The difference between the Nordic countries and Germany is record high

Originally published in Montel

Nordic power prices have skyrocketed recently, but have nonetheless never been lower than they are now relative to the rest of Europe, explains Sigbjørn Seland, Chief Analyst

Although the prices are of course very high compared to what we have been used to, the situation now is that power prices in the Nordics, also here in southern Norway, have never been lower than they are relative to elsewhere in Europe, Seland said at the 'Produksjonsteknisk konferanse' in Gardemoen.

Seland pointed out that there have been huge price increases for coal and gas in the last year, the latest rise due to the Ukraine war, which is affecting European power prices. The April contract at the Dutch gas hub TTF was at a record high of 345 EUR / MWh on Monday but was last traded for 194 EUR / MWh on Wednesday morning. 

We see that the expectation of the Nordics system price is also affected by what is happening in the world, though perhaps surprisingly little when power prices elsewhere in Europe show the rapid development, Sealand said. 

 The Nordic power contract for the second quarter ended on Tuesday at 122 EUR / MWh, while the corresponding German power contract ended at 428 EUR /MWh.

Sustained discount to Europe

Seland emphasized that the market expects Nordic power prices in the next few years to be 60-70 EUR / MWh lower than in Europe.

In addition for 2024 and 2025, it is seen that there is a much lower price expectation. There has never been such cheap power in the Nordic region relative to the rest of Europe, Seland said. 

The German 2024 contract ended on Tuesday at 120 EUR / MWh, while the corresponding Nordic contract closed at 40.9 EUR / MWh.

Sealand explained that the power balance in the Nordic region has become very strong, and will remain strong in the future. 

Previously, we had a power market in the Noric region that was reasonably balanced in normal hydrological years, while we now have a production surplus because so much wind power has been built, Seland said. 

It is no longer the marginal cost of coal that determines the price level, while the power balance in the Nordic region is becoming increasingly important, Seland explained. 

Decoupled from Germany

For the past 20 years, the marginal cost has been very important for the price level in the Nordic region. However, then we see that there is an underlying trend that shows there is a tendency that the price of power in the Nordic region over time has become relatively cheaper to Germany and Europe, and it has gained tremendous speed lately, Seland continued. 

It was not until last summer and autumn that it was seen that even though there was a deficit in the hydrological balance, which was quite large, the system price did not rise against the spot price in Germany as had been seen before according to Seland. 

The Nordic system price has averaged 102 EUR / MWh so far this year, while the German sport price has been as much as 177.2 EUR / MWh.

Still low price area

Seland pointed out that the power balance will be stronger in the years ahead, where production growth is "safe" until 2024, when growth is based on approved investments, while growth for consumption is more uncertain. 

The market also sees this and is afraid that the power balance will be too strong in the years ahead with low prices, Seland said. 

Lots of new production is being phased into a system where there is not yet a large increase in consumption. This gives a rapidly increasing probability for 4-5 years with very low system prices relative to the rest of Europe. However, dry years will give very high prices as long as the prices on the continent and in England are as high as they are, added Seland. 

It is quite obvious that even though coal and gas prices are at extreme levels and power prices elsewhere in Europe are unrealistically high, prices in the Nordic countries can be very low in the coming years.  

If you get high inflows in the years to come, you will get such large production surpluses that the water values in the Nordic system will be very low, also in southern Norway, Seland emphasized. 

Seland therefore believes it is overwhelmingly likely that the Nordic region will remain a low-cost area in that perspective.

In the longer term onwards 2040 and 2050, we believe that it will probably remain a low-price area, even though we paint a picture of huge growth in power consumption over the next ten years, concluded Seland.

Reporting by: Kjersti Dalfest at Montel