A phenomenon that has not been seen in a decade can increase the price of electricity

The exceptionally weak spring water situation in the Nordic countries now brings uncertainty to the electricity market. Water reserves have dropped so low that they were last at a similar level a decade ago. This can put upward pressure on the price of electricity and fluctuate prices.

The weak water situation is especially affected by the winter with little snow and the drought that preceded it in Norway, which is a large producer and exporter of hydropower. Hydropower was needed in the winter during cold and windless periods of frost. As a result, a deficit has arisen in Norway’s water reserves, which corresponds to according to the news agency Bloomberg about a fifth of the country’s hydropower production last year.

As in Norway and Sweden, the winter in Finland also had little snow in many places. This is now visible in waterways, but the effect on the electricity market is moderate. In Finland, the share of hydropower is about 10–20 percent of the annual electricity production, but in Norway and Sweden the share is higher than this. Through the need for imported electricity and the common electricity market, the neighbors’ hydropower situation affects the price of electricity in Finland as well.

Energy company Vattenfall’s electricity market expert Peter Strandbergin according to the so-called Hydrological balance at the beginning of April in the Nordic countries was about 24 terawatt hours below the long-term average. The number can be related to the fact that Finland’s electricity consumption was 85 terawatt hours last year.

There is no threat of an electricity shortage, but the tight water situation means that the flexibility of the electricity system is reduced. As a result, wholesale electricity prices may rise and fluctuate more sensitively if more expensive production than hydropower has to be started to cover the demand for electricity. Usually in the spring, the price of electricity goes down, when the meltwater guarantees an abundant amount of hydropower.

Rains can be hoped for in April to improve the water situation. This would be desirable also because in April the annual maintenance will stop electricity production in the first and second reactors of the Olkiluoto nuclear power plant. The situation is made easier by the fact that, thanks to the early spring, the heating season is starting to end and there should be plenty of wind electricity available.

If there is no water during the spring, according to Strandberg, as autumn and winter approach, the effect can be seen not only in the spot prices of the electricity exchange, but also in the pricing of derivatives markets. This means upward pressure on the prices of fixed-price and fixed-term electricity contracts if the amount of hydropower available during the winter looks uncertain. The already uncertain situation in Iran brings pressure on the pricing of the derivatives market.

The need for weather-independent control power has been brought up in connection with wind power. This spring’s situation reminds us that hydropower is also weather-dependent electricity production, and climate change makes weather phenomena even more unpredictable. Possibilities to start new flexible production have also been explored in Finland, but the matter has progressed slowly.