Norway acts to restrict electricity exports and protect security of supply

Norway acts to restrict electricity exports and protect security of supply
Source: Watt-Logic

Last year I warned repeatedly that Norway can not be expected to sit passively by while other countries drain its reservoirs and that it may well take steps to restrict exports. I drew attention to comments by Norwegian Prime Minister Jonas Gahr Støre, and Energy and Petroleum Minister Terje Aasland and the fact that prices in Norway had soared since the opening of large interconnectors with Britain and Germany in 2021 with the Government having to subsidise end users to up to 90% of their bills. At the same time, a dry year until the autumn saw reservoir levels fall to 20-year lows. Studies commissioned by the Government pointed at the interconnectors as both reducing Norway’s security of supply and driving up prices.

“We must have control that we have enough power in Norway. The bottom line for this is our own security of supply. We must be sure that we always have enough water in our reservoirs. There must always be electricity in the socket and we must have enough power for our industry”
– Jonas Gahr Støre, Prime Minister of Norway

For months the Norwegian government signalled that it was inclined to act. Last week it announced measures that could indeed see market interventions that would restrict electricity exports in order to protect security of supply in Norway. Legislation will be brought before the Storting that will require producers of hydropower to contribute to security of supply, with new obligations at times of low reservoir levels or “where there is a prospect that reservoir filling may reach low levels”. In its press release, the Government explicitly references the prospect of restricting exports. The measures should be in place before next winter.

Details of Norway’s hydro protection measures have been announced

The mechanism consists of the following measures:

  • Creating a legal duty for hydropower producers to contribute to the security of electricity supplies
  • Formalising the reporting scheme for hydropower producers from summer 2022
  • A requirement that hydropower producers develop strategies to ensure security of supply, allowing access to the energy authorities for the control and supervision of these plans, including the imposition of sanctions where necessary
  • Powers for the energy authorities to intervene in reservoir allocation, in situations where there is a real danger of energy shortages
  • Clarification that restrictions can be imposed on foreign connections in situations where there is a real risk of energy shortages

“The review of the power situation 2021-2022 concluded that the Norwegian power system is now more vulnerable than before to unexpected events. With the change in the law we are now starting, we emphasize the producers’ responsibility to contribute to the security of supply. It is a tool to better secure the very cornerstone of the Norwegian power supply – our adjustable hydropower.

The situation we now see in the energy markets in Europe can extend over a long period of time. The energy authorities will therefore assess the power situation on an ongoing basis, and use the various steps in the mechanism when the need so requires,”
–  Terje Aasland, Minister of Petroleum and Energy

The control mechanism will take an incremental approach, where stronger measures can be adopted if threats to security of supply escalate. The mechanism is explicity intended to ensure the security of Norway’s electricity supplies, and not to reduce power prices.

Norwegian energy authorities already have the right to intervene in hydro production in situations of rationing, however this new mechanism would allow for earlier intervention by the authorities. However, interventions would be strictly limited, and only apply in situations where there is a real danger of a shortage of energy and, it is clear that the producer’s own risk assessment deviates from that of the authorities.

Work on formalising the scheme will begin immediately. Norway’s Directorate of Water Resources and Energy has been commissioned to start the regulatory work, while the Ministry of Petroleum and Energy will start the legislative work. The scheme must operate alongside existing measures for highly strained power situations (SAKS).

While export restrictions are normally prohibited under EU law (and Norway has some responsibility to follow these laws as an EU trading partner) trade rules do tend to allow for temporary restrictions in times of shortages (but not motivated by controlling prices).

“There has been uncertainty about whether and when export restrictions can be used. Here, however, there is room for manoeuvre within EEA law which we wish to use. I would therefore like to make it clear that, for reasons of security of supply, restrictions can be set on foreign connections if there is a risk of energy shortages, also before we get into a rationing situation for Norwegian households and businesses,”
–  Terje Aasland, Minister of Petroleum and Energy

The question is whether an EU that is heavily dependent on Norwegian gas is going to get into a fight over access to Norway’s electricity resources while at the same time allowing countries such as Germany to voluntarily close perfectly good nuclear power stations. Norway has boosted gas production in order to support the EU’s quest for non-Russian gas – it could easily pull back to previous norms without violating any agreements.

Norway’s neighbours have reacted with concern

Norway is part of the European common market via the European Free Trade Association (“EFTA”), which also includes Iceland and Liechtenstein. The EFTA Surveillance Authority (“ESA”), which monitors the group’s compliance with common market rules, has expressed “concern” at these proposals, and indicated it intends to enter into discussions with the Norwegian Government.

“Any measures that may lead to restrictions on the power market in the European Economic Area are of concern,”
– ESA spokesperson

Others have also reacted with alarm at the proposals. Johannes Bruun, a director at Danish network operator Energinet, has been quoted in the press saying “the whole narrative in Norway is wrong”. But the Norwegian Government appears to be determined, noting that Norway’s electricity system is unique in Europe, depending on a resource which can run out and not be replenished until the weather allows.

In Britain, there is a strong rejection of the idea that it may be dangerous to reply on imported electricity. Fintan Slye, Chief Executive of National Grid ESO recently told me that he saw no prospect of Norway ever restricting exports to Britain, while Cordi O’Hara, president of National Grid Ventures which co-owns the interconnectors says there is “a clear recognition that our interconnectors to Europe are mutually beneficial.”  I suggest that both pay much closer attention to what Prime Minister Støre and his Energy and Petroleum Minister have been saying over the past year: Norway has had enough!

Time to re-think the approach to interconnection

It is clear that TSOs love interconnectors. They allow them to defer investment in domestic generation and transmission capacity, having the benefits of those assets when needed without the downsides of having to pay for them (or get their domestic consumers to pay for them). They often also participate in the economics of co-owning those interconnectors, presenting a clear conflict of interest (in Britain, the separation of the TSO from the ownership of transmission assets helps to mitigate this risk, but no such separation exists in other European countries).

But there are two risks that have been ignored so far – what if a connected country cannot supply electricity when needed, and what if it decides it doesn’t want to? Somewhat bizarrely, despite assuring me that Norway would never restrict electricity exports, in the same conversation, Fintan Slye told me he was worried the EU may refuse to export gas to Britain when needed, threatening our ability to generate electricity from gas. Indeed the official reasoning behind both the coal contingency and Demand Flexibility Service was the concern over access to gas supplies.

Countries may not be able to export if they lack surplus electricity. In France, prolonged nuclear outages have turned the country from a habitual exporter to an importer, while Norway has had very public concerns over reservoir levels in the southern NO2 region for most of the past year. The other risk is that with many European following a wind-led energy transition, at times of low wind speeds, many countries may require imports at the same time, exceeding the capacity of exporting countries to fill the gap.

It seems unlikely that we can continue on the current track of automatic cross-border flows based on short-term price differentials while countries make decisions about generation and transmission capacity at the national level. This is leading to situations where citizens in one country are subsidising the choices of governments elsewhere, which is unfair and likely to be unsustainable.

If NG ESO worries that the EU might restrict gas exports why is it not at least similarly worried about Norwegian electricity exports? Everyone wants to have their cake and eat it, but what if the bakers decide not to play any more? Better to make sure the market works for everyone than to pretend there are no problems, but it does not appear that many people are willing to take Norway’s concerns seriously despite the fact that it is literally bringing forward legilsation to restrict exports in order to protect domestic supplies. Ignoring this is something we may come to regret.

Source: Watt-Logic

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