ICIS Long-Term Power: Nordics to remain cheapest power price region in Europe to 2050

This is a condensed version of our analysis for ICIS EU Long-Term Power subscribers that was originally published on 5 July by Roy Manuell, Analyst – EU Carbon & Power Markets.

Our ICIS EU Long-Term Power customers have access to extensive modelling of European power markets out to 2050 with various different options and proposals. If you have not yet subscribed to our products, please get in contact with Justin Banrey (Justin.Banrey@icis.com) or Audrius Sveikys (Audrius.Sveikys@icis.com).

A combination of a consistently high share of renewable generation, low demand, and enduring low reliance on gas will keep power prices in the Nordics – consisting of Denmark, Norway, Sweden, and Finland – trading as the lowest in Europe in terms of regional spreads.

ICIS’s new 2050 long-term power forecast that we expanded across to Poland, the Nordic and the Baltic regions at the end of June explores three possible scenarios for emissions reduction pathways in each Nordic country: a Base Case outlook, a High RES and a Low RES pathway.

ICIS modelling shows that by 2050, and indeed more generally over the next three decades, each Nordic country will have the cheapest wholesale power prices in Europe – with the exception of Portugal as previously analysed and with Sweden and Finland having similar price spreads to Great Britain and Ireland.

This means that the regional average price of the Nordic will remain well below that of other areas of Europe with spreads reaching their widest from 2040 onwards. In this analysis we will discuss the reasons for why this is the case.

2050 country extensions

• We have expanded our coverage of several north and western European countries out to 2050 from November 2020 and Southern Europe in March 2021. We have now launched our extensions for the Nordic and Baltic countries as well as Poland at the end of Q2 2021.
• Within these forecasts we have created three different scenarios that each represent a different pathway for GHG reduction, capacity build-out and prices, and the scenarios are differentiated by carbon prices, demand, technology developments and cost assumptions
• Long-term capacity build-out for renewables and gas plants is determined by our investment model, which considers financing and operating costs, lifetime and load factor assumptions, investor hurdle rates and natural resources and is linked to the Horizon model to determine when and where capacity will be added. See our investment model description for more information
• In terms of emission reductions, in our base case we assume that a 2050 net zero GHG target is put in place at a European level, but that only a 90% reduction is achieved. This is in contrast to the High RES scenario, where a net zero GHG European economy is achieved, and the Low RES scenario, where only a 75% reduction in emissions is achieved
• All data cited in this analysis is from our Base Case forecast unless otherwise stated

Analysis

High RES share to keep downward price pressure

• One of the key reasons for the continued pressure on Nordic prices is the fact that the region already has ample renewable generation capacity, comprised mainly of hydropower in Norway and Sweden and wind in Denmark
  • Finland has a relatively lower share of renewable generation but its 4.4GW of nuclear capacity currently generates almost half of its power
  • Each Nordic country will further expand renewable generation out to 2050 exerting gradually more downward pressure on prices as a result
• For example in our Base Case pathway, we expect Norwegian annual hydro generation alone to exceed total demand in 2021, while the overall share of renewable output compared to demand is 115%
  • This underlines the dominance of hydro in the country with Norway exporting its excess renewable output already
  • This is something that does not occur in most other countries until the 2040s, if ever
  • While the dominance of hydro in Norway is not applicable across the region and in Sweden the share of hydropower is much lower at 51%, the overall Swedish RES share is 82% due to higher wind and solar capacity
  • Denmark is also considered a global leader in wind and combined onshore and offshore generate around half of its power already – comparable to Germany
  • All of this means that each Nordic country has prices for 2021 below all others in Europe that we model
• Our expectations for the renewable share of generation only increase due to wind and solar growth in the region
  • Looking at Denmark as an example without hydro, strong wind capacity growth drives its renewable share of demand above 100% before 2030 and in Sweden the level is around 90% by the same year
  • This doesn’t happen in Spain – another country with strong RES growth – at all during the 2050 timeframe
  • By 2050, the renewable share of demand is only below 100% in Finland due to the enduring importance of its nuclear portfolio

Low demand and strong wind conditions

• Two of the main reasons for this, other than the already-high share of renewables in the Nordic mix, are low demand and strong wind investment conditions
• Firstly, each Nordic country is relatively small in terms of power demand and this is essentially due to low population
  • Crucially in terms of its power market dynamics, Nordic power demand is low relative to its renewable generation capacity and our expansion assumptions
  • Overall, we expect Nordic power demand as a share of the European total to remain just over one-tenth and actually decline out to 2050 in relative terms from 12% in the 2020s to 11% in the 2030s and 2040s
• But as a region, the Nordics currently produce almost one-quarter of total EU renewable generation including hydro in 2021 and while this will decline as other countries ramp up renewable expansion, will remain comfortably above the region’s share of demand out to 2050
  • This keeps a downward pressure on Nordic prices and while other regional premiums to the Nordics will tighten over the coming decades due to wind and solar growth, almost all markets will remain more expensive
• This is also due to the fact that the Nordics have strong investment conditions for wind due to their geography both in terms of meteorology and their access to the North and Baltic Seas
  • As a result, we see wind capacity expansion to progress at a similar rate to the European average in the 2020s and 2030s before slowing down in the 2040s in our Base Case pathway
  • Despite the fact that Norway, Denmark and Sweden will have already nearly reached a point in 2030 where domestic demand can be satisfied by renewable generation alone, capacity expansion increases beyond this and thus exerts a continued pressure on prices
  • In particular, we expect offshore wind expansion by 2030 to be particularly strong, rising from a regional total of 2.7GW in 2021 to 9.3GW by 2030 – growth of 250%
  • This is driven by significantly strong capacity expansion in Denmark that will account for 80% of Nordic capacity installed by 2030

Strong export region

• With demand already near-satisfied by renewable output, and wind capacity growth at a similar level to the European average, we expect the region to assert itself as a key exporter of power to the continent
  • Each country will move to a net exporter over the next few decades and those such as Norway and Sweden already export and we expect to move from a net 49TWh and 28TWh exported respectively in 2021 to 61TWh and 31TWh by 2040 when European continental supply is perhaps at its tightest due to nuclear phase-out completion in several countries and German coal phase-out completion
  • Also we expect Nordic hydro will continue to play an important role especially in light of thermal capacity phase-out and during hours of low renewable output
• However, the starkest net trade changes can be seen in Denmark, which rises to a strong net exporter due to wind expansion
  • Denmark moves from a net balance of around 1TWh in imports in 2021 to 15TWh net exports by 2030 – a level at which the country remains relatively stable out to 2050
  • This is driven by the rapid Danish offshore wind expansion discussed above as well as interconnection capacity expansion with the UK and Germany
  • The price spread dynamics also incentivise new interconnection points to be built from the Nordic countries to the continent which further drives regional net exports

Low reliance on gas

• One final but crucial reason for price weakness in the Nordics relative to other regions is its lack of gas reliance as a transitional fuel compared to say Germany, Spain or Greece as three examples
• Annual gas generation in the Nordics currently stands at 2% of the European total and will gradually decline to a share of 1% by 2050 due to the aforementioned wind expansion
  • Meanwhile, in other countries that are more reliant on coal and nuclear at present such as Germany and Spain, we see the share of gas-fired generation in the country’s mix remain above 10% well into the 2030s
  • It is only really in Finland, and to a lesser extent Sweden, where nuclear plants are gradually closed in the 2030s onwards that gas is needed to meet demand
  • Even in Finland however, the share of gas as generation falls below 10% in 2025 and then remains at less than 3% from 2035 onwards
• The relevance of this to price is important and inextricable from our carbon price expectations
  • As a region, the low reliance on gas means that prices are relatively less sensitive to the general uptrend we expect in carbon prices out to 2050
  • In Germany and Spain in contrast, the high marginal cost of gas-fired plants in the 2030s in particular drives their annual prices to a stronger premium to the Nordics

Market impact

• Overall bearish relative to other regions due to strong renewable conditions and already-built renewable infrastructure
  • This combined with low demand and low gas reliance means that Nordic prices remain below their European counterparts (Portugal aside) for pretty much the entire next three decades
  • The result of this is a continued high level of exports to Europe where coal and some nuclear is phased out with net exports reaching their heights around the 2040s
  • Consequently, Nordic price spreads also widen to their furthest during this period onwards