Blog post

Is the Nordic region the new hotspot for renewables?

Energy Blog, 12 November 2020

Despite its long winters and temperatures which can go as low as -50°C, is the Nordic region (Finland, Norway and Sweden) poised to become the new hotspot for renewables investors?

Current state of renewables in the Nordics

With a combined installed generation capacity of 93 GW and a total electricity production of 370 TWh in 2018, the Nordic region is the 3rd largest European electricity market after Germany and France. The generation mix in the region is already heavily dominated by renewables. In Norway, 95% of the electricity production comes from hydropower plants with onshore wind accounting for the remaining 5%. Although the share of renewables in Sweden is at a lower 65%, including nuclear generation means that 99% of electricity is carbon-free in Sweden. Finland is the only country in the region where fossil fuels still represent a significant share of the generation mix (30%) although renewables still dominate (40%). Nuclear also plays a significant role in Finland (30%) with 1.6 GW of additional capacity to be commissioned in 2021.

Despite these high levels of clean energy penetration, growth in renewables is still forecasted to be strong in the Nordic region in the coming decades. Onshore wind in Norway is expected to grow by 10 GW by 2050 to meet increased demand for electricity while hydropower capacity is expected to remain flat. In Sweden, increase in demand and the gradual phasing out of nuclear power plants means that close to 30 GW of renewables capacity, mostly onshore wind, will have to be added to the grid by 2050. The factors driving renewables growth in Sweden will be at play in Finland too with close to 20 GW of renewables capacity to be added by 2050, again mostly onshore wind.

All these renewables capacity additions will require investments in excess of EUR 50 billion, making the region a clear target for renewables investors. However strong growth in renewables, also forecasted in other parts of Europe, is not the primary reason why the region has become so attractive to investors in recent years.

Leading the transition away from government-sponsored fixed-price revenue schemes

What makes the Nordic region really stand apart from most other European renewables markets is its remuneration structure. Whilst renewable projects in most other markets sell all their electricity, at least during the first 10-20 years of operation, under various types of government-sponsored fixed-price revenue schemes (mainly FiTs or CfDs), such fixed-price revenue schemes don’t exist in the Nordic region. Instead, a large portion of a project’s revenue stream comes from the sale of electricity on the spot market leading to projects, and therefore investors, being heavily exposed to the risk of fluctuations in merchant power prices, although projects do benefit from limited non-merchant revenues too.

Sweden has been operating a market for green electricity certificates, known as Elcerts, since 2003. In 2012, Norway joined this market thus creating a joint market for Elcerts across Norway and Sweden. Under this regime, the projects receive a top-up payment on top of merchant revenues which is driven by the balance of supply and demand in Elcerts. The increase in supply in recent years (addition of renewables projects) while demand stagnated (the government did not significantly increase renewable energy targets) led to a collapse in Elcert prices. While Elcert prices were averaging 15-20 EUR/MWh until recently, prices are currently around 5 EUR/MWh and are expected to further decrease to 1-2 EUR/MWh in the coming years with no rebound expected in the long-term.

Finland, on the other hand, operates a form of floor-price revenue scheme. However, the level of non-merchant revenue granted in the latest auctions is very low with a top-up premium capped on average at 2.5 EUR/MWh and premium payments decreasing when electricity prices go above 30 EUR/MWh.

Paradoxically, this significant exposure to merchant power prices for renewables projects is one of the main drivers behind the recent surge in investors’ interest in the Nordic region. With fierce competition in other European renewables markets exercising downward pressure on returns, renewables investors seeking to achieve their target returns have few options.

They can invest in riskier technologies such as offshore wind or floating wind. However, both technologies entail large investments which many investors are not willing to or able to allocate to a single project and require industrial expertise, either in-house or through a partnership. Furthermore, while the return premium on offshore wind has eroded in recent years as the technology matured, floating wind is not mature enough for many investors.

Another simpler option to increase return is to take more exposure to merchant revenues while sticking to more established technologies such as onshore wind and solar PV. Indeed, the steady decrease in the level of revenue available under government-sponsored fixed-price revenue schemes across Europe over the past decade has led to merchant revenues outperforming regulated revenues in most markets today. Furthermore, the inherent volatility in power prices means that investors, for an equivalent level of revenue, can demand higher returns when investing in projects with merchant exposure compared to projects selling their electricity under fixed-price revenue schemes.

The Nordic region, with its strong onshore wind pipeline and its quasi-merchant revenue structure, is the perfect market for investors chasing higher returns and not willing to take more technology risk. However, as appealing as it may sounds, taking more exposure to merchant revenues can prove to be quite risky as power prices can be very volatile, even on a monthly basis, and forecasting long-term trends is notoriously difficult. Carefully evaluating and managing this risk is key to a successful investment in the region. In that regard, the ongoing Covid crisis is an unfortunate example of how dramatically electricity prices can be impacted by external events, with monthly average electricity prices having plummeted to as low as 1.5 EUR/MWh in certain price areas of Norway over the summer (although above-normal rainfalls last winter and therefore a surplus of hydropower energy available are also to be blamed for).

The emergence of a corporate PPA market to mitigate merchant risk

Investing in or lending to a fully-merchant renewables project in the Nordic region is highly risky and virtually no investors or lenders are willing to do so. Spot power prices are driven by many factors upon which project owners and financiers have no control.

Finland, Norway and Sweden all belong to the Nordpool electricity market which also includes Denmark and the Baltic countries. The Nordpool market is divided into 15 price zones. Although prices can temporarily vary from one zone to another depending on the balance of supply and demand in each zone and the amount of interconnection capacity available between different zones, prices across the region follow a similar pattern.

Due to the high penetration of hydropower in the generation mix, prices are heavily influenced by hydrologic conditions which can vary significantly from one year to another. Under average hydrologic conditions, Nordpool prices usually follow prices observed in neighbouring European markets, albeit with a typical discount of 10 EUR/MWh, where thermal power plants are the marginal electricity producers and are therefore primarily driven by coal and gas prices.

In response to the significant decrease, in recent years, in the level of non-merchant revenue available to projects in the Nordic region, project developers and investors have decided to turn to private entities to mitigate their exposure to merchant revenues. Most new projects being developed in the Nordic region now seek to secure stable revenues for at least a portion of their electricity production by entering into fixed-price power purchase agreements (PPAs) directly with large end-consumers.

These PPAs typically cover a large portion of the project’s electricity production (up to 80%) for a period of time ranging from 10 years to up to 30 years. Typical counterparties are large corporates with a local footprint and high electricity needs, such as internet giants (e.g. Amazon, Facebook, Google) or commodity producers (e.g. Norsk Hydro), looking to get long-term certainty on their electricity bills. Corporate PPAs are therefore beneficial to both projects and large corporate consumers.

Although corporate PPAs constitute an efficient tool for projects in the Nordic region to hedge their exposure to merchant revenues, the market for corporate PPAs is still a relatively new, albeit growing, phenomenon in Europe. Over the past decade, only 8.6 GW of renewables capacity was contracted under long-term corporate PPAs in Europe, the majority of which in the Nordic region. The main factor limiting the further growth of the European corporate PPA market is the scarcity of offtakers able to meet the stringent credit requirements imposed by lending institutions when assessing whether to grant loans to projects backed by corporate PPAs and whose money is necessary to fund such projects.

The scarcity of financially robust corporate offtakers in Europe also means that the European corporate PPA market is currently a buyer’s market where offtakers have the upper hand in the negotiations of the PPA terms, most notably with respect to the PPA price. This is reflected in the large discount, compared to market prices, that offtakers usually manage to secure. For instance, in Sweden, while market prices were on average slightly above 40 EUR/MWh in 2019 (prior to the Covid crisis), prices secured by offtakers under long-term corporate PPAs were in the high 20 EUR/MWh to low 30 EUR/MWh range. It remains to be seen whether in the long run the corporate PPA market will become deep and liquid enough such that it is no longer a buyer’s market.

The level of price discount that can be secured by offtakers under corporate PPAs should be a key point of focus for investors. Indeed, while corporate PPAs are traditionally seen as being beneficial to projects by enabling debt funding and limiting price volatility, they can also potentially destroy value if the price discount is too high. Investors should also keep in mind that they remain significantly exposed to merchant price risk even when a corporate PPA is in place as most of the stable cash flow generated by the corporate PPA is used to service the debt raised by the project.

Plenty of debt liquidity

Whilst European banks had often been reluctant, if not altogether refusing, to lend to projects exposed to merchant electricity prices in the past decade, mostly because of painful previous experiences in some European markets, it seems to no longer hold true as far as the Nordic region is concerned. To avoid missing out on a growing volume of opportunities, many European banks are now willing to lend to projects which have a significant portion of merchant revenues, provided however that the financing structure is not overly aggressive and that it can withstand a prolonged period of severely depressed electricity prices.

In practice, the debt market is not as standardised as in other European renewables markets still benefiting from long-standing regulated revenue schemes and there is a large variation in how aggressive each bank can be. Debt tenors can typically go as far as 6/7 years beyond the PPA tenor, provided that there are large cash sweeps being triggered close to the expiry of the PPA to reduce the effective exposure of lenders to merchant revenues. Pricing depends on the level of exposure to merchant risk and is typically around 150 bps for onshore wind (excluding the impact of the Covid crisis). There is sufficient appetite in the market to finance medium-sized projects (100-200 MW) with a club of only 1/2 banks.

Alongside traditional banks, debt funds have emerged as a new class of lender keen to take more exposure to merchant risk in exchange for more attractive remuneration. Although only a handful of transactions have materialised, such debt funds can consider fully-merchant structures and can offer long tenors, beyond 20 years in some cases. The growing appetite from such debt funds, if confirmed, could prompt some investors reluctant to leave value on the table by entering into a corporate PPA, or simply unable to source a bankable corporate PPA, to choose the fully-merchant route instead.


With its promise of higher returns and the emergence of a strong, albeit still limited, corporate PPA market, the Nordic region has undoubtedly seen a surge in interest from investors in recent years. Financial investors in particular, such as infrastructure funds or insurance companies, are very active in the region, buying single assets or building up development platforms. The level of M&A activity is high and is expected to remain so in the near future, even despite the current Covid crisis.

How long will the Nordic region remain the favourite playground for return-hungry financial investors in Europe is still to be seen. Could another European market, such as the Spanish market with its higher temperatures, longer annual sunshine hours and similar transition to a merchant remuneration structure for renewables projects, soon replace the Nordic region in this role? It doesn’t seem to be the case just yet, but appetite is indeed growing rapidly in this market too as recently described in a separate blogpost.