Insights
Despite a partial normalisation so far in 2023 from the sky-high prices we saw in 2021 and 2022, one thing is certain - high uncertainty for the price going forward has come to stay.
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How is the electricity price determined?
Every day at 12 noon there is an auction in the electricity market for the following day. In Norway, this takes place at the Nord Pool. Simply put, the power producers submit what price they are willing to sell the electricity for, and the price of the last kilowatt hour that covers the aftersupply sets the price in the market. In this way, the market ensures that the most affordable power is the one that gets to produce first. In Europe, it is often gas power plants that produce the last kilowatt-hour, and thus the price of gas is very leading to the price of electricity. In Norway, water reservoirs often set the price, or gas power plants indirectly through imports from foreign cables. Periods of very low electricity prices are characterized by high production of power plants with low marginal cost, namely solar power, wind power and unregulated hydropower (river power or overflowing water reservoirs).
All in all, this means that it is the electricity consumption, weather and price of energy raw materials that control most of the electricity price.
Norway's electricity price zones
Norway has five so-called electricity price zones, NO1 (Eastern Norway), NO2 (Southern Norway), NO3 (Central Norway), NO4 (Northern Norway) and NO5 (Western Norway). The price in these electricity price zones is often different due to limitations in grid capacity between them, as well as the fact that some are connected abroad.
What has electricity prices been historically?
From 2010 to 2019, the electricity price was mostly between 20 and 60 cents, with an average of 35 cents across the electricity price zones. In 2020, electricity prices were abnormally low mainly due to a mild winter 2019/2020 as well as lower energy consumption due to COVID-19 which led to low energy prices globally.
In 2021, this abruptly reversed, with reopening after the pandemic and increased energy consumption, as well as different weather conditions such as extreme drought in Brazil where the largest source of power is hydropower.
In 2022, the situation escalated further with Russia's invasion of Ukraine and disruption in the supply of natural gas to Europe. Historically, 40% of Europe's natural gas consumption has come from Russia. In addition, in 2022 there was an extreme heat and drought in Europe that led to less hydroelectric power generation as well as special circumstances in which nuclear power plants had to be shut down due to lack of cooling from parched rivers.
2023 has seen a partial normalisation in prices probably caused by a warm winter in Europe and a more calmed sentiment in energy markets with lower gas, coal and oil prices. The end of the summer has been marked by low electricity prices mainly driven by unusually heavy rainfall, from, among other things, the storm Hans which has led to overflowing water reservoirs.
What will be the price of electricity going forward?
Just as one has a market for tomorrow's price (spot), one also has a market for power with delivery further ahead in time. In Norway, this is done on Nasdaq. By reading the price of these contracts, one can see what market participants think the electricity price is going to be in the years ahead.
Prices are illustrated in the graph below for electricity price zone NO1 and NO2. The electricity price for NO1 is expected to average ~80 cents for next year, falling to ~70 cents in 2026. NO2 is about 10 cents across.
There is great uncertainty around what the electricity price will be going forward, and the market has missed many times before. Many unknown factors are going to drive the price of electricity going forward, namely weather, new development of power plants such as solar and wind farms, developments in demand for power as a power-intensive industry and electrification of transport, and geopolitics such as what we have seen with the war in Ukraine - to name a few. What there is broad agreement on in the market is that the uncertainty and fluctuations in the price of electricity have come to stay.
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Also read: Negative electricity prices: What does it mean for solar owners?
