Norway shelves GO exit, yet fails to stimulate terawatts of demand (Updated)

Policy context

The Norwegian industry has been historically opposed to the GO system, arguing that by switching to a common European market-based method, they would incur additional costs and lose their location based competitive advantages (Norway has more than 95% share of renewable in its domestic electricity production). In 2019, a proposal by the Labour Party (Arbeiderpartiet) to withdraw from the GO system was rejected by the Norwegian parliament. The idea later re-emerged in October 2021 when the centre-left government announced plans to pull Norway out of the GO system.

However, the government turned the corner this year, planning to introduce changes to the GO system by Q3 2025 instead of leaving it, with a language that implies that they want to tie GOs closer to the physical realities of electricity flow.

This came on the back of GO price hikes in 2022 when Nordic Hydro GOs hit record highs of EUR 10/MWh. The Norwegian government then realised that “this market has grown much more than we could have predicted”. Financial considerations was one of the main reasons Veyt cited for making the EECS exit unlikely, as GOs are one of the income sources for the Norwegian state, municipalities and other power producers. In addition, according to a 2019 study, given a GO price range between 0.6 EUR/MWh and 2 EUR/MWh, the Norwegian state received anywhere from NOK 160 to 530 million (or 17 to 55 MEUR) in tax revenue for the sale of GOs in 2018.

With prices rising over the past couple of years, GOs bring even more income to the state budget, although figures pale in comparison with revenues from petroleum activities. Veyt estimates that the Norwegian state could have received between NOK 1,122 million and NOK 3,221 million (equivalent to 98 to 282 MEUR) for 2023, depending on the lowest and highest GO prices.

Second, a Norwegian GO exit would also present legal hurdles since the country is part of the European Economic Area (EEA).

Earlier, Veyt modelling showed that the Norwegian GO-exit or possible export restrictions imposed by the AIB (akin to the Icelandic export ban) in 2025 could trigger almost two-fold price increases within the EECS market, up to 4.57 – 4.68 EUR/MWh, depending on the electrification assumptions (reach out to contact@veyt.com to learn more). This would see supplies to the GO market reduced by 140 TWh annually, accelerating the onset of supply shortages under both scenarios.

While the Norwegian industry has shown a reluctance to unbundled GOs, last year saw a long-term Power Purchase Agreement (PPA) announcement between Statkraft and Hydro, which included GOs. This indicates that there is a greater acceptance domestically for a system with requirements of greater linkages with the physical power market, which might influence the development of the system in 2025.

Norwegian GO market lacks regulatory support leading to double claiming

However, the Norwegian GO market is still exposed to the double claiming problem, with the risk persisting amid the Norwegian Environmental Authority’s (NEA) decision to upkeep the location-based method to qualify for EU ETS compensation. Under this state aid scheme, companies are qualified to receive state aid for the costs incurred in the carbon market if at least 30% of their electricity consumption comes from renewable sources. As the Norwegian government continues with the location-based method, while the Member States embrace the market-based approach, Veyt reiterates its risk assessment of double claiming in Norway. Already, some market players avoid procuring RES-E GOs from Norway for this reason.

A recent report published by the Norwegian Environment Agency (Mijodirektoratet) reveals that for 2023, the Norwegian government paid out NOK 6.1 billion in 2024 (around EUR 520 million) in compensation for electricity surcharges stemming from the fact that fossil-based utilities in Denmark, Germany, and other countries are subject to the European Union Emission Trading System (EU ETS). While Norway’s electricity generation is 95% renewable (mainly hydro), the fact that the relatively small grid is connected to the big continental power market means Norway is a price taker.

Some 55 energy-intensive installations (aluminium, iron and steel, chemicals, paper, etc.) received compensation for 2023 electricity costs. The total amount, NOK 6.1 billion, is partly financed by the Norwegian government’s revenues from auctioning its share of European Union Emission Allowances (EUAs), the units issued under the EU ETS. That said, the handout was equivalent to 203% of Norway’s auction income in 2023, with the rest sourced from the general budget.

The EU ETS Directive earmarks member states’ EUA auction revenues to be used for climate-related purposes. Electricity cost compensation to industry is listed as an eligible purpose, but many countries decide to spend their revenues differently. Governments spending more than 25% on indirect cost compensation must report to the European Commission to explain why and specify the electricity costs that are being compensated. On average, EU countries paid out 10% of EU ETS auction revenues to industry in 2022.

The list of Norway’s beneficiaries from the electricity compensation scheme and their electricity demand through 2021-2024 are presented in the table below. Electricity consumption fell from 37.1 TWh in 2022 to 34.4 TWh in 2023, most likely due to higher electricity prices during this period and general economic conditions. For the first half of 2024, data from the Norwegian Statistics Central Bureau shows a 1% increase in electricity consumption of energy-intensive industries year-to-year, in line with the IEA data. The IEA forecasts further industry demand recovery to 1.7% in H2 2024. Veyt estimates therefore put the electricity consumption of Norwegian state-aid beneficiaries at 36.9 TWh in 2024, with most of the demand coming from the aluminium sector.

The Norwegian government estimates to spend anywhere from NOK 76 to 116 billion (around EUR 6.5 – 9.8 billion) over the period of 2021-2030, depending on the EU ETS prices, with annual compensation averaging NOK 8.7 billion (approximately EUR 740 million) between 2024 – 2030 (see graph below).

Market impact

The recent statement by the energy minister Terje Aasland might provide some assurance to market participants who have been reluctant to buy Norwegian GOs. However, the use of a location-based method for CO2 compensation is problematic for double counting in Veyt’s view. It does come with risks.

Norway employs the CO2 compensation tool the most in Europe (while other countries, such as Italy, cannot afford it). Over the past five years, the Norwegian industry has received twice in CO2 compensation than it has paid in CO2 allowances.

By relying on location-based reporting, as much as 11 TWh worth of RES-E demand may be falling out of the Norwegian domestic GO market in 2024. For comparison, Norway’s own-domain RES-E GO demand for the 2023 disclosure period stood at 36.7 TWh according to the AIB statistics, increasing 53% year-to-year. This effectively removes additional GO demand from the market, artificially suppressing GO price levels through regulatory means.

It is worth noting that companies could opt for other state aid rules qualifiers such as investing at least 50% of the aid amount in GHG emissions reduction projects or implementing recommendations of the energy audit report. In the Norwegian case, it is highly likely that companies opt for the third criterion – to ensure that 30% of their electricity use comes from renewable energy sources – as this does not require any active interventions on their part.

Per Veyt’s earlier analysis, Norway’s application of state-aid rules could signal a bearish outlook for Norwegian GOs and bullish for EECS GOs to the extent that the market is risk-averse. As mentioned earlier in the article, some market players have already adapted their procurement strategies to avoid the Norwegian market, however, this trend is likely to be relatively small-scale.

Nonetheless, the Norwegian GO market could see rising domestic demand amid transposition of the Corporate Sustainability Reporting Directive. Although market-based reporting is embraced, the option to use residual mix is cited as a first recourse according to Norwegian Water Resources and Energy Directorate (NVE) for reporting energy consumption and mix as well as total GHG emissions. Ultimately, the effect on the GO market could vary by sector and depend on the market players' adaptation response to the new reporting standards and concerns with making RES-E consumption claims in the short to middle term.

Implementation of RED II on national level in Norway has the potential to improve RES-E GO demand through the requirement to have PPA-bundled GOs and unbundled GOs for retailed contracts. This would see the GO system further entrenched and might improve liquidity for RES-E GOs in the domestic market. At the time of writing, Norway has not transposed the directive despite the deadline imposed by the Commission (13 August 2024). Veyt closely follows these developments and will report on them as more information becomes available.