January 31, 2023

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A quantum leap in European energy – E24

The gas crisis has caused gas prices to rise extraordinarily, and gas energy controls the price of energy, the author of the article writes. Here is a power station in Drogynbos in Belgium.

Despite powerful hydropower and the lowest costs in Europe, we could end up with the most expensive electricity for consumers, writes Kjell Rowland.

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The record expresses the writer’s position. You can submit discussion articles and entries to E24 here.

The Norwegian Energy Act 1991 idealized a market-based energy system. It has become a model for the European Union, but in reality it has never been implemented outside the Nordic countries.

At the EU summit on December 15-16, the model was buried. Then came the first documents showing the direction in which the EU’s deep structural reforms in the energy market were taking.

Thirty years ago, Norway set the trend, and now the challenge for Norway is to be able to understand and follow the changes in the European Union.

It has long been clear that the EU must reform its energy market in order to achieve radical climate goals. The war in Ukraine and the subsequent crisis in the gas market accelerated the changes. The ambition is that over the next year radical structural changes are investigated, a normal legislative process is implemented through the Council and the European Parliament, and a structure for an entirely new system of power is adopted.

what’s the problem?

In today’s energy market, the marginal and most expensive energy product determines the entire market, both for producers and consumers. The gas crisis has led to extraordinary gas prices, and gas energy controls the price of energy. This leads to energy prices of NOK 3-8/KWh.

This causes discomfort in Norway, but threatens the very existence of large industries in Europe. Aluminum production and industrial fertilizers have been halted in many countries. The European auto industry is delivering 25 percent fewer cars this year than in 2019. New projections from the International Energy Agency suggest gas scarcity will be greater next year than this year.

High energy prices are likely to persist for several years. Whether companies that have been closed for years will ever return to production is an open question. What that means for the poor is sad. The Economist recently estimated that it could cause more people to die from cold and disease than in the terrible war in Ukraine.

In Spain and Portugal, they have stopped letting gas power set the price of energy, even if gas power plants are in production. It has cut the price of energy almost in half, but the subsidies for buying expensive gas are colossal.

Climate policy depends on the successful construction of a new energy system based on zero-emission technologies. In order to ensure adequate investment in the new production capacity, it is recognized that buyers of such strength are needed who can write long purchase contracts. The spot price is very uncertain, and the probability of it being very low in heavy wind periods is increasing. Indeed, countries have to directly or indirectly step in and guarantee such contracts (often called CFDs). An alternative is green certification, which has led to the development of wind power in Norway.

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The absolutely crucial thing is that spot prices cannot or should not control the choice of technology, the volume that is expanded, or the time that new capacity goes into production. This was the idea in Power Law.

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Consumers must also be protected from high and volatile energy prices. There is no point in building new wind power at 30-50 øre/KWh, but letting consumers pay more kroner for the same power. The benefits of cheap renewable energy should come as a benefit to consumers, not ultimately as a super dividend for energy producers. Prices to consumers should be largely linked to production costs and long contracts.

The role of spot prices in the future will be to improve the operation of the price-sensitive part of energy production, including gas and hydrogen power plants, and to stimulate consumption flexibility. In the Norwegian model, spot prices also dominated the price level for consumers, determining in principle what is profitable to build new capacity. Also in the future, our hydropower system needs an efficient spot market to improve operations.

The paradigm shift in the European Union has just begun. Much is unclear about what the system will look like, not least how difficult it will be to realign the power system. Many will find that the prerequisites for the investments made change dramatically, and not in such a way that new super profits appear.

What seems clear is that the new system must make it profitable for new investments on a large scale, and that the price of energy will largely reflect long-term costs in the system, not hour-to-hour scarcity as Nordpool does.

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On January 3rd, Arvid Moss of Hydro had a column about the challenges in Norwegian energy policy. The message was that we must build more renewable energy, and if we do, energy can still be a competitive advantage for Norwegian business.

I totally agree with that.

The amazing thing about the article is that it contains no references to the world around us. The profound changes that seem to be coming in the European Union and the United Kingdom. with today
Strong cable ties and deep energy cooperation, this will set strong guidelines for what Norway can and should do.

The consequences for Norway depend on which prices will control flow through cables in the future, and how the price spreads from other countries to Norway. Here at home, we must investigate how pricing is set and regulated for end users. We have complete control over the latter. Cable operation requires negotiations and agreement with the European Union and the countries at the other end of the cable.

Because we are fortunate and have a system dominated by hydropower, the need for structural changes is different than in Europe. It provides opportunities, but it can also have a downside if we don’t keep up with the class.

Despite strong hydropower and the lowest costs in Europe, we could end up with the most expensive electricity for consumers. Therefore, the challenge is much more complex than building more power in Norway.