Key Takeaways
Norway is blessed with abundant cheap hydropower, which accounts for almost 90% of its electricity generation.
Recently, its electricity price has spiked as agreements with its European neighbors require it to absorb higher costs when wind generation fails for countries with whom it has export agreements.
Norwegians found themselves paying 20 times higher rates one week than the week before.
Norway wants out of these agreements, supplying power to its neighbors only after its own citizens’ needs are met.
Many European nations are beginning to experience volatility in power prices tied to increasing amounts of intermittent wind and solar, spurred by subsidies and other government policies, and their hidden costs of backup power and transmission.
President-elect Trump is opposed to such policies, which had been embraced by his predecessor.
Electricity prices in Norway recently surged to $1.18 per kilowatt-hour, marking the highest level in 15 years and an increase of 20 times compared to the previous week. Historically, Norway has enjoyed relatively low electricity prices, thanks to its extensive hydroelectric power generation, which accounts for nearly 90% of the country’s energy supply. However, this sharp rise in prices is largely due to a shortfall in wind energy from Germany and the North Sea. In response, Norway’s government covers 90% of the additional costs above a certain threshold, in line with agreements made with neighboring European nations. As a result, the government plans to cut its electricity interconnection with Denmark when the current agreement expires in 2026 and suspend exports to Germany and the UK. Critics argue that Norway should prioritize domestic affordability by ensuring lower prices for its citizens before exporting electricity, as was the practice for decades.
Norway has become a crucial energy supplier to the EU, not only for electricity but also for oil and natural gas, after Russia’s invasion of Ukraine disrupted Europe’s energy supply. EU countries are keen on a unified electricity market, claiming that Norway also benefits from this arrangement when it imports electricity through interconnectors with other European nations.
A similar situation is unfolding in Sweden, where electricity prices in the southern city of Gothenburg were recently 190 times higher than in the northern city of Luleå. Both Sweden and Norway suffer from inadequate internal electricity transmission infrastructure, which results in higher prices in the south—where demand is concentrated—compared to the north, where much of the power is generated.
Europe’s shift towards renewable energy sources like solar and wind has faced significant challenges. These intermittent power sources require backup generation to maintain stability. For instance, despite Germany having 82 gigawatts of solar capacity and almost 70 gigawatts of wind power, fossil fuels still account for around 80% of the country’s energy mix in 2023, the same share as in 2010, according to Danish energy analyst Bjorn Lomborg. This has come at a significant cost to both German consumers and industries.
In addition to the challenges posed by the intermittent nature of solar and wind power, which require costly backup generation and are driving up consumer prices, European policies are also adding to the cost of generating electricity from these sources. In the UK, for example, the government paid £1.3 billion ($1.64 billion) this year to compensate wind turbine operators for curtailment, a result of inadequate grid capacity. To address this, it’s estimated that the UK would need to invest £40 billion ($50.6 billion) annually in expanding its grid infrastructure. These costs are ultimately passed on to British consumers, who are facing higher energy bills due to both the curtailment payments and the country’s reliance on costly electricity imports during periods of low wind.
The situation is set to worsen as the UK government recently approved new interconnectors with Europe to secure electricity supplies during windless periods. As a result, electricity prices in the UK are expected to rise even further. British industrial consumers are already paying four times more for electricity than their counterparts in the United States, even when factoring in the rising costs associated with climate policies under the Biden Administration.
Even Europe’s Big Oil companies are getting out of their energy transition plans involving these intermittent sources. Shell and BP are both exiting wind power: Shell has sold its U.S. onshore wind business and BP has spun it into a joint venture with Japan’s JERA. As governments stopped subsidizing or reducing the subsidies for wind energy, the Big Oil industry no longer sees it as economic. Warren Buffet told us that years ago. He said, “For example, on wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.” It is likely only a matter of time before Big Oil will find solar no longer a good investment.
In addition to sourcing electricity from Norway, countries in northwest Europe are increasingly turning to wood as a fuel source for power generation. Policymakers have classified wood pellets and other forms of wood fuel as renewable energy with low net emissions—provided they meet the criteria for sustainable forest management. This classification has been welcomed by European utilities, as wood fuel offers a more reliable energy source compared to intermittent solar and wind power, allowing it to be dispatched consistently by system operators around the clock.
However, in 2023, the European Union revised its Renewable Energy Directive, calling for a clearer and more detailed definition of what constitutes sustainable forest management. The aim is to ensure that the use of wood fuels contributes to a reduction in net emissions, addressing concerns about the environmental impact of large-scale biomass burning.
Global output of wood pellets has more than doubled to 47 million metric tons in 2023 from 21 million metric tons in 2013. Europe and Northern America accounted for most of the global production (51% and 28%, respectively) and Europe accounted for 70% of global wood pellet consumption in 2023. In that year, the United Kingdom imported 6 million metric tons of wood pellets, Denmark imported 3 million metric tons, the Netherlands and Italy each imported 2 million metric tons, and France and Belgium each imported 1 million metric tons. The situation has almost become comical: the largest generation plant in the U.K. (Drax) now runs entirely on wood pellets (having been converted from coal)—the majority of which are sourced from forests in the United States and then shipped across the Atlantic as a gesture to “save the climate.”
Conclusion
Norway’s electricity prices have spiked due to interconnectors it shares to get power to mainland Europe, where wind energy has slumped. Despite its abundant and inexpensive hydroelectric power, Norway’s energy prices have increased domestically when European countries draw on that energy. Norway may have to revert to an old policy and allow those power exports only when its power demand is satisfied to the dissatisfaction of its European neighbors.
Europeans are finding that when subsidies are removed or cut, it is no longer economical to build wind and solar facilities. Mainland Europe’s foray into intermittent wind and solar power has not proved fruitful and added huge costs to consumer bills. Therefore, some countries have turned to a traditional source of energy in wood, importing wood pellets from North America, which European policymakers allow as renewable fuel with low net emissions.
While the United States has 148 gigawatts of wind power and 138 gigawatts of solar power, it still generates about 60% of its power from coal and natural gas and almost another 20% from nuclear—all of which are dispatchable by the system operator 24/7. President-Elect Trump has indicated that he would like to do away with many of the tax credits in the Democrat-passed Inflation Reduction Act, which, if it does happen, will result in curtailment of many renewable energy projects.
