How can investors cope with low power prices in the Nordics?

Strong winds, low population densities and favourable geography have turned Nordic countries into powerhouses of European wind development.

Sweden was the second-largest country in Europe by onshore wind capacity installed in 2019, when 1.6GW was completed. Norway also made the top five with 780MW. But for how long can this continue?

The growth of renewables has played a part in a fall in wholesale power prices in the Nordics that call into question the profitability of future wind farms.

For example, power purchase agreement (PPA) specialist Pexapark has shown that renewables power prices in the Nordics yesterday were €21.70/MWh, or 39% lower than the European average of €35.73/MWh. Power prices in the Nordics are at their lowest level since €21.14/MWh at the end of March 2020, and 15% below than the €25.64/MWh they achieved a year ago.

Investors must find ways to cope with these low prices.

Taking the plunge

On 22nd October, we looked at this issue in our latest Watt Seat webinar, called ‘The Power Price Plunge: What impact on the Nordics?’, which we ran in partnership with law firm Cirio and financial advisor Voltiq.

Our panel was comprised of Nord/LB’s Gerard Pieters, Rabbalshede Kraft’s Tobias Nylander, Voltiq’s Manuel Cabrerizo and moderator Jörgen Möller from Cirio. They discussed how downward pressure on power prices would make it difficult for developers to build wind farms profitably, and potential solutions.

Our panellists agreed that low and volatile power prices would undermine the certainty that investors need when they are making investment decisions about projects. They are also increasing pressure on owners to offer shorter PPAs.

Pieters, who is head of origination Europe at Nord/LB, said he was concerned that the volatility in power pricing was leading to shorter PPAs at wind farms. Since 2015, he said it has been common to see corporate PPAs of 10-15 years, but he said the current situation with power prices made deals of those sorts of length less attractive.

Yes, corporates might be able to lock in prices that look low now, but many of them don't want to commit to long deals if there’s a chance that prices will go lower. It's a low-risk strategy given that steep rises aren't expected either.

Pieters added that the global economic challenges caused by Covid-19 were making long-term PPAs look less attractive too, and “financing structures have to respond” to those pressures. It's another major headache for investors.

Nylander, who is chief development officer at Rabbalshede Kraft, said there was an imbalance between supply and demand of corporate PPAs too.

He said he is not a “huge fan of PPAs” and he wasn't seeing enough demand for them from the corporate sector. The high-profile PPAs we've seen have been few and far between. As a result, he argued it is “not sustainable [for developers or investors] to base your business on PPAs solely”, and firms needed to find other sources of stable revenues for their schemes.

But there is a lack of clarity on where such support would come from.

Politicians under pressure

PPA prices have been driven down due to the amount of renewables capacity, including hydro, in the Nordics. Low gas prices will also have an impact on the wind sector, as will growing support for the nuclear industry in Finland.

Meanwhile, governments in the region are under pressure from those who feel there's been too much onshore wind development in the last five years. They don’t see wind as the success story that our webinar's listeners would!

In Sweden, for example, the government isn't doing enough to give investors confidence. The government can veto projects that are already in development or even under construction, and no investor likes to be threatened with the potential for retroactive changes.

On top of that, the grid is under strain. The Nordics has seen some large wind projects, but that’s only any good if the power gets where it is needed.

On the plus side, there are investors who want to invest in the Nordics. For them, the supply of projects is too small. But it appears they are increasingly unable to get the certainty that their deals require.

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