High and dry: A look at Nordic power prices and reservoir levels

This September has seen Nordic power prices reach highs not seen since 2012, after a turbulent summer where spot prices over and above €60-70 have been the norm.  Multiple factors have contributed to these high prices, including the hydrological situation in the southern part of Norway and Sweden. To get some insight into these prices and whether they are here to stay, we spoke to Eylert Ellefsen, a Senior Analyst and resident Hydrologist at Energy Quantified. 

Can you tell us a little bit about the hydrology situation in the Nordics right now? 

Eylert Ellefsen (EE): It has been very dry throughout the Nordic Region during the summer, which has coincided with very high continental power prices. This is important as it’s created the conditions for power to be exported to the continent. There’s been an increased possibility for exporting power out of the Nordic Region.  

In Norway, the exchange capacities on the new power cable towards Germany have been heavily used. The south – price zone NO2 – is directly connected to Germany, the Netherlands and Denmark. So NO2 and southern Norway have been able to produce and export at a high level despite decreasing reservoir levels.  

And what about the other parts of the Nordics? 

EE: On the other hand, the northern part of Norway and Sweden, particularly Sweden, have had normal reservoir inflow recently. So the prices have been lower there, but they have been producing at max capacity as the wind levels have been low too. So that's why, at the moment, there's a huge difference in the hydro balance between southern Norway and northern Sweden and northern Norway too. 

There is of course congestion between the north of Sweden, SE1 and 2, towards SE3, the price zone in the middle of Sweden. But this is nothing new. However, the power surplus in the north of Sweden has increased in the last five years because of more wind power capacity being built there. So there's a large surplus of power in the north of Sweden.  

Going back to the situation in southern Norway: Is this something which we've seen before or in previous years?  

EE: Well, we have 20-30 years of statistics. And we are still not at the all-time low levels for reservoirs, because they were well filled last year. It takes more than one year for hydrological balance to ‘normalise’ after a year like last year. But it is true that we are now at much lower levels than normal. And I would say that the inflow to the reservoirs in southern Norway, this is the really extreme situation right now. Because I think I can easily say that the inflows are at an all-time low. I have some numbers for one single river flow, which is an important one, with statistics going back to 1960. And this year, it is the lowest we have seen on record. [see chart Riverflow Location Bulken below]

How long can we expect this situation to continue? What are the forecasts telling us? 

EE: I think the most important factor is the precipitation forecast. If we have heavy rain in the next weeks, the inflow situation will improve a lot. And now, we see a rather dry spell over the next 45 days, I would say. I don't have visibility or a real horizon of more than three weeks in advance. So I would say in the next two or three weeks, we won't see any change, in fact.  

Do you see this becoming more of a trend in years to come? 

EE: I think what we see now in the Nordic Region is within the scope of the variations that we've seen before. There are regional differences, as I said. The situation in the south of Norway is quite extreme, maybe the driest period for 50 years, in some regions, at least. While in northern Sweden, where there has been a lot of precipitation lately, so there is no issue. We have seen periods in the past where both northern Sweden and southern Norway have been dry at the same time.  

If we speak about numbers, the lowest hydrological balance has been calculated at a deficit of around 40 terawatt-hours for the Nordic Region. And now we are at around minus 24 terawatt-hours, so we still have some margin.  

And what about the prices? 

EE: It's gas, coal and CO2 prices that are affecting the operational costs for fossil fuel plants. At the moment, CO2 is at an all-time high. And gas and coal are also close to their all-time highs. So all in all, we’re seeing all-time high fuel prices and hence all-time high operational costs for power - I think around €100-110 euro - especially in continental Europe where those power plants are very important in the generation mix.  

When we look at the forward prices for the fuels, gas and coal, they are assumed to decrease, from Q2 next year. So I think that by summertime next year, based on what the market is saying, we can expect a decrease in prices.  

What about price convergence between the Nordics and Continental Europe?  

EE: Of course, with more connections and capacities, the connections will be stronger. And the European prices are more or less a price reference for the Nordic Region. I think that if the Nordic Region maintains a power surplus and its exporting power towards the continent, we will continue to see a certain price difference between the Nordic and the Continental prices. But it's not easy to estimate what the ‘normal’ price difference will be. I think something between €15-25, with lower prices in the Nordic Region, is likely to be the case. Right now, we’re seeing €20-25 [difference] in the spot market. It’s as if the market doesn’t have a clear view of what this ‘equilibrium’ price difference should be, they are struggling to define it. So much has changed now, just in a couple of years: we had a very wet year in Norway last year, in the Nordic Region, with very low power prices. And now we have a dry period, very high continental prices and a deficit of hydropower in Norway and Sweden. 

Are higher prices here to stay for the Nordic region? 

EE: I think what is happening is that the price difference between the Nordic prices and the Continental prices is narrowing. That means that the Nordic price for Q4 has a certain upside as we get closer to delivery. On the other hand, I think if we really have a lot of wet and windy weather in the Nordic area, we can expect very low prices. I think that's what the market is fearing, and if we have a bearish Q4, then prices may fall very significantly again. 

In general, the Nordic market will be more volatile in the years to come, because there's not so much fossil fuel production, which would stabilise the prices in the Nordic region. The generation mix is mainly hydropower and an increasing amount of wind power, so if we have a surplus, prices will be very low. And if there is a deficit, prices could be very high, as we saw this summer.  

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