How do NSL and NordLink affect Norwegian power prices?

How do NSL and NordLink affect Norwegian power prices?

To help connect up Europe’s renewable energy sources to the locations that need it, several high voltage subsea cables criss-cross the seabed to help transport energy across the continent. Two of these are the North Sea Link (NSL) and NordLink. They aim to deliver renewable energy across Europe, extending the reach of renewable energy while reducing carbon emissions. The NSL directly links the UK to Norway, and NordLink connects Norway to Germany. 

While the connection of these countries is undoubtedly a great move for renewable energy, it still comes with its challenges. For example, exports can lift prices in south Norway during tight hydrology, while imports during windy or sunny periods in the UK or Germany can depress prices, sometimes to zero or even negative figures. 

Short-term considerations can include instances of hydrology, outages, and capacity caps. On a more long term basis, all three countries will have to address how to increase European wind and solar output, as well as consider zero-price hours. 

How do interconnectors shape price formation?

Interconnectors are useful tools that let energy flow easily between different markets, which helps to ease volatility of pricing, as energy is moved from a lower priced market to a higher priced market. This integration of markets leads to potentially lower consumer bills and more efficient energy networks. So, for example, exports during high GB/DE prices tend to lift southern Norway prices, whereas imports during low GB/DE prices tend to lower them. In 2019 Storm Atiyah caused wind power to surge, turning prices negative in the UK; these types of occurrences can go on to affect the spot pricing of other regions, including Norway.  

Hydrology, seasonality and reservoir management 

For hydro energy models, seasonality can greatly affect reservoir management, sometimes to the area's detriment. Low inflows and low reservoir levels make water more scarce, which can amplify export-driven price lifts and make energy pricing more volatile. Wet years with large amounts of rain, on the other hand, can soften pricing, as the water supply is more plentiful, which can cause price drops. Snowpack, or periods of snowfall, can also affect this, as during the winter months, available water is frozen and not available for use, whereas when the snow thaws, it can create an abundance of water.  

Price convergence, spreads and volatility 

• Tighter spreads with GB/DE when links run near capacity; wider spreads when constrained. 

• The new links explained a limited share of the 2021 price surge, and the isolated long-run price effect declines as zero-price hours grow in Europe. 

Congestion, capacity caps and outages 

Because of the hostile location of where subsea cables are situated, deep on the seabed, they can be both inaccessible and prone to damage. Damage is more frequent due to the exposed nature of deep-sea environments, which also experience extreme cold and damage from marine life. Due to the remoteness of their location, repairs are also extremely difficult. This means that when planned maintenance or faults occur, they reduce transfer capacity and alter flows. For example, the North Sea Link's maximum capacity was reduced from 1,400 MW to 1,100 MW under license conditions in 2023, which affected potential price convergence. 

Forward markets and hedging 

What changing spreads mean for EPADs, corporate hedges and utility risk?

Regulator work on transmission rights is an important task; it streamlines the trading environment while also addressing issues with issuance and allocation. Certain energy markets require tighter transmission regulations to ensure that all participants in the energy market are on a level playing field, and this is where regulators step in. With factors such as managing risk through price hedging options, including long-term transmission rights linked to interconnectors, mitigating price volatility, and network investment price control, all these elements combine to result in a truly transparent and efficient energy market.  

Long-term outlook as Europe adds renewables 

As Europe expands its renewable portfolio, more wind and solar energy means even more hours of very low-priced renewable energy piped abroad through the link. This is beneficial to both consumers and to Norway’s renewable power generators, as it provides affordable renewable energy elsewhere in Europe and increases import opportunities for Norway. It also dampens the links’ upward price effect in Norway over time. 

Battery storage will also become extremely important to the long-term success of the links, with storage stepping in to store fluctuating supplies of energy from Norway’s renewable sources, both Norwegian side and elsewhere. Energy can be stored during high-output periods and released when demand is higher. Certain national grids, such as the UK’s, will greatly benefit from much-needed grid upgrades to combat infrastructure incompatibility and slow connection issues, although internal constraints may slow the actual implementation of these grid upgrades.  

NSL and NordLink: what to watch next?

For the full benefit of the subsea cables to be realised, policy will have to adapt to support the influx of renewable energy that will reach overseas markets, with considerations given to advanced market design around capacity allocation. Congestion rents are another consideration, which is a congestion-related revenue charged by energy market operators when transmission equipment can’t keep up with demand locally. This revenue is then used to fund the rollout of fit for purpose transmission networks to avoid overloading networks in the future. Transmission operations themselves will also play a part, with updated long-term scenarios from transmission operators and system planners modelled to help prepare power operators and the grid itself for an increase in renewable energy being transmitted. 

Policy and regulations may need to be reinforced to help address internal bottlenecks and accelerate the renewable transmission transformation. Eventually, if existing projects are deemed successful, additional cables may be added in the future to expand Europe’s wider energy transmission network or existing cables reinforced to alleviate internal bottlenecks.