At the start of 2023, we hoped for a mild winter and were waiting for both the outcome of the EU’s market design reforms and recommendations from the Norwegian Energy Commission. Looking back, we know that we made it through the winter, the markets made it through 2023’s twists and turns and the overall market model is likely to be preserved without major changes. That said, it is too early to say what the long-term outcome will be.
Geopolitics – namely the ongoing war in Ukraine, the outbreak of war in Gaza, the rivalry between the great powers and China’s increasing control of critical raw materials – mean that security of supply has become even more important for both the EU and its member states. The EU’s response to the gas crisis was partly to heighten ambitions for renewable energy, but also to secure access to gas through long-term agreements with, for example, Norway. The US support package for industry, the IRA, has raised concerns for the competitiveness of European industry Some member states are taking action: France will support the upgrading of nuclear power and Germany is taking steps to protect industrial workplaces.
In Norway, the weather wreaked havoc on the power market, and it has become increasingly clear that we will need more power and grid capacity to meet climate targets and successfully transition the Norwegian economy away from fossil fuels. A lot happened last year but much is still in the making, with the road ahead unlikely to be any less bumpy.
Large investments and political action are needed. Investors dislike unclear and uncertain policy. With increasing uncertainty in the markets linked to both geopolitics and energy and climate policy, political action is needed to mitigate the uncertainty. Fortunately, there are almost two years until the next election campaign in Norway, potentially providing room to create a broader political consensus on long-term policy.
The weather wreaks havoc on the markets
After two years of extreme power prices in the Nordics and Continental Europe, power prices have fallen considerably. Even though prices are now significantly lower than those we
experienced in 2021/22, they are still well above pre-crisis levels. The main reason for the power price decline has been falling gas prices, which shows that gas generation costs are still the price anchor in the power market both in the Nordics and elsewhere in Europe.
Full gas storage illustrates that Europe has been able to move away from Russian supplies, by establishing floating LNG terminals, entering into long-term supply agreements and attracting spot cargo. Imports of piped gas have also increased somewhat. However, the gas market remains fragile, with high gas and power prices still a possibility in cold periods.
At the end of 2023, reservoir filling in Norway was somewhat below normal after a very cold November with high power consumption. Earlier in the autumn, the situation had been completely different, especially in the south-east of Norway where both Storm Hans and the subsequent ‘Little Hans’ led to record high reservoir levels. Limited transmission capacity to the south resulted in low power prices in NO1 and NO5, while prices in NO2 coupled with much higher prices on the Continent. Limits in trade capacity with Sweden contributed to the split pricing. Our analysis shows that these extreme price differences were a result of the very unusual weather and are not some new market normal.
We still expect price differences between northern and southern Norway. While northern Norway has a power surplus that cannot be exported to the south because of limited grid capacity, the balance in the south is tighter and prices are affected by the situation elsewhere in Europe.
Sometimes interconnection in the south is expected to yield lower prices than elsewhere in Norway. This happened during the recent cold spell, with new record-low temperatures and relatively high power consumption during the first days of 2024. Prices were high across the country but, in the southernmost price area, more normal temperatures and wind power generation levels on the Continent allowed for relatively cheap imports and therefore lower prices.
The Nordic power market was really put to the test during what has subsequently been dubbed ‘Black Friday’. On November 24, Kinect accidentally sold an average of 5,787 MW in each hour of the day-ahead auction, a volume equivalent to half of the estimated consumption in Finland. Fortunately, the lights stayed on, but we got 10 hours in which the market clearing price in Finland was -500 EUR/MWh, with the average daily price ending at -203 EUR/MWh. The error is probably the most expensive that has been made in European power market hisotry and may have cost Kinect 35-40 million Euros.
We need more electricity, and we need it fast!
"More of everything – faster". Norway’s Energy Commission concluded that Norway needs more electricity generation and network capacity. Although we can and should use energy more efficiently and flexibly, Norway must also increase generation capacity and expand the grid. Alongside this conclusion, the Commission proposed a wide range of measures to help meet this need.
The Commission also emphasised the need to step up the pace and strengthen the coordination of climate and energy policy, pointing out that it may be necessary to prioritise between different political goals. At the same time, its report makes clear that implementing the necessary measures will not be easy, at least not if they are to be done quickly. The transition is complex, involving decisions by small and large players, a variety of technologies and energy solutions, and regulation that needs to be integrated with the market and price signals. The pace of activity has not increased significantly during the year, though there are signs of increased momentum in several areas.
Even before the Commission presented its report, the government was working on measures to reduce the lead times for consenting new power generation projects and presented a national plan for energy efficiency in October.
During the year, initiatives were launched to increase the availability of power. The dispute at Fosen was partially resolved before Christmas and, on the eve of the new year, the government put forward a package of measures designed to meet the requirements of both reindeer husbandry and energy development. Whether this will reduce land-use conflicts for power sector developments in reindeer herding areas remains to be seen, but the package has received a positive, if somewhat mixed, reception from reindeer herders. It also remains to be seen whether greater revenues for local municipalities will increase their enthusiasm for onshore wind developments, where development has been stagnant in recent years.
For the time being, it appears to be easier to develop wind power offshore than on land, but even offshore, developers face challenges. Increased costs have, among other things, made it necessary to increase the state funds made available to the would-be developers of the Sørlige Nordsjø II windpark. Seven applicants are expected to try to pre-qualify for auctions to develop Norway’s initial offshore wind project, with the application deadline set for February this year. Cost increases and concerns related to the other auction requirements mean that there remains some uncertainty as to whether these consortia will actually go on to participate in the auction itself. The prequalification deadline for developing floating offshore wind at Utsira Nord has been postponed and no new date has been set.
The decision to coordinate electrification, network development and wind power production in connection with the Melkøya natural gas processing facility implies greater centralised prioritisation and coordination of consumption, network development and generation. More initiatives like this are probably necessary, both to make better use of the system we have and to develop the system as efficiently as possible. At the same time, the halt to the construction of Freyr's battery factory in Mo-i-Rana is an illustration of the planning challenge—even industrial ventures that have been connected to the grid and are under construction cannot be considered a sure thing.
At the same time, existing industry also needs more power to cut emissions. In dialogue with the Ministry of Energy, the Norwegian Confederation of Trade Unions and the Confederation of Norwegian Enterprise have joined forces to map the challenges and opportunities found across the country and recently presented a county-by-county action plan.
The taxation of power generation has been a sore point in relations between industry and government throughout the year. Increased rates of resource rent taxation, the (temporary) introduction of a high-price contribution tax on hydropower and the introduction of a new resource rent tax on onshore wind power have not strengthened the will to invest. While the increase in the rate of resource rent taxation is probably here to stay, the high-price contribution has already been abolished. Though short-lived, its most important consequence may have been to weaken the industry's trust in politicians, making new investments more dependent on guarantees or support from the state.
In October, the Norweigan Supreme Court weighed in on another long-standing political controversy when it handed down a unanimous verdict on Noway’s relationship with ACER. The judgment states that the Norwegian Parliament’s decision to adopt European legislation did not amount to giving ACER the authority to make decisions of great importance for the Norwegian energy sector, i.e. in relation to prices, foreign cables and exports.
We cannot avoid mentioning the political debate on market pricing. There was intense discussion of measures to reduce or control market prices throughout 2023, through direct intervention in price setting, restrictions on generators’ use of hydropower reservoirs and reductions in exports. An electricity price task force was set up to assess the consequences of all of these various proposals and has, tellingly, delivered a report exceeding 250 pages entitled the Art of Balance. The Committee did not propose making any major changes to the market’s organisation and concluded that the current approach to pricing should be continued. They highlight that the most important policy measure to ensure competitive power prices is to maintain a lasting generation surplus.
Meanwhile, the electricity price support scheme provided to households has been strengthened and extended to 2024, with the government hoping that lower market prices will make it redundant.
The grid is full!
Last year, it became even more evident that inadequate network capacity is holding back the energy transition. Actors all over the country want to switch from fossil fuels to renewable electricity, both in the transport sector and in industry. In addition, there are many plans for the establishment of new green industries with large power needs, such as data centres and battery and hydrogen production. Statnett has allocated 7 GW of network capacity to support new or increased consumption, 30 percent more than today's maximum load. Much of this will be in place before 2030.
They have received requests corresponding to an additional 18 GW from new consumers considering expanding or establishing themselves in Norway. Taken together with the reserved capacity, these requests correspond to a doubling of network capacity compared to current peak load levels. Realising that level of network capacity will take a long time. Statnett's plan to build a stronger network, the so-called target network, extends to 2040.
In the meantime, Statnett is working on alternatives to try and make room in the existing network. Several measures are relevant:
- Prioritising the connection of new industry projects according to their maturity so that immature projects do not hold up customers that can act quickly,
- Carrying out more thorough analysis to determine whether the limits set on new consumption are too strict,
- Assessing the possibility and consequences of relaxing operational security limits,
- Increasing the use of flexibility, and
- Coordinating to find better solutions, including alternatives to grid capacity expansion
We have put an eventful year behind us. There is no sign that either the pace of change or tempers in the energy and climate debate will be any lower in 2024. The direction is set, but the path must be made as we go. If there's anything the last couple of years have taught us, it's that one never knows when new challenges will arise.
No one has the full and final answer, but we will continue to deliver solid professional advice to help both authorities and industry navigate more safely through the rough seas ahead.
Happy New Year!