Threat or Opportunity?

European Power Market Trends Affecting Norwegian Hydro Generators – Threat or Opportunity?

The Energy Transition – A Threat to Small Hydro Producers?

The energy sector has gone through massive changes in the last years:

Rapid advancements in wind and solar technology coupled with renewable subsidiary programs have led to large scale investment in renewable generation across Europe. Once built, these wind and solar plants are able to generate power at almost zero marginal cost – as a result of this as well as the dropping oil price, wholesale power prices have been suppressed across Europe:

In Germany, where the push towards the ‘Energy Transition’ (i.e. the increasing switch to wind and solar powered generation) was felt earliest, average wholesale power market prices have dropped by 65% since 2010.[1] As a result, many thermal power generators (oil, gas and coal fired power plants) have been pushed out of the market and gone out of business.

Since the build out of wind and solar in the Nordic markets happened later (and at a much slower rate than in Germany), the effect was slightly dampened here, with a price decrease of ‘only’ 50% since 2010. Based on current market signals however it looks as though this trend will continue in Norway at least until 2020.[2] This change in the market environment together with the reduction in El-Certificate prices[3] has disproportionately disadvantaged Norwegian small hydro generators who are faced with significantly extending the amortization period of their investments (or struggling to earn back their return-on-investment altogether).

New Market Opportunities for Flexible Producers?

At the same time, these market developments also open up new opportunities for Nordic power producers:

Since the production of wind and solar plants depends on the weather, their production varies quite a lot over time – the following graph shows how German wind production can easily vary by over 10 GW within a single day.

Consequently, countries with a higher share of ‘new renewable’ generation (wind and solar) experience higher price volatility across power markets.

Whilst there is not yet a large amount of wind power in Norway, the Norwegian market is still exposed to the effects of wind power in neighbor countries (such as Germany, Sweden and UK) because of existing interconnection lines. In large extent due to this, the variation of prices[4] in the Nordic Day-Ahead has nearly tripled in the last 3 years.

This means that for hydro producers who have a storage, producing power at the right time has become increasingly important, as the difference between the lowest and highest price hours within the year is increasing:

For example in the year 2016, the lowest 1000 hours had an average price of 17.28 €/MWh while the most expensive 1000 hours were traded at 43.66 €/MWh.

But even still, volatility is still relatively moderate compared to the rest of Europe:

When we consider that Germany still has roughly twice as much spot market volatility as the Nordic market, we must ask ourselves whether the market changes we have observed in the last 3 years in Norway are perhaps only the beginning of a greater trend?