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Nordic power markets: at the heart of Europe’s energy transition

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OPINION
Nordic power markets: at the heart of Europe’s energy transition
With Denmark, Finland, Norway and Sweden leading the way on renewables
integration we explore the outlook for the Nordic power markets
31 August 2021
1 minute read
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.
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. We explored our findings in a recent webinar. Read on for a recap of
some of the key points and fill in the form to access a selection of our presentation slides.
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 harmonised 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.
Take a closer look at the outlook for Nordic power markets
Long-term hourly analysis is essential to understand the dynamics of decarbonising power
markets. Our Nordic power outlook was developed using our EPSI Europe platform, built to
provide on-demand insights into supply and demand fundamentals, and price formation. The
new Nordic power report and datasets – including outlooks for each of the twelve bidding
areas – are available to clients of our Europe Power Service. Alternatively, the full outlook is
also available on our store.
You can also fill in the form to access a copy of the presentation slides that accompany this
article, including charts on:
Low carbon generation by country
Nordics wind and solar capacity outlook
Net flows by market
Hydro inflow uncertainty: production and price impacts
And more.
Fill in the form at the top of the page for your complimentary copy.
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