is it a choice between electricity hungry data centres generating Tik-Tok videos or AI servers? Listen to a discussion with Marius Holm Rennesund of Thema on the potential for demand growth in Norway and the wider Nordic region. And as the discussion about Norwegian nuclear power resurfaces, we talk about the viability of atomic energy in the country.

Host: Richard Sverrisson, Editor-in-Chief, Montel
Guest: Marius Holm Rennesund, Partner, Thema Consulting

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:07

Hello listeners and welcome to the Montel Weekly podcast. Bring Your Energy Matters, an informal setting. In today's pod, we return to Norway and the investment climate for new renewables in the country. We've come a long way from the skyrocketing wholesale prices of a few years ago, and now the market has sunk to a level that raises questions about the viability of future green investments in the wider Nordic region. Helping me, Richard Sverrisson to discuss this and much, much more is our old friend, Marius Holm Rennesund of Thema. A warm welcome to you, Marius.

Marius Holm Rennesund, Partner, Thema Consulting: 0:39

Thank you very much, Richard.

Richard Sverrisson, Editor-in-Chief, Montel: 0:40

Must be busy days.

Marius Holm Rennesund, Partner, Thema Consulting: 0:41

It is. It's a lot of happening in, in the market right now, so it's it's definitely busy.

Richard Sverrisson, Editor-in-Chief, Montel: 0:45

Absolutely. And on the policy and regulation side as well?

Marius Holm Rennesund, Partner, Thema Consulting: 0:48

Yeah. A lot of happening all across Europe and I think also in the wider picture and new geopolitical situation that also feeds into the European energy and power markets. So it's gonna be exciting also following that forward.

Richard Sverrisson, Editor-in-Chief, Montel: 1:00

Absolutely. Mean, it's all become very global in a way, hasn't it?

Marius Holm Rennesund, Partner, Thema Consulting: 1:03

It has. But it's also, we have had years of kind of rule-based trading now. And now everything has been shaking up so far. It has led Europe closer together. But we'll, we will see, we had the the elections, the European elections last week with a lot of votes for the very right wing. So we'll see what that leads to in, in terms of of the European Union moving forward.

Richard Sverrisson, Editor-in-Chief, Montel: 1:24

Absolutely. Fingers crossed it doesn't lead to slow down of the energy transition here, but of course that's the concern here.

Marius Holm Rennesund, Partner, Thema Consulting: 1:30

Yeah, it definitely is. And we're seeing also, a market in renewables where China have large market shares in parts of the solar and batteries, et cetera and the EU wanting to move away from that due to con due to security concerns and that might also increase the cost in the energy transition.

Richard Sverrisson, Editor-in-Chief, Montel: 1:48

Yeah, but is, is that I think that's something that the EU wants to do, but hasn't that ship sailed in a sense? Is it too late for Europe to build up that kind of solar capacity or to manufacture solar panels and also, so EV batteries?

Marius Holm Rennesund, Partner, Thema Consulting: 2:01

Yeah, you at least need a political will there and maybe some kind of support. But I think all the governments across Europe see this as very important, our security issues in general. So I think we're moving in that direction, maybe early bit too late. So that's, but you know, it's difficult to see not that costs are increased if you're actually following that. Path. As we, the last few months have been basically flooded by cheap solar panels from China, et cetera. But it's still early days in, in that discussion so that's something to follow for sure. And I think also the security mar margins in the power system across across Europe will need to increase. And that's costly as well.

Richard Sverrisson, Editor-in-Chief, Montel: 2:39

And I, the it's almost I think it's a well known fact, but hardly discussed that the production of the solar panels in China were produce mainly through a coal-fired electricity generation.

Marius Holm Rennesund, Partner, Thema Consulting: 2:49

Exactly. Exactly.

Richard Sverrisson, Editor-in-Chief, Montel: 2:50

So they're quite dirty in a sense.

Marius Holm Rennesund, Partner, Thema Consulting: 2:51

Yeah, they are. They're.

Richard Sverrisson, Editor-in-Chief, Montel: 2:52

So maybe it's a good thing that can be moved to Europe and also if it generates jobs and then security, which is obviously a prime concern for Yeah, for the European Commission and European PO politicians generally. But if we tend to know in the Nordic region, Marice what. Is there also this kind of backlash against the net zero or the climate policies that have been at the forefront really of policy for the, for five, 10 years and beyond?

Marius Holm Rennesund, Partner, Thema Consulting: 3:17

Yeah. I'm not sure it's a backlash, but we definitely see public opinion and we're seeing that in Norway for years. We, we don't show wind kind of turning. It. Has been difficult to invest in, in onshore wind in Norway, we see in Sweden more and more projects being vetoed. Although I think still it's, public opinion wise in Sweden the public really sees that we need more renewables. It's a more difficult situation in Norway. Finland. On the other hand, we saw a lot of investments a couple of years back and basically turning Finland from a high priced area. That combined with Otre finally coming online to to a lower priced area. But it's more difficult. We've also seen costs for for wind increasing partly due to the war and supply problems. So you've had a market where prices have been going down and costs are stayed high and even increasing. So right now I think it's difficult. I think we will see. Costs coming down, they've already have for solar due to the overcapacity in China. I think we will eventually see that in, in wind as well. We see the first sign so that with costs coming down further down the value chain, but it takes time to to trickle up to to lower turbine prices basically. So I think that's a challenge. And of course we see low pro prices in the Nordics right now, so it's it's a more difficult case.

Richard Sverrisson, Editor-in-Chief, Montel: 4:36

That's a, maybe a good point for me to I think some of the points you've raised here, Iris, we'll discuss over the course of this episode, but if we start off with a wholesale power price levels in Norway, in the Nordic region, they were, as I'm mentioned in the introduction. It's, they're a lot lower than what we saw, in, at the height of when the war in Ukraine, when Russian raided Ukraine and also in the buildup to the war. Of course. Yeah. What are the main reasons for that, if you can explain that to our listeners what's happening in the markets at the moment?

Marius Holm Rennesund, Partner, Thema Consulting: 5:03

Yeah, I mean the, the very high prices we saw during 2020 23 partly as well, is really due to high gas prices and combined with relatively high CO2 prices as well. And then with Europe, have been been quite good at substituting away from Russian gas. Germany has built up more LNG facilities followed up with some long-term contracts, but we're also reliant on more spot cargoes coming in. But gas prices are basically back to to pre-crisis levels. For a while they were even lower. Have come up over the last few months. And we've also seen CO2 prices going down. And that's determining the production cost of a gas fired power plants which sets the price on the continent for for many hours. And that also feeds into. The Nordic market but we have a very divided Nordic market with a southern part which is well connected to the continent and follow prices there, although with a discount quite closely. And then we have a northern part where we have in a normal year, a a large surplus that you can't export southwards. And that's also influenced the system price and the total Nordic price. So we see quite large price spread also towards towards Germany. Very high right now. We think it will will close in the coming years, but it will definitely be a spread there. If you look at Southern Norway and the NO two area we think over time with a lot of new demand side projects likely to come in. The queue at the TSO it's very long. You have projects, with a possibility to double demand, that won't happen. Not all of them will be realized. And it's really the grid that now is setting the limitations in Norway for the prospects of new demand going forward. But with the demand picking up. Very little investments over the coming years in the production capacity. We are looking at the balanced situation and may maybe also a deficit towards 20, 20 30.

Richard Sverrisson, Editor-in-Chief, Montel: 7:00

That close. Yeah. You think? Yeah.

Marius Holm Rennesund, Partner, Thema Consulting: 7:01

And then, we, we need imports and prices needs to go above prices in the countries we are we're importing from. Meaning that we will at least southern part of nor of the Nordics and particularly Norway we'll go closer to the German price and eventually, potentially also above for a period.

Richard Sverrisson, Editor-in-Chief, Montel: 7:18

But that's some way off at, that's some, and we're still only in 2024, so that's six to 10 years away potentially. Yeah. But if I can turn to, turn to the points you raised there about demand and the increase that you're seeing or the cues for new projects at the TSO. Can you give us some more detail about what kind of projects are they and what kind of demand growth can you see?

Marius Holm Rennesund, Partner, Thema Consulting: 7:37

It's a combination of projects. We see battery factories, we see data centers obviously in the queue. We see also more el electrification of existing industries. And transport as well. So it's all the buzzwords with the batteries and the data centers, et cetera. And some hydrogen projects. Fewer in Norway than we see elsewhere in the Nordics. Fossil South real steel is really driving that demand in northern Sweden. But some projects are there. When we get, new players coming here now. And the last time they looked at the Nordic market in Norway was five years ago, and they say, this was a no brainer. Grid was not an issue. Relatively low power prices high security of supply more than enough power. And now they come back and suddenly realize if I'm not in the queue at the TSO, I can forget my project for the next 10 years. And then they rather move to Sweden or Finland. But that long queue also make us quite comfortable in, in believing that we will get a quite steep demand growth over the coming years. There might be delays, power prices go up. Some of those projects might not be realized, but there's more than enough new projects to come in as well.

Richard Sverrisson, Editor-in-Chief, Montel: 8:47

But you mentioned most data centers and one of the sort of hot topics at the moment is AI and the amount of power that uses. Are you seeing any of those kind of, projects in the queue or being talked about at least?

Marius Holm Rennesund, Partner, Thema Consulting: 9:00

Yeah, they're definitely being talked about. And I think the discussion that is really coming up in Norway now is should we should we give power to to TikTok or others, or should we prioritize what we will use the the electricity on? We've been in a situation since the market was liberalized that we have had. Plenty of of electricity. And it's a first come, serve, first served basis for getting grid connections. Now when we're looking at potential scarcity those discussions are coming in. Should we prioritize certain types of industries that creates more jobs? Or should we keep the first come first served? And I think. As I said, it seems like data centers, at least the ones that are not in the queue now, they would rather go to Sweden, north Finland because it's grid is not an issue and it's it's easier to establish that right now.

Richard Sverrisson, Editor-in-Chief, Montel: 9:52

Absolutely. I just reminds me that a couple of months ago there was a big chaotic episode of, or the trains were canceled going to, to the airport. And I shared a taxi with someone who was building a data center in Norway and was very excited by the projects in the Nordic region generally. So that's obviously something that's a growth area. The other thing, Mari, so it's interesting that there is more of an people are urging, the TSO or the people deciding to be meal picky to pick and choose between the projects. And I mean, isn't that's quite a complex area? You're getting quite it can be very subjective, can it not?

Marius Holm Rennesund, Partner, Thema Consulting: 10:25

Yeah, definitely. Definitely. And I think it's. Still a way to go. But I think the discussion will be there. And it, you basically ask the government to pick the winners in a way. Both the projects that will proceed and the projects that actually give what you want. Maybe that is those that are a bit more labor intensive as, as well. So you get jobs sometimes it might be easier. You set up a hospital versus a a data center. But I, yes, it's, it is very subjective. The TO in Norway now has said that if projects don't show any progress, they will cut 'em off earlier. But again, what is enough progress? There's there's a lot of of decisions to being taken out there without kind of firm basis for that decisions. So it's I think we'll we'll see a heated debate around this.

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

And to be fair, governments generally, not just Norway or the Nordics, but generally don't have a great record in picking winners, do they?

Marius Holm Rennesund, Partner, Thema Consulting: 11:18

No. No, exactly. It's gonna be a challenge.

Richard Sverrisson, Editor-in-Chief, Montel: 11:20

Absolutely. But let's talk more generally about, so on the supply side, we talked a little bit on demand. What's happening on the supply side? You said that the investment climate now is very challenging in, in a way. What are the main reasons for that?

Marius Holm Rennesund, Partner, Thema Consulting: 11:31

No, we've had a full stop, basically an onshore wind for years. All the licensing licenses were drawn back. You had to reapply and it's now gradually opening up if the municipality is positive. We see already now that a lot of municipalities actually veto veto onshore wind in general without seeing even a project. So you've got fewer and fewer sites to pick from. I think to succeed you have to have somebody local that is connected to the area, to the municipalities, and that you do it in a good way. So there are fewer that are actually able. To do that and the public opinion against offshore, no, sorry, onshore wind. Is still quite negative. So we see some projects proceeding. We see different ways of trying to maneuver to make them more to make the local people more pro them. We have some companies offering, power at cost, basically for new wind farms to the inhabitants in the municipality, et cetera. So you try different ways of persuading municipalities to actually be the host of the project.

Richard Sverrisson, Editor-in-Chief, Montel: 12:40

It's much more a carrot than the stick, isn't it? Yeah.

Marius Holm Rennesund, Partner, Thema Consulting: 12:42

It is, yeah. But we also seen, the tax system being changed so that more should go back to to the municipalities. But onshore wind is still challenging and I think it will be going forward. We see some solar coming both on the household side but also more industrial projects. I think also there we are gonna see a new debate so on farmland that's. Being used. So that creates a debate around what you should do the, use the areas for which is particular for for solar utility scale. I think we will see projects but also there heavily debated. If you look at. The long term, it's really the offshore wind that should save us in a way. We've seen costs going up there as well, but we got the winner for the for the first auction. Did that surprise you, Mari, or yeah, it surprised me a bit. I think it was a foreign winner. That was in a way, a good thing.'cause you always get this debate of whether StatKraft or Equinor was told to bid. So we're outta that.

Richard Sverrisson, Editor-in-Chief, Montel: 13:41

For those listeners who are unaware, can you just say who, who won the auction and under what terms?

Marius Holm Rennesund, Partner, Thema Consulting: 13:46

It's, it was a consortium. Of of the Swedish and Dutch and Japanese fund and company and investment fund owned by Ikea. Which has a track record in offshore wind. But basically they, they will use up the the subsidies over the first five to 10 years of the lifetime of the plants. Of course it also remains to be seen that it will be built. It's possible to draw out. It's a fine for that. But it's really the offshore wind. That will bring us back into, to balance in the thirties. So we really need that in the long term. I think from what we see for the coming years, demand is definitely growing. And there's not much supply coming online. So we will eventually eat away from that power surplus that we have.

Richard Sverrisson, Editor-in-Chief, Montel: 14:32

So the offshore wind is certainly very important there. And as you say, it's quite interesting that, I think it's quite telling in fact that a foreign bidder won because in other parts of Europe it's not always the case. In a and that's pot potentially emphasizes the fact that it was a very competitive auction and a competitive process, which is positive. Now when it comes to, it's interesting also what you say about solar and wind. We have the solar debate in other kind, so Italy, for example has banned or. Wanting to ban the use of solar and agricultural land because of that conflict over, over land use. And then, we talked earlier this year, I talked with the head of renewable Norway, Oslo Cargo about this kind of getting municipalities on board and buying them into, to getting if you want to build the new onshore, it's onshore wind. It's very tricky. It's very complex. And it's hard to get that buy-in, isn't it from the population at large?

Marius Holm Rennesund, Partner, Thema Consulting: 15:20

It is. And I. Therefore, I also think we will see a change in who is actually investing in onshore wind. What we saw previously was a lot of foreign pension funds, renewables funds, et cetera. We might see some of them, but the need to to cooperate with somebody local or local utility. So I will think that we will definitely see more utilities Norwegian utilities investing in wind and less of of the foreign money coming in.

Richard Sverrisson, Editor-in-Chief, Montel: 15:43

Yeah, quite the flip side of what happened on the offshore side. Yeah. But what about new hydro? Is that just off the table? Is that completely impossible Marius, would you say?

Marius Holm Rennesund, Partner, Thema Consulting: 15:51

No We are seeing investments, but most of them are basically upgrades and increasing the capacity. Because we're going into market with more volatility going forward, and as a hydropower producer, you want to catch those high price hours. So it's less on new production and more on new capacity. We see a few larger projects that can come online. And then it's, the resource base is not that big anymore, right? There's a lot of protected rivers. We don't expect the large investments. We'll see some more small scale. We will some see some upgrades that also would give some additional production and maybe a few medium sized to larger projects. But it's really. Wind offshore, some wind on shore, and a bit of solar going forward. Yep, absolutely. But in, in terms of solar as well, we. Even and I got get this question a lot, why do you see so much cannibalization of solar in the southern part of Norway? You don't have any so solar. But we are really seeing that we are importing those low price towers from Germany when you have had a explosion in solar investments over the last couple of years.

Richard Sverrisson, Editor-in-Chief, Montel: 16:59

And not, the Netherlands as well has been, exactly. It's the same kind of issues there of oversupply and grid constraints and they're exporting their problems out to their neighbors. Yep. Most, if I can just touch on that, on the topic of power purchase agreements or PPAs the climate now with kind, with lower prices, is that quite challenging? What are you hearing at the moment in the Nordic region, Norway and the Nordic region companies wanting to sign? Obviously there's always a disparity between those who, want to buy cheaply and to sell highly, but at high, at higher rates. But what, what's happening at the moment given the environment of low prices?

Marius Holm Rennesund, Partner, Thema Consulting: 17:32

No, I think it depends a bit on, on the area you're located in. We have large area price differences and large discrepancies between supply and demand in the different areas. And in the northern part of the countries, we see a large surplus. Now we see. Companies with new projects wanting to do PPAs, but we also see, I think suppliers that see that demand is going to grow in those areas and the projects won't be realized before in a few years. That has increased prices. To some degree. On the other hand, of course, you're very influenced by the current market prices as well in those negotiations. And and that had. Has pushed prices in the other direction. In parts of the Nordics. So I guess we see a bit fewer of of the deals being being made now. So it's a bit of a slowdown, you'd say. A bit of a slowdown. But we, when you had the peak in wind power investments with a lot of foreign investors coming in and they had to do a PPA because it was project financed. Those times are over. Investments have slowed down. And that also leads to to less supply of PPAs. On the other hand we see that. More of the medium sized companies got the wake up call during the energy crisis. And have gotten a more active in thinking about how to buy power. How to secure their power price. They're not, the big energy intensity ones, but the ones that still have a fairly large large energy consumption. And we see more of those players coming into the market as well.

Richard Sverrisson, Editor-in-Chief, Montel: 19:00

That's interesting 'cause I if you aggregate their demand, that's still quite sizable, isn't it?

Marius Holm Rennesund, Partner, Thema Consulting: 19:04

Yep. Yep.

Richard Sverrisson, Editor-in-Chief, Montel: 19:04

Yeah, I think that, that's interesting 'cause I think, but in addition, Norway hasn't been as affected by negative prices as maybe Sweden and Finland. Definitely hasn't to the same extent. Are you seeing any kind of interests or from. Batteries or from, storage, even hydrogen coming in to to, you mentioned the volatility for hydro producers, but it's also very interesting for those who have those kind of flexible assets in terms of batteries and otherwise and storage facilities.

Marius Holm Rennesund, Partner, Thema Consulting: 19:32

Yeah I, we'll definitely see that. I think we see that more in Sweden and in a way it is it's a large pipeline of batteries there. And we've seen it in Germany. For the last year or two. But we definitely see increased volatility and everybody has talked about that for years. But over the last, couple of years we really see it's happening. We see more volatility in the day ahead market. We also see. See increasing prices in intraday and balancing markets as well. And when we look at Germany, we see a lot of batteries also being used in the intraday market. And basically what you wanna achieve is not using your battery, but. Buying and selling in the same hour and locking a profit there without getting the battery degradation. We still have a lot of flexibility, particularly in, in Norway. So the business case is worse there. And we see them rather in the more short term markets than the day ahead markets. But we will get investments. We see them in Sweden. Some also in Norway. But the income potential is larger in, in Sweden. Definitely.

Richard Sverrisson, Editor-in-Chief, Montel: 20:29

Absolutely. That's that's very interesting. And I think another aspect which I want to touch on with you, Marius, is that's been very much in the media or a focus here, talked about in nor, and that's a nuclear power. It's Norway is one of the countries that they have some test reactors have had them for million years, but you haven't actually had them actively. Producing power. What's the nature of the debate? The moment? Why has this kind of raised its head in Norway? The debate about, bringing nuclear into the power mix?

Marius Holm Rennesund, Partner, Thema Consulting: 20:53

No I think it's partly because we, we don't want onshore wind. Offshore wind. Yes we want it, but we see it's expensive. And then suddenly this new technology with small reactors come in and say they can produce cheaply and use. Only a small area. I think that the nature part of the debate going, from climate now also being more pro-con conserving nature has sparked that debate. Of course, we've also had one company that has been very vocal in, in the debate. I think it started off as something that could say what's towards 2030 and the deficit. We see that we might come into that won't happen. Nobody ever build one of those small reactors in Norway, we don't have any commercial reactors, have never had there's not a licensing, pro procedure and regulation in place that will take a lot of time. We see now that, the average time for a larger hydropower project to be realized is. 12 years. Most of that is on the regulatory side with licensing. In a new sector where we don't have the framework at all. I think we we need we'll see time increasing much from that as well. When optimistically, we could see that in the mid forties or something. And then we haven't talked about cost yet. Exactly. And who knows? We never built any of them. The first kind of generational dose reactors will be more expensive than the next et cetera. But. If somebody wants to build them on commercial terms we might see them late in, in the forties. But that's not something we kind of use in our base case when we do our long-term forecasts.

Richard Sverrisson, Editor-in-Chief, Montel: 22:30

That's interesting.'cause it's, yeah, it's it's been talked about, but often the track record of these big reactors, they're not in terms of cost overruns and delays. I mean it's the finish in the French examples, there are others, but those are clear.

Marius Holm Rennesund, Partner, Thema Consulting: 22:42

Definitely and that's one of the arguments of those wanting to build the smaller ones that that's a very different technology. Both security wise, but also in manufacturing. And that cost overs are less likely as it's not tailor made for each and one project. But that's, it still remains to be seen.

Richard Sverrisson, Editor-in-Chief, Montel: 22:59

And how would that work? And just a final question really, Marius, but how would that work in terms of a small, small modular reactor, SMRs, they're often talked about. How would that work with very renewable ba, renewable based system, power system? We've seen it in Finland. We have a lot of negative prices, very, a lot of volatility after ALTA three came online. But how would it work in Norway with very much a hydro based system?

Marius Holm Rennesund, Partner, Thema Consulting: 23:22

No, I think first of all. Olkiluoto is really big. 1600 megawatts, right? And here we are talking about modules of two to 400 megawatts and they won't be built at the same time, so volumes will be less. And they will more work as a, as base load power. Of course, adding to. Yeah, adding to the base load part of it and you can still flex with the hydropower. So I think you will, you won't see the the effects you're seeing in, in, in Finland simply because you will do this gradually with smaller modules. And also gain some, and I think also that's what's the developer wants, gain some experience from the first and potentially build more fascinating stuff.

Richard Sverrisson, Editor-in-Chief, Montel: 24:01

Marius, thank you very much for being a guest on the Montel Weekly podcast.

Marius Holm Rennesund, Partner, Thema Consulting: 24:04

Thank you.