The Covid-19 pandemic has affected all areas of society. Many industries are struggling and the International Monetary Fund expects GDP to fall by more than eight percent in the Eurozone. Nevertheless, Europe is continuing its energy transition with undiminished vigour. The EU has continued to carve out the details in its “Green Deal” and has published both a hydrogen strategy and an offshore wind strategy. Both offer interesting opportunities for Norway. The Nordic power market has been affected by extreme precipitation levels. A mild and wet winter led to sharply falling prices which culminated below 5 EUR / MWh during the summer. For the first time, we also experienced negative power prices in Norway.
EU members have agreed to cut emissions by 55% by 2030. Now the question is how to achieve the target.
At the EU summit in December, heads of state voted in favour of raising the 2030 emissions reduction target from 40% to 55%. The new target will be included in the EU’s new climate law, alongside the long-term commitment to reach net zero emissions by 2050.
With a new and far more ambitious climate goal, work is now underway to find out how to achieve it. Each element of the EU’s energy and climate policy framework must be adapted to be consistent with the new goal. To this end, the European Commission has launched the “fit for 55” work program to draft proposals for a new, large climate package by the summer of 2021.
A key consideration in the design of the new climate package is the extent to which emission cuts will be driven by higher carbon prices versus support for emissions reduction measures. The outcome will have major consequences for both carbon and power prices. Increased carbon prices and subsidies for renewable energy production would both act to reduce power sector emissions. However, while a change driven by subsidies will push power prices down, an increase in carbon prices will push power prices up.
The tools chosen to achieve more ambitious goals will have major distributional consequences among countries, sectors and companies. The negotiations on the EU’s future climate policy framework are therefore likely to prove challenging. Given Norway’s special position in the European energy field, Norway and Norwegian actors would be well advised to keep on top of and take part in these discussions.
Record low power prices in 2020 were primarily due to the weather
As we see in Figure 1, the Nordic power price began to fall towards the beginning of 2020, well before the Covid-19 pandemic hit Europe in March. This was due to unusually high reservoir levels and mild weather conditions towards the end of 2019.
Lots of water, wind and snow
The mild, windy and wet weather continued throughout the winter. In the mountains and northern Norway, the precipitation settled as snow and resulted in record-high snow deposits. At its peak, the hydrological balance was 35 TWh higher than normal in Norway, corresponding to about 25% of annual power consumption.
At the same time, wind power production was high both as a result of increased capacity and a lot of wind. With large unregulated production from wind and hydropower and low consumption due to high temperatures, hydropower producers began to undercut each other to drain reservoirs and make room for the inflow of melting water in the spring. As Figure 2 shows, during winter, reservoir levels fell from well-above the normal level down to the observed minimum level for the last twenty years, before the melting snow resulted in a sharp rise.
The negative price spiral continued until the summer and culminated in the first-ever period with negative power prices in Norway. In autumn, the humid and mild weather continued with reservoir filling reaching record-high levels.
Normal power demand in the Nordics
It is difficult to see the effects of the Covid-19 pandemic and the subsequent lock-down in the power market data for Norway. Power demand in the Nordic countries seems to have been only slightly affected by the pandemic. In Europe, on the other hand, we have seen periods with a decline in power demand of between 10 and 20% in those countries that have been hit the hardest. The low demand in some countries has, to a certain extent, affected the power market directly, but also indirectly through low gas prices.
The price of carbon has, after a temporary dip, returned to the level seen before the pandemic. The price seems to have been more strongly affected by changes to long-term climate goals than short-term movements in the market.
Onshore wind has whipped up a storm
The resistance against onshore wind power, which grew in strength in 2019, has continued undiminished. In June, the government presented to parliament a report on wind power in which they tried to address the demands of opponents to wind power. The report calls for stronger regional and local anchoring and poses stricter requirements on the schedule of the licensing process and the impact assessments required.
It will take time to implement the changes. We expect the development of new large wind power projects in Norway to cease from 2021 until we approach 2030.
Wind power is moving offshore
While opposition to onshore wind power remains strong, more and more people are pointing to offshore wind as an important technology for the energy transition. Two areas on the Norwegian shelf have been opened for offshore wind development and several significant players are positioning themselves to take shares in the offshore wind market.
Increased interest in offshore wind is also evident in Europe. In November, the European Commission presented its offshore renewable energy strategy. In the strategy, the Commission proposes an increase in offshore wind capacity in the EU from 12 GW today to 60 GW in 2030 and 300 GW in 2050. This means that offshore wind will play a key role in reducing the carbon footprint of the European energy system.
This is not to say that the development of offshore wind resources is ready to start. To achieve the targets, offshore areas must be made available, member states need to find effective ways to cooperate on projects, and a common market framework for hybrid projects – which combine offshore wind farms with interconnectors – must be developed. On the latter, THEMA assisted the Commission in the assessment of alternative market models.
Hydrogen set to play a significant role in an emission-free European energy system
Hydrogen is still expected to play a key role in the future European energy system and is currently experiencing strong momentum. More ambitious climate policy in the EU has accelerated the need for emissions reductions in areas where hydrogen is probably the most effective, long-term solution.
This summer, the European Commission presented its proposal for a European hydrogen strategy. The main emphasis of the strategy is to build a value chain for hydrogen production based on renewable energy (green hydrogen). The Commission has set a target of 6 GW of electrolyser capacity in 2025 and 40 GW in 2030. The plan is to develop a well-functioning hydrogen market and infrastructure that will enable centralised production and transport solutions. Hydrogen is also expected to play an important role in balancing the power system. Although the Commission has focused on green hydrogen, hydrogen from other sources may also play a role in the medium term. Here, hydrogen from nuclear power and natural gas with CCS are particularly highlighted.