Part 1: 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.

Table 1 – Nordic Day Ahead System Price Development

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?

Continental European Trends coming to Norway

Looking into the future, there are actually 3 factors which will influence the Nordic markets in the years to come and which should drive volatility up even further:

  1. The capacity of wind power in Norway itself will increase (e.g. the “Fosen” wind park built by Statkraft with a total capacity of 1000 MW is scheduled to gradually go into operation from 2018 to 2020[5])
  2. The capacity of wind power built in neighbour countries (Germany, Sweden, UK) is still increasing (e.g. in 2016 alone, Germany added an additional 5 GW of wind power, bringing the total installed capacity of wind in Germany to 45 GW)[6]
  3. Additional interconnection lines to countries with higher market volatility are currently under construction (e.g. the Nordlink and NorGer cables linking Norway and Germany)

Short Term Trading will become increasingly important

And it is not only the day-ahead market (ELSPOT) that will be influenced by increased interconnection and build of renewables in Norway:

Additionally, the harmonization of the intraday-markets under the X-Bid scheme (scheduled by Nordpool to be available starting Q1/2018) will allow Norwegian market participants to trade with counterparties from all across Europe.

As a result, the intraday market (ELBAS) and regulating power prices should also become more similar to continental Europe (and thus a lot more volatile). The following graph comparing regulating power prices in Norway (NO1 / Oslo) to German regulating power prices[7] clearly shows just how much larger price swings may become possible with increased interconnection:

This increased volatility in the day-ahead, intraday and regulating power prices presents opportunities for flexible hydro generators who are able to react to market signals in a flexible way to increase their revenues.

With such increases in market volatility expected in the next few years, being flexible and producing according to short-term market signals will allow generators to capture the highest revenue (€/MWh) from their production.

At the same time, more challenging regulating power prices also mean that good forecasting of production and proper imbalance management will become a crucial factor to financial success for run-of-river power plants.

In part 2 of this series of articles, we will examine with a concrete example power plant:

  • How the market changes of the last few years have affected sales revenue
  • How flexible producers can capture more value from their generation in this new environment
  • Whether – under these new market conditions and with NVE’s recent greater openness to such projects – now perhaps is the right time to turn your run-of-river plant into a storage by building a reservoir and which factors should affect your investment decision.

Part 3 will focus on the challenges of proper forecasting and imbalance management for run-of-river plants under this new market environment.


[1] Source: EPEX Spot, see http://www.epexspot.com/en/market-data/dayaheadauction

[2] Source: Nordpoolspot, see http://www.nordpoolspot.com/historical-market-data/, NASDAQ commodities

[3] Source: SKM, see http://www.skm.se/priceinfo/history

[4] For a random variable vector A made up of n scalar observations, the variance (or volatility) is defined as where   is the mean of A: 

[5] Source: Statkraft, see http://www.statkraft.com/IR/stock-exchange-notice/2016/europes-largest-onshore-wind-power-project–to-be-built-in-central-norway–/

[6] Source: German wind power association, see https://www.wind-energie.de/themen/statistiken/deutschland

[7] Source: Amprion reBAP Ausgleichsenergiepreis, see http://www.amprion.net/ausgleichsenergiepreis