May Recap: Weather changes trigger price hikes in Nordics

Weather changes trigger price hikes in Nordics

Nordic system futures have surged following a sudden and sharp deterioration in the hydro balance. Meanwhile, the price gap between the Nordics and the continent is narrowing.

Only a month ago, our publications reported a significant surplus in the Nordic hydro balance. In early April, the level was just below +15 TWh, and in January it was as high as +25 TWh. The substantial surplus led to periods of exceptionally low system-level spot prices. In response, system futures for the summer months and Q3 plummeted, driven by expectations of abundant water inflows from snowmelt during the peak season.

The current reality is somewhat different: within just a few weeks, an exceptionally dry spell across Northern Europe – classified as a drought in some areas and significantly impacting the Nordics – completely wiped out the hydro balance surplus. According to the latest figures from analysts LSEG, the balance is expected to be in a marginal deficit of 1 TWh by the end of May, a stark contrast to the situation that the Nordic electricity market faced just a few weeks ago. If current trends continue, the hydro balance is set to slip into deficit in the coming weeks – for the first time since August last year. The extensive transmission capacity from Norway, particularly to the more expensive price areas like the UK and Germany, means that a hydrological surplus can now disappear much quicker than in the past, especially under the weather conditions we have seen recently. Unsurprisingly, this is affecting electricity prices and, perhaps more importantly, shaping expectations for price levels over the summer.

Low-priced summer cancelled

The nearest system futures have increased dramatically in price, with a jump of over 50% on the June, July and August contracts, as well as the third quarter of the year. The scenario in which hydropower producers would be forced to release water from reservoirs at very low prices, as seen in certain previous years, now looks increasingly unlikely, unless there is a sudden and dramatic shift in weather patterns. However, current forecasts suggest the dry spell will continue, with long-term outlooks indicating a predominantly dry, calm, and warm summer across Northern Europe. Wind production in Northern Europe has generally been low for a while now, throughout much of the past winter and into the current spring. This prolonged calm has naturally increased the risk of high power prices, especially when accompanied by overcast conditions, leading to the well-known phenomenon of Dunkelflaute.

While price increases in the Nordics have been somewhat dramatic, the downward trend in the gas market has tempered developments on the continent, even though this region has also had its fair share of calm weather over the past months. The result is a narrowed price gap between the Nordics and the more expensive continental electricity markets. The difference between the Nordic and German Q3 contract at the beginning of May is approximately 55 EUR/MWh, compared to 65 EUR/MWh a month ago. The lower price spread is particularly significant in Denmark, where EPADs are highly dependent on the price spread between the system and Germany.

Snow melt begins

Despite the weakening hydro balance, we are still in flood season – the period of intense snowmelt in the Nordic mountains, when rivers swell with water. This means that the reservoirs, which recently hit their lowest level of the year, will now fill up over the coming weeks and months before peaking in early autumn.