November 29, 2021

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- Until 2030, we're on our way - E24

– Until 2030, we’re on our way – E24

Expensive electricity creates uncertainty in the industry, but Norway’s Norsk Hydro plants have electricity agreements until 2030. – We’re on our way, says CFO Pal Kildemo.

Wanted: Making aluminum requires a lot of electricity, which is why Hydro has its long-term agreements.

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The recent hike in electricity prices has created concerns in parts of the industry. Among other things, Elkem fears future investments in Norway if energy prices rise sharply.

Norsk Hydro is also concerned about its long-term power supply. Hydro is used against 18 terawatts (terawatts) electricity per year.

The company’s Norwegian smelter is somewhat better than its international operations. Norwegian plants have long-term agreements on hydropower and wind energy up to 2030, and some for even longer.

– We have Norwegian portfolio coverage up to 2030, and even after 2030 we have significant coverage, says CFO Pål Kildemo at Norsk Hydro up to E24.

– This is ensured by water and wind contracts, and we have had the opportunity to secure energy at much lower price levels than what we see in the market now, at the price levels that were necessary to achieve profitability in these wind energy projects. So we’re in a good position, he says.

The lines show Hydro’s energy consumption, while the colored boxes show the energy contracts and when they expire. The figure on the left applies to Norwegian smelters, while the figure on the right applies to foreign plants such as Aluminium, Tomago, Slovalco, Albras and Aluette.

Expect higher prices

Recent NVE Estimate That the price of electricity in Norway (excluding grid rent and fees) will rise to 52 øre per kilowatt-hour in 2030, from about 30-40 øre per kilowatt-hour in the past 20 years.

“Two important reasons for this are the increased exchange capacity between Nordic countries and Europe and that we assume persistently high CO2 prices,” NVE wrote in its long-term market analysis.

Until 2030, NVE expects energy production in Norway to increase by less than demand. Energy consumption in traditional industry, shelf electrification, and new investments in hydrogen and battery plants are expected to increase.

Pål Kildemo Norsk Hydro’s Chief Financial Officer and CEO Hilde Merete Aasheim presents third-quarter results.

The Slovak contract must be replaced

Hydro has also entered into a number of long-term energy agreements for its international operations in recent years, some of which will need to be replaced soon. Among them is the Slovalco smelter.

– We’re a little shorter in our global smelters. For example, the energy contract in Slovakia expires this year, and we’re more exposed there, says Kildemo.

On Tuesday, Norsk Hydro provided new numbers. The company generated adjusted gross operating profit (ebitda) from a record high of NOK 7.219 billion in the third quarter, up from NOK 3.1 billion at the same time last year.

The background is higher aluminum prices and larger quantities, while more expensive raw materials to produce have lowered the numbers somewhat.

I had to buy electricity in the market

Although Hydro has secured energy through long-term agreements, the company may have to purchase some energy in the spot market. This can happen, for example, if there is dry weather and little water in the reservoirs, as in the fall.

The company’s energy production was just 1.69 TWh in the third quarter, up from 3.16 TWh in the same quarter last year. Thus, Hydro had to enter the market and buy some electricity.

– In principle, this should be very negative for Hydro, but then you have huge differences in the price of energy where the price in some price areas is much lower than in others. That means it’s cheap electricity where we buy the most energy, and expensive where we sell energy, Kildemo says.

According to the CFO, this had a positive impact on Hydro of about NOK 300 million in the third quarter.

The hydro/aluminum smelting plants in Høyanger and Sunndal in northwest Norway are located in inexpensive NO3, where electricity this fall was much cheaper than in the rest of southern Norway. Karmøy and Husnes facilities are located in the more expensive NO2, and Årdal on NO5, which also has unusually expensive electricity.

This is the Hydro Sunndal smelter.

Hoping for more renewable energy

Hydro hopes that the industry in Norway will also be able to reach competitiveness in the future. According to NVEs New market analysis There will be more hydropower and solar energy until 2030, but consumption is expected to increase more than production, so the energy surplus is expected to decrease.

– Until 2030, we’re well on our way. Then, we rely on renewable energy being built at an attractive level from an industrial perspective as well. Kildemo says there have been fewer announcements of new renewable projects recently.

– NVE expects energy surplus to drop from about 20 TWh now to 7 TWh in 2030. So it might be even scarcer in the future?

– As it seems now, we have to have more power to be able to replace what goes out in 2030. If you’re going to replace energy with sources other than, say, terrestrial wind, it also has other costs to build, which will affect the construction of it, Kildemo says. Competitiveness.

CEO Hilde Merritt Achim is also concerned with ensuring adequate strength of the industry. Labor and the Center Party have opened up more force in their government programme, including controversial onshore wind power in places where there is local acceptance.

It’s a challenge for the new Norwegian government now, that it’s really working to bring in more power, Achim says.

Bet on the sun and the wind

Hydro is Norway’s third largest producer of renewable energy, with an annual energy production of 9.4 TWh in a typical year, according to its own annual report.

The company is also focusing on wind and solar energy through Hydro Rein, which is set to be listed separately on the stock exchange.

Hydro Rein has entered into an agreement with Sweden’s Eolus to purchase the rights to the 260MW Stor-Skälsjön wind power project in Sweden, and expects an investment decision for the project to be made in the fourth quarter of this year.

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