Growth in Renewable Energy Will Shift Europe Towards an Almost Complete De-carbonization Before 2045

Thank you for spending some time with us, Sigbjørn. You are the Chief Analyst responsible for the Nena Analysis Long-term Reports. For those that do not know them, what is the key content of these reports and how are they used?

StormGeo Nena Analysis releases its Nordic Power and Electricity Certificates long-term reports twice a year. The reports, which have been published for nearly 20 years, offer scenario analysis with price forecasts for the Nordic System price and all Nordic area prices up to 2045, as well as price projections for Germany, France, UK, The Netherlands, Poland, Estonia, Russia, Latvia and Lithuania on annual resolution. The Nordic Power Outlook – Spring 2018 further includes a detailed annual supply and demand balance and all new investments in transmission until 2045. All scenarios are up to date and include the latest known regulatory impacts.

In the Elcert Report, we provide a detailed overview of more than 100 TWh of new renewable investments, with specific valuation details on 400 onshore wind power projects currently under development.

The long-term reports are used by a wide range of international clients which have a long-term stake in the Nordic power market. Power producers and power intensive consumers are looking to protect their businesses and deliver return in the long run, and they know that Nena Analysis can help them better understand the future scenarios which can offer opportunities or threats to their operations.

Regulators and grid operators are seeking our view on new investments in the renewable technologies that require licensing and grid extensions. Banks and funds need input from a competent and neutral advisor on Nordic power for their investment assessments and credit ratings. Other investors and traders require insights from a team that has long-term experience in the markets.

How is your team of analysts able to create the kind of forecasts we see in the Nordic Power Forecast through 2045?

Our foundation is textbook economics — we build supply and demand curves for short- and long-term forecasts, calculating the marginal costs for each relevant production technology and making demand projections for all large electricity-consuming parts of the economy. To build on that foundation, we look at current and future investments, policy, trading, cost of coal, etc in the Nordics to feed into our model. We also take the cannibalization effect into account, which in this context, says that the more wind power you have in a market, the lower the price that wind power achieves (compared to the average power price). This effect is something many people in the market don’t take into consideration as much as they should, but it has a big impact on the long-term forecast.

Other information that we draw from is data on electricity consumption and production. Based on this information, you can understand the market equilibrium in real-time. Combined with our identification of technological trends, we can build projections and make educated assumptions for a long-term forecast. We know with a great deal of accuracy what the market will be tomorrow or next week. Looking five, ten, 20+ years in the future requires the use of these educated assumptions. If you are a wind power developer (building wind farms), you need to have an informed idea of the power price for the lifecycle of your investment, or the next 20 years. This is why having a long-term forecast of the power market is so important.

How has the electricity market changed in the last five years in the Nordics?

Over the last five years, building new wind farms has become so inexpensive that there has been a boom in investments and development. This decrease in cost is due to technological developments — specifically, the size of the wind turbines. Ten years ago, turbines were half the size they are today; and the larger the turbine, the more energy you generate.

Since 1995, the price for electricity has been tied to the production cost of coal power plants. But this is not the case anymore. The cost of renewable electricity has decreased faster than anyone could have expected five years ago. Developing new onshore wind farms is now significantly cheaper than running existing coal power plants, making renewable energy, or in this case, onshore wind power, cheaper than coal and gas power for the first time ever. A lot of people who have been in the Nordic energy industry for many years have a hard time adapting to this shift away from coal, but it’s the clear way forward.

What is a way that policy has influenced the power market?

The electricity market is highly influenced by political decisions. The global ambition to de-carbonize the power markets is in fact political. For many years, the European carbon market has been out of balance due to the oversupply of CO2 quotas (the maximum amount of CO2 companies or countries are allowed to emit). This has been a big obstruction for the EU in reaching their long-term de-carbonization goals. Within the last 6 months, the carbon market has been restructured to avoid this, and electricity prices all over Europe have greatly increased. This goes to show just how important it is for us to take certain political decisions into account for forecasts.

What are some general trends you see coming in the Nordic region as technology advances?

Within 10 years, the Nordic region will be close to 100% de-carbonized because of the increasing investment into renewable energy (hydropower, wind & solar), nuclear energy and potentially, bio-fuelled combined heat and power, which is regarded as CO2 neutral. The Nordic region is unique because of the vast amount of large water reservoirs, which are a perfect source for energy storage. This allows for a massive amount of storage that you can’t have in other places, making de-carbonization less costly here. We believe that within 30 years, as technology advances and makes storage cheaper for other countries, most in Europe will de-carbonize in a similar way.

Solar production has been rapidly increasing worldwide, how is this a viable industry within the Nordics, where there can be very little sun much of the year?

The lack of sun does have a big impact in the Nordics, as solar power is currently not competitive here. However, it’s growing rapidly, especially in Denmark and Sweden, due to subsidized investments. We do not expect this market to be competitive for the next few decades without these subsidies. In other parts of Europe, however, solar power is very competitive. Southern Europe, like Spain, has a high utilization (the number of hours where power is produced per year), making it cheaper to invest in solar. The Nordics only gets about 1300 hours per year; a low utilization that drives prices up.

What are the biggest technologies being developed now in the renewables industry?

As wind and solar become the cheapest sources of electricity, new kinds of energy storage need to be developed — renewable energy cannot exist without it. We can expect a massive deployment of energy storage solutions (large-scale batteries or battery-similar technologies) within the next ten years. The Tesla Powerwall is a great example of this.

Over the next five to ten years, there will also be massive development of interconnected capacity, or the transference of electricity by sea cables and transmission lines, between the Nordics and Europe. Because renewable energy is intermittent and unpredictable, the ability to store and transfer it is extremely important.

What will a cross-border supply chain for energy look like?

This is definitely being discussed at length in the renewables industry. There is a current trend to disconnect from the main grid, or “go off the grid,” and install your own solar production and batteries. This is actually very popular in Germany. It raises a new challenge, however, because the electricity grid is a natural monopoly — we all have to share the cost. So if people opt out of this system, the cost will increase for those who stay connected, making more people opt out, and so on. Due to this, grid operators may need to find new ways to subsidize or charge for the use of the grid.

Furthermore, an increasing number of things require electricity now — transportation, industrial processes, data storage, cryptocurrency, petroleum installations, etc. As more electricity is consumed, we will all face higher costs to be connected to the grid. This increased demand could postpone the complete de-carbonization in Europe for five to ten years, but won’t completely halt it.

Sigbjørn Seland

Sigbjørn has a Master of Science, Finance from NHH Bergen/University of Mannheim Germany, and is a former trader at Drammen Kraft AS.

He is the Chief Analyst responsible for Nena Analysis' Nordic Power Market and the Long-term Outlook Reports.