Not only has Russia exploited its market power in the European gas market in connection with the war in Ukraine, with power prices at levels we have never seen before. The EU has implemented powerful crisis measures to mitigate the situation and quickly make itself independent of Russian gas. At the same time, the pace of change is being stepped up, and changes are being discussed in the market design to cope with a power system with much more renewable production. The EU continues to build muscle to become Fit for 55!
Here in Norway, the drama has been intensified by the opening of the new foreign cables to Great Britain and Germany, as well as a historically dry summer and early autumn. The power price support scheme has been continued and expanded, and never before have more people followed the development of the magazine filling in the south. Additionally, the price differences between north and south of Norway have never been greater. If we look at the bigger picture, we see a clear change of pace in consumption growth linked to electrification and new, green industry and prospects for a much tighter power balance in just a few years. And 2022 was the year when it was seriously revealed how critical grid capacity is for Norway to reach its climate targets. The Power Grid Committee has submitted its recommendations, and now we are eagerly awaiting the recommendations from the Energy Commission, which will present its report on 1 February.
We are not finished, neither with the crisis measures nor with the longer-term adjustment. New policy will be discussed and implemented, and we will find out more about how much flexibility and adaptability energy policy and the power sector has. We are in an uncertain time and no one can predict how quickly changes will come and when the situation will return to normal.
All previous market records have been broken
2022 has been an eventful year in the power market, to say the least. The price records from 2021 have long been forgotten, because in 2022 we have seen 24-hour prices above NOK 6/kWh in southern Norway. The most important reason for the high power prices has been the development in the gas market. With low imports of gas from Russia, Europe has been afraid of having too little gas through the winter. In August, the gas price exceeded EUR 300/MWh, well over 10 times normal levels. At the same time, the CO2 price has remained at a high level throughout the year, mostly in the range of 70 to 90 EUR/t.
It did not help the power prices in southern Norway that the first three quarters were also drier than normal. While gas prices skyrocketed, magazine filling fell to record low levels, and the media wrote about the risk of power rationing in southern Norway. A combination of a cold and dry autumn and winter, and little gas to Europe (and closed international connections), would most likely result in a need for rationing. Without access to imports, we estimated that the probability of rationing was up to 10-20 percent.
Rarely have Norwegians been so satisfied with a wet and mild autumn. In October and November the rains came, and the reservoirs in the south quickly filled up to normal levels. The danger of rationing was more or less averted. At the same time, Europe succeeded in filling gas stocks for the winter. Gas prices fell and power prices were almost back to normal levels, before the cold came in December, driving up both power consumption and power prices.
Central and Northern Norway were spared the highest power prices for a long time. While consumers in southern Norway had to pay several NOK per kWh, the reservoirs further north overflowed after a wet period, resulting in power prices of a few cents. We have little transmission capacity from north to south in Norway, and the power mostly flows via Sweden. With restrictions in trading capacity from north to south in Sweden, and from Sweden to southern Norway, we have ended up with record price differences internally in the Nordic region and in Norway. Prices in southern Norway have thus been more influenced by trade on intercountry connections to Denmark, Great Britain and continental Europe. Weekly power prices are shown in Figure 1.
The debate about how many NOK the two new international connections have contributed has continued throughout the year. The past year has shown that the price effect is highly dependent on the situation, and the combination of extremely high prices on the continent and dry weather in southern Norway has produced a price effect that is far higher than previously expected and what you would have had in a more normal situation.
Nuclear power has also been widely discussed through the year 2022. In the Nordics, we are still waiting for the new Finnish Olkiluoto 3 reactor to come into full operation. The Finns also had to scrap the planned Hanhikivi reactor, which was to be delivered by a Russian company. The energy crisis has contributed to increased support for nuclear power in many countries, and several countries are planning to build new nuclear power. In Sweden, the new government has stated goals for the reopening of two decommissioned reactors and plans to build new nuclear power. At the same time, France has struggled to keep its reactors operating, which has contributed to the energy crisis and high power prices on the continent. In Germany, the last two nuclear power reactors have been allowed to operate a few months into 2023.
New power for electrification and green industry
There are prospects for significant growth in Norwegian power consumption going forward. If we are to reach the ambitious targets for emission cuts the government has set in the current government platform, and transform Norwegian industry, we must acquire a lot of new power. Although we have a surplus in a normal year of around 20 TWh today, the power balance may become negative after 2025 under the current development.
The announcement of the first areas for offshore wind development is expected after the turn of the year, but production is unlikely to start before 2030, perhaps with the exception of the Trollvind area, which Equinor believes can come into production from 2027. Onshore wind is back on the map, where it stands and falls on municipal will and popular acceptance. The power companies have also dusted off several hydropower projects but believe increased taxes could threaten profitability.
The question is still whether we will get the power up quickly enough, and what we should possibly prioritize if we are not successful; electrification to reach climate goals or new, green industry, electrification of the shelf or datacentres and battery factories?
Market design: The end of the world as we know it?
In Norway, high prices and warnings about rationing have given rise to strong popular demands for changes in the market system and trade with foreign countries. A maximum price and a halt in exports have been among the most popular proposals. The rebellion was dampened somewhat with the introduction of the electricity subsidy scheme - and the adjustments that were adopted by an extraordinarily unified parliament, which is rather unusual. An information obligation has also been introduced for the hydropower producers, an electricity support scheme for business - too late and too little according to many - and a scheme to increase access to reasonable fixed price contracts. At the same time, the government has proposed increasing the ground rent tax for hydropower, introducing a ground rent tax for wind power and a temporary tax on extraordinarily high incomes for hydro and wind power (called the high price contribution). Whether this holds up will be evident over the winter, and it may be decisive that the winter will be mild and short - throughout Europe.
The EU and the countries on the continent face even greater challenges than we do. It is not immediately easy to replace gas imports from Russia, which accounted for 40 percent of the gas in the EU before the crisis. In addition, Putin was lucky with the weather when he first had to turn off the taps – the summer was unusually hot, which also posed challenges for the production of coal and nuclear power. Increased exports of gas from Norway have helped, but prices have been even higher on the continent than here.
The EU countries do not have any ground rent tax or similar schemes to rely on to finance support schemes for people and businesses but have nevertheless spent large sums to support vulnerable households. As a crisis measure, a top tax has been introduced for non-regular production and measures aimed at cutting both the direct use of gas for heating and in gas power generation have been introduced. The EU adheres to the "Energy efficiency first" principle also in times of crisis. Nevertheless, it is warned that next winter may be even tougher. The pressure is increasing both in the member states and in the EU.
The war in Ukraine and Russian actions in the gas market have triggered a deep crisis in European energy policy. At the same time, the climate crisis has become even more acute, and the COP27 meeting concluded that the 1.5 degree target is almost impossible to achieve. The energy transition project was ambitious and challenging from before. It hasn't gotten any easier in 2022, and we've had an even worse time.
The competitiveness of the European economy and industry is also being pressured by the introduction of the Inflation Reduction Act in the US which supports low-emission technologies instead of introducing carbon taxes. It creates fear that European industry will move to the USA and may, for example, become important for the requirements the EU sets for renewable hydrogen.
EU President Ursula von der Leyen pointed out early on the need for reform of the power market to loosen Putin's grip on price formation and the marginal pricing principle. Now the commission is working hard to put forward proposals for a long-term market reform that will ensure this. It is painfully obvious that the system is too vulnerable to gas power as a source of both power and flexibility. But it is not easy to spot the solution to this Gordian knot: How to curb consumption and stimulate investment in new production capacity while keeping prices down? The basis for the consultation will arrive before Christmas and the commission plans to present its recommendations in March.
And these are not the only reforms coming in 2023. Work on the Fit-for-55 climate package is also continuing, including the expansion and tightening of the EU allowance market (ETS) and a carbon tariff on imported goods (border adjustment mechanism), the hydrogen strategy, etc.
Norway: We need more power grid, and we need it quickly
2022 was the year when it was seriously revealed how great the demand for grid capacity is, and how critical the grid is for Norway to reach its climate goals.
The demand for grid capacity has almost exploded. New grid capacity corresponding to 30 percent of the current capacity has been ordered and interest has been expressed corresponding to a doubling of the capacity by 2030 (see illustration below). In comparison, we have spent 100 years building up today's grid capacity. The drivers behind the growth in demand are the decarbonisation and electrification of transport and existing industry, and many plans for expansion of existing and the establishment of new power-intensive industry.
Long lead times in the transmission grid and in the regional distribution grid can slow down the desired social development: it can take 8–10 years from when a customer orders new capacity until the grid is actually in place. Much of the time spent is due to long licensing processes.
The Power Grid Committee, which submitted their report before the summer, was tasked with finding measures to reduce lead times for new grids. The response from the committee was mainly to streamline the current processes, rather than to radically change the processes. Increased resources for the Norwegian Water Resources and Energy Directorate (NVE) for processing applications were proposed and have been implemented.
The proposals from the Power Grid Committee were well received, but according to the grid companies, will not be sufficient to support the strong growth in demand. The Minister of Energy has also called for more radical proposals to deal with the challenges.
If existing grids can be used better, more customers can be connected faster. One of the measures being tested is the conditional connection of customers who have the opportunity to reduce consumption when the grid is under pressure. Another possibility, both to deal with grid challenges and the power challenges Norway is facing, is to utilize flexibility from heating processes in industry.
Several grid companies have advocated that the Norwegian TSO Statnett should reduce the level of redundance in the grid somewhat to make room for more customers. New transmission grid for the Stavanger region with a capacity of 1300 MW gives e.g. only room to increase connections of 200 MW. An important purpose of the new line is to increase security of supply in Rogaland, which has been weak for 20 years. But in 20 years there have been no major outages either. The question is therefore whether one can still live with a slightly weaker security of supply for the next 10 years if one can then electrify more of the industry and make arrangements for new industries. The grid companies for their part must assess technical possibilities for running the grid "harder" and adopt new technology that can free up capacity quickly.
The local distribution grids are also facing major grid investments in the future. After several rounds of proposals, hearings and discussions, this year, The Regulation Authority for Energy (RME) introduced a new grid rental model also for the smallest customers. The new model provides incentives that can help reduce peak load in the grid and move for instance EV charging to the night-time. Some grid companies also point out that the rapid introduction of solar cells can become a driver for grid investments. Increased electricity production is welcome when we see that consumption is growing much faster than production capacity. But it will also be important to find solutions where solar can be phased in at the lowest possible (grid) costs.