Why is predicting the price of electricity difficult?
In my work, I discuss topical energy issues with Finnish industry representatives and potential foreign investors on a weekly basis. Over the last few years, there is one question that is very frequently raised during these discussions – how do you see the price of electricity developing in the future?
Electricity prices are determined by the Nordic electricity market. I have sometimes compared the difficulty of predicting electricity prices to forecasting weather or climate change implications; after all, these days electricity production is quite dependent on the weather. In the long term, certain major trends may be discernible, but short-term developments are enigmatic and are themselves the sum of many variable factors. In addition to weather conditions, electricity prices are also affected by for example generation and transmission outages, emission allowance prices, fuel prices and the balance between supply and demand.
Recently, many players have published their own forecasts of future electricity prices, and I always regard these with reservation. However, I think the best way to try to analyse the issue is through a few development paths.
Wind and solar roller coaster
According to Finnish Energy’s Electricity Year 2023 report, Finland had the second cheapest wholesale electricity prices in Europe on average last year. However, at the same time, there is an active discussion that the Finnish electricity market has one of the highest spot price fluctuations in Europe, even within the same day. The correlation between renewable energy production and price volatility is clear, as the graph below shows as an example.
Source: Finnish Energy
The pace of change in energy production towards renewable energy has been rapid, with the desire to get rid of fossil fuels as soon as possible. The change is illustrated by the fact that while Finland has almost 4400 megawatts (MW) of nuclear power capacity since the completion of the Olkiluoto 3 reactor, the installed wind power capacity was almost 7000 megawatts. Yet wind power covered only about 18% of Finland’s total electricity demand.
The increasing weather-dependent electricity production also poses new fundamental questions for different electricity consumers: Am I ready and able to adjust my consumption to the fluctuating production? Can I store electricity or use electricity during low-cost hours to produce hydrogen, for example, for storage? Ultimately, in the face of increasing price volatility, consumption-side flexibility will have a significant impact on the overall composition of electricity procurement.
A nuclear power plant is not built in a day
In the big picture, the constant and ever-increasing volatility of electricity prices may ultimately benefit almost no one. That is why Finland – and other Nordic countries – also need stable baseload power and various sources of balancing power. Examples include conventional nuclear or small nuclear power, and pumped hydro. It’s important to note, of course, that these forms of production do not themselves eliminate price volatility, but they do reduce the weather dependence of production proportionately.
While the construction of new wind power, and solar power in particular, appears to be a relatively “fast” process, the situation is very different for nuclear power. Construction projects for traditional large nuclear power plants are notoriously massive and quite lengthy in duration. The idea behind small modular reactors (SMRs) is to make them smaller, serially produced and faster to commission, but the practical operation and licensing processes for commissioning them are still a question mark. In fact, for the Nordic countries, it is realistic to assume that new nuclear power, in one form or another, will not be available on the market on a large scale until the latter half of the 2030s.
However, the wild price volatility in the electricity market also contributes to the challenge of building new baseload power and balancing power. As with any industrial project worth billions, the investment must be able to guarantee a steady return and payback time. The current market model does not necessarily do that. Ultimately, these investments require major societal decisions to build steady capacity to meet the growing electricity demand. The same capacity can also support the ever-increasing share of renewable production forms.
The exciting years of new industrial demand
In its latest updated estimate, the grid operator Fingrid has outlined that electricity consumption in Finland will increase from around 80 terawatt hours (TWh) today to as much as 130 TWh by 2030. The largest growth drivers would come from various industrial sectors and data centres, but also significantly from hydrogen production and electrification of heating.
Source: electricity production and consumption outlook, Fingrid forecast Q1/2024, Fingrid Oyj
The difficulty factor is of course increased by the fact that the consumption growth estimate is based on new projects where the final investment decision may still be quite distant in the future. The current global economic and political situation has created uncertainty in the investment environment, which has already contributed to a slowdown of certain large projects. There are also still some uncertainties, for example in the regulation of the hydrogen economy. On the other hand, the potential of billions invested have driven even otherwise relatively united EU countries to compete against each other through various support mechanisms, not to mention incentives from across the Atlantic.
In the long term, electricity price forecasts will depend to a large extent on how new industrial demand in the Nordic countries materialises and how much new power production can be built to support this new demand. In the energy sector, this is often described as the chicken and egg problem, because ultimately supply and demand are always interdependent. Certain regions in the Nordic countries, such as Finland and northern Sweden, have already proven to be the most attractive areas for new energy-intensive investments, which is already partly reflected in market pricing.
Statistics show that electricity demand in Finland has fallen in recent years due to the general economic situation and various energy-efficiency measures, among other factors. However, no massive industrial project to generate new demand has yet materialised. The future will show whether clean, secure and affordable electricity will ultimately be our competitive advantage.
In any case, the Nordic countries are an ideal location for energy-intensive industry and services. In addition to affordable electricity, the grid is one of the most reliable in the world and we have plenty of well-located, high-quality sites for a variety of industries.
