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Nordic wind power push faces price challenges in 'extreme' year

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Nordic wind power push faces price challenges in 'extreme' year

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The Ajos nearshore wind farm in Finland, which is supplying power to retailer Ikea. The Finnish market has been sheltered from much of the power price declines in the Nordic region this year.
Source: OX2 AB

In Europe, the Nordics have been the place to be for wind farm development in recent years. But a perfect storm in the market's fundamentals has pushed down power prices in 2020, and left some feeling the squeeze.

After a tumultuous first quarter, Norwegian utility Statkraft wrote down the value of Europe's largest onshore wind farm, Fosen Vind, a six-part project in Norway with a combined capacity of 1,057 MW.

A combination of very high hydro reserves due to heavy snow, and limited export capacity to the rest of Europe, has weighed heavily on the Nordic system price, which has seen levels under €10/MWh. Prices vary significantly across the system's price regions, with northern Norway and northern Sweden seeing particularly low prices. Constraints on north-south power lines to the southern off-take regions contribute to the oversupply in the north.

"This year has been an extreme year," Kathrine Stene Bakke, senior principal at consulting firm Afry, said in an interview.

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Other utility giants such as Vattenfall AB, RWE AG, Fortum Oyj and EnBW Energie Baden-Württemberg AG also run wind farms in the region, which in the absence of subsidies relies heavily on corporate power buyers like Microsoft Corp. and Google LLC to underpin new projects. Fosen Vind has a long-term power purchase agreement, or PPA, with metals producer Norsk Hydro ASA.

With record low wholesale prices, particularly in Sweden and Norway, the market for corporate PPAs could start to stutter as it becomes challenging to strike agreements that allow for the financing of new projects. High wind speeds and large areas of unused land in the north are currently juxtaposed with a lack of off-takers in the PPA market, Bakke said.

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"It makes it more difficult for buyers and sellers to find a price that they can agree on," said Justin FitzHugh, vice president of business development at Oslo-based advisory firm Arctic Securities AS, in an Oct. 26 interview.

For now, the effect has not filtered through to the market, given the long lead times and long-term nature of contracts. However, "If these prices are sustained, I could see that creating problems for people trying to contract PPAs, on both sides of the table," he said.

An ongoing slump in current power prices also affects people's perception of the future, FitzHugh said. "This kind of shock to prices doesn't really help anybody," he added.

More than ever, location is therefore key. Nordic wind developer OX2 AB sees stable PPA prices for its southern Swedish projects this year, with a number of industrials still keen to sign deals, PPA Manager Kari Tikkanen said.

Financing for wind farms also adapts to changing market fundamentals. "We continue to develop offerings that are attractive investment opportunities, be that with fixed-price PPAs or alternative risk management approaches," Tikkanen said in an email.

Finland still golden

As parts of Sweden and Norway face particularly unfavorable power price outlooks, Denmark and Finland are less affected.

With just over 2 GW of installed capacity, wind-rich Finland is a few years behind other Nordic countries in its renewables build-out, according to Ville Hailikari, energy partner at Helsinki-based law firm Krogerus.

"There are lots of projects in the pipeline ... Of course [the power market decline] has affected the regime, especially on the PPA side. Despite that, the market is very active," he said in an interview, with deals now often featuring floor and ceiling pricing rather than a fixed price. "Most of the Nordic banks have come into the market; they are taking a very positive view," he added.

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Another developer, Germany's ABO Wind AG, has been active in Finland since 2013 and sees continued growth potential, with over 2 GW of projects currently under development and another 2 GW in the acquisition phase.

"There's no reason for buyer's remorse. To the contrary," Daniel Duben, communications lead for ABO Wind, said in an email. Thanks to its large, sparsely populated plains, developers are building very large wind farms with the latest generation of turbines in Finland, which reduces generating costs substantially. "We clearly see Finland as an engine of renewables production in the EU," Duben said.

Power buyers, such as tech firms looking to power data centers in the Nordic region, are still driving demand for off-take deals, and favorable conditions for green hydrogen production will see the technology boost future demand, he said.

U.K.-based fund manager Glennmont Partners entered Finland with the acquisition of the 211.4-MW Piiparinmäki wind farm in 2019, construction of which is currently underway. Glennmont sees the asset, which is backed in part by a PPA with Google, as a cornerstone for a Scandinavian cluster, according to Henrik Urbansky, investment director at the company, who added that Glennmont is homing in mainly on Finnish and Swedish assets.

"I'm not going to say the returns are stellar in Finland; they aren't," Urbansky said in an interview. However, falling levelized cost of energy is supporting the business case, and Glennmont is taking a long-term view on the investment. "We're going through a bit of a valley," he said.

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Maevaara wind farm in Sweden.
Source: OX2

No 'drying up'

The longer-term market forecast for the region by consultancy Afry sees prices recover to pre-crisis levels toward the middle or end of this decade and climb through to the mid-2040s, on the back of increasing fuel and carbon prices, rising electrification and demand growth, new interconnector capacity and the phaseout of nuclear generation.

For the renewables drive to maintain momentum, the transmission links between the north and south need to be strengthened, and the permitting system ought to better balance military interests with wind power growth, OX2's Tikkanen said. In Finland, thresholds for appealing permits are low, which is dragging out the process, added Hailikari of Krogerus.

Investor interest for Nordic assets remains and there is still strong liquidity in the PPA market there, according to Glennmont's Urbansky. "We do see that the prices that are on offer are lower. What we haven't seen is a drying up," he said.

Across the Nordics, new corporate PPA demand is coming increasingly from companies with comparatively lower power needs but high sustainability targets, which require additionality as a part of the off-take deal, such as retailer IKEA AB, said Afry's Bakke.

"The willingness to meet [at a price] is more challenging now than it will be next year," she said, assuming a return to more normal weather conditions. "Anything is up from this level."