From the electricity turmoil of 2022 to negative prices: Is it time to redefine the 'normal state' of the electricity market, and what will the future electricity prices look like?
2022 was the year that allowed electricity to govern our thoughts. From carefree warm showers and machines idling away, to quick showers and meticulous energy-saving plans. Two years later, electricity prices may not have reached the high levels of 2022, but we face continued volatility, increased demand, and weather-dependent energy sources, which will impact prices significantly. Forecasts do not indicate that prices will reach the same levels as in previous years, but is it reasonable to expect electricity prices to stabilize and return to the so-called 'normal state,' or is it time to abandon the idea of an outdated normal? Let's examine what influences price levels, volatility, and how we can become smarter in the face of a sustainable energy landscape.
What influences electricity prices?
The role of transmission capacity
Since 2011, Sweden has been divided into four electricity regions with limited transmission capacity between them. Traditionally, northern Sweden has supplied southern Sweden with hydroelectric power, while southern Sweden has provided nuclear power. However, the phase-out of nuclear power has altered the dynamics. With more electricity generated in the north and higher demand in the south, a transmission challenge arises. When the capacity cannot meet the needs of the south, electricity prices increase there, creating price differences between the north and the south.
International price impact
Sweden trades electricity on the international market through the Nord Pool Group. The price is influenced by international conditions, as vividly demonstrated by Russia's invasion of Ukraine. Reduced gas supply to Europe affected prices globally. Even though Sweden uses very little fossil gas, prices rose due to higher European prices. However, limited transmission capacity gives southern Sweden the opportunity to avoid European prices if they produce more electricity than the transmission allows.
Weather Conditions as Price Directors
The big change is the introduction of more weather-dependent power into the system. About 40 percent of Europe's electricity now comes from renewable sources. Weather conditions not only affect electricity consumption but also electricity production. Wind power output correlates strongly with winter weather, while solar and hydropower have their own seasonal variations. Hydropower, the largest electricity producer in Sweden, is stable on a daily basis but is affected by hydrological conditions. Renewable sources are a win for the environment and absolutely nothing that should back down, but in order to get enough produced electricity, we need to strengthen and expand weather-dependent power and power grids.
Volatile Electricity Prices
Prices will continue to be volatile. This means adapting to a future where electricity prices can swing independently of demand and where our energy production is more dependent on the weather. The future of electricity prices is uncertain, but there are indications of higher prices. Increased electricity consumption due to transitions and electrification brings challenges to the capacity of electricity production, and we simply have to accept that the 'normal situation' has changed. Previously, electricity production could be planned in a completely different way. Today, weather and wind dictate how much electricity we can access. This requires flexibility in our electricity consumption and, regardless of price, saving and optimizing as much as possible. By taking control of their energy consumption and implementing energy-saving measures, industries and businesses can reduce their vulnerabilities to price fluctuations and potential power shortages. It's time to abandon the 'we'll deal with it later' mentality and start acting for an unpredictable future. Energy efficiency is the cheapest and most effective tool to dodge soaring electricity prices when they do come. Contact us and let's save energy and money in your business!