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EXPLAINED: Why do Norway's regions have such different power prices?

Richard Orange
Richard Orange - [email protected]
EXPLAINED: Why do Norway's regions have such different power prices?
Reservoirs in southern Norway hit 20 year lows in 2022, exacerbating the power price differences with the north. Pictured is a dam in Norway. Norway is dependent on hydroelectric dams to meet its energy needs. Photo by Bjørn Kamfjord on Unsplash

Several foreigners living in Norway have gotten in touch asking why the power price can differ so much between different regions. Here's the answer.

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How does Norway's power market work? 

Norway is divided into five 'bidding zones', which form part of the 12 bidding zones in the Nordpool power exchange, with the hourly power price in each bidding zone set in a daily auction.
 
"Every morning, all producers send in a bid for every hour of the next 24 hours: how much they would like to produce, at what price, hour by hour," explained
 
Marius Holm Rennesund, partner at Thema, the Oslo-based power markets consultancy. "On the demand side, large industrial players do the same. For households, it's the electricity retail provider who does that on our behalf."
 
"You basically stack up all the different production units from the lowest price to the highest price, and you do the same thing for demand, and then you find the intersection between the two. And the power price is the price given by the last producer that needs to produce to meet demand."
 

Why have power prices been so different in different regions? 

In 2022, a very rainy year in Northern Norway combined with new wind parks across the border in Northern Sweden to push down the price of power in Norway's two most northerly bidding zones, NO4 and NO3. At the same time, low rainfall in southern Norway combined with the gas shortages in continental Europe led to record high power prices in the southerly NO2 and NO1 zones.

"What you got was basically trapped power, you had more supply than you needed in the north and you would have liked to export it to the south where we really needed it because it was dry, but you couldn't because the grid capacity wasn't large enough," Rennesund said.

Added to this, the NO2 zone is connected to The Netherlands, the UK and Germany through undersea interconnector cables, while NO1 is connected to SE3, one of Sweden's two most southerly regions, which are in turn connected to continental Europe through interconnectors to Germany, Poland and Latvia.

"Southern Norway is directly connected to continental Europe, and after Russia’s war in Ukraine, Europe wanted to move away from Russian gas. As a result, gas prices skyrocketed over the last year and a half, and in many hours, gas-fired power plants are what set the power price in Europe, and that also influenced prices in southern Norway, and that was amplified by a dry year here because then you have less domestic hydropower production."

In recent months, there have also been some price differences between the price in NO1, which includes Oslo, and NO2, which includes Kristiansand, which Rennesund said was mainly because of differences in rainfall, which have affected power production.

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Why aren't power prices cheaper in Norway at night? 

One of our readers asked why power wasn't much cheaper at night in Norway when it is in most other European countries. Rennesund said this was because so much of Norway's production comes from hydroelectric dams.

"We have a lot of hydropower with reservoirs. In continental Europe, you have low prices during the night because it costs a lot to stop and start gas-fired power plants, so they don't do that. In Norway, regulating power production up and down is cheap -- it's just opening and closing a hatch at a hydroelectric dam -- so if demand is low during the night, you would rather not produce anything to keep prices more stable."

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What would happen if Norway got rid of its bidding zones? 

Rennesund said that Norway's bidding zones made the system much more efficient, both in how power was generated and distributed in the short term and in the long term, because of the signals sent to electricity producers, grid operators, and electricity consumers. Rather than Norway becoming more like Germany, where prices are more uniform, he said Germany would benefit from being more like Norway and having bigger price differences between regions.

"It ensures efficiency both in the short term and in the long term because power flows from the areas where prices are low to the areas where prices are high," he said. "You make sure that it's worthwhile producing more in other areas and exporting it to areas where it is needed as prices in those areas will be higher, and it gives short-term signals for the consumers to try to use less electricity if prices are high as well."

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The bidding zone system also creates efficiency in the long term, affecting where new power production is built and where the industry decides to establish itself.

"It gives the signal to invest in production in areas where prices are high instead of in areas where you already have sufficient power," Rennesund said. "As prices in Northern Norway have been very low for quite some time, we are now seeing a lot of industrial players wanting to build facilities up there for different types of electricity-intensive production. It also shows where the grid operator should invest in new grid capacity."

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