By Peter Osbaldstone, Research Director, Europe Power and Renewables; Dan Eager, Principal Analyst, Europe Power and Renewables; and Rory McCarthy, Senior Research Manager, European Power and Renewables, Wood Mackenzie
With Denmark, Finland, Norway and Sweden leading the way on renewables integration we explore the outlook for the Nordic power markets
The Nordics have taken an early lead in the energy transition race. With a heavy focus on renewable power and abundant system flexibility, the region is arguably decades ahead of other markets and will play a pivotal role in wider European net zero ambitions. So, how is the Nordic power mix evolving and what will that mean for power prices in the region?
In our new long term outlook for the Nordic power markets, the latest development of our Europe Power Service, we used our EPSI Europe platform to model supply-demand dynamics and power prices to 2050. Read on for a recap of some of the key points.
The Nordics lead the world on renewables integration
The Nordic countries feature world-leading levels of renewable power – and, historically, the lowest power prices in Europe. Hydropower is currently prevalent. Norway, for example, features near 100% renewable supply, and 80% of that comes from highly flexible hydropower. Denmark, meanwhile, has the world’s highest level of wind and solar penetration, thanks to early policy direction. And Sweden and Finland both encompass high levels of renewable integration, supplemented with nuclear.
Abundant resource means wind will continue to grow across the region, with wind and solar together overtaking hydro as the Nordics’ dominant source of power by 2038. While hydro will continue to provide much-needed flexibility, it will be part of a more dynamic mix.
Rising demand in the Nordic region will be outstripped by supply
The Nordics’ power mix will have to cope with increasing demand. We expect a 30% boost – predominantly from electric vehicles, the electrification of heat, data centres and battery giga-factories – increasing from 390 terawatt hours (TWh) today to 540 TWh by 2050.
However, as the demand line on the chart above shows, this rise will be outstripped by the increase in supply. Growth will be driven mostly by onshore and offshore wind, with solar also contributing. Hydro will stay relatively steady in absolute terms but will have a reduced supply share. Nuclear’s contribution will also reduce as Sweden completes its phase-out, leaving only Finnish plants in operation.
Growing oversupply means the region will expand its role as a net exporter of low-carbon power and system flexibility.
Wind is the big opportunity in the Nordics
Wind is already dominant in Denmark but in the future its importance will grow across the region, driven by the best wind resource in Europe. Overall Nordic capacities will quadruple by 2050, to around 114 gigawatts (GW). Finland lags its neighbours in wind, with around 2 GW of installed capacity in 2020, but its rich resources offer strong potential.
Offshore wind is just beginning its growth story, but will make up a quarter of wind capacity in the Nordics by 2050. High volumes of wind power output will present balancing challenges, but the region is well positioned to absorb these.
By comparison, solar will grow tenfold but from a much lower base, reaching 31 GW by 2050.
Major transfers of power will continue to define the Nordic power market
Overall, Norway and Sweden tend to export excess power while Finland and Denmark are net importers. However, resource distribution and demand density varies across the region, not only between countries but also between bidding areas within them.
As a result, the Nordic power market is defined by major transfers of power, both within the region and beyond, made possible by high levels of interconnection. As the penetration of variable renewables continues to expand, not just in the Nordics but across continental Europe and the UK, the business case and system-needs case for further interconnection will be crystallised. It’s a critical component of a successful Nordics and Europe-wide energy transition.
Power price spreads will increase before coming back down by the 2040s
At present, market prices in the region are reasonably harmonised – although the current spread between bidding areas has increased dramatically from 2019. This is largely due to price dynamics in continental Europe (with Germany being a particularly strong influence) and network constraints in the region.
By 2030, several factors will cause the price spread to widen further. For example, the Western Denmark DK1 area will be more aligned with the UK power price thanks to the 1.4 GW Viking Link interconnector, which will begin commercial operation around the end of 2023.
Meanwhile, the nuclear build programme in Finland will see lower prices emerge there.
By the 2040s we expect prices to become more armonized and stable again as interconnection in the region is built out and the system adapts to increasing renewable volumes.
Availability of hydro resource will have a significant impact on prices
The availability of hydro introduces a level of uncertainty to the outlook, since power production from the source has the potential to heavily influence prices as well as flows to neighbouring markets.
Historically, fluctuations in hydro production have been in the order of plus or minus 7% of the mean. Projecting a similar degree of fluctuation on future supply, the impact will vary by area. For example, the DK2 area of Denmark has no hydro, but is well interconnected to those markets that do; it can expect to see a price impact in the order of 8%, on the mean value across the horizon. By comparison, the NO2 area of Norway contains around half of total Norwegian hydro reserve; it can expect a price impact in the order of 30% on the mean value.
Climate change will bring increased uncertainty to weather systems, with particular risk to hydro-dominant systems, as temperature and rainfall are likely to stray further from the average.