The Nordic nations have long enjoyed powerful advantages from its natural resources, traditions of stability and highly skilled workforces. Now, as the energy transition gathers pace, the region increasingly finds itself at the heart of Europe’s push to net zero.
The Nordic countries – usually defined as Norway, Sweden, Denmark, Finland and Iceland – have already largely succeeded in decarbonising their electricity systems. Besides Denmark, all generate a large share of their electricity from hydropower; geothermal plays a key role in Iceland; nuclear is significant in Sweden and Finland; while Denmark is a world leader in wind power.
There are still opportunities for infrastructure funds to invest in power generation. Richard Gavel, portfolio manager for the Nordic Green Energy Fund managed by Sweden’s SEB Group, notes that electricity demand is expected to double in the next 20 years, as transport electrifies and new industries are established.
“Higher electricity usage combined with [the] green transition calls for large investments in renewable energy,” he says, noting there are many opportunities to acquire and upgrade existing power facilities in the region.
The power-to-X factor
With a total population of less than 30 million, the Nordic countries have the potential to produce considerably more megawatts of green electricity than can be consumed locally. This means the region has an important part to play in the decarbonisation of the entire European continent.
These nations already supply green electricity to other European countries via grid interconnectors. Norway, for example, is linked to Great Britain, the Netherlands and Germany via subsea transmission lines.
But not everyone is convinced that this is the best way for the Nordics to contribute to Europe’s net-zero efforts.
“There is a discussion as to what degree excess energy is going to be moved in the form of electrons or in the form of molecules,” says Igor Lukin, senior portfolio manager for infrastructure at Allianz Capital Partners. “We see a lot of advantages to using molecules, because it’s more cost-competitive.”
Lukin says the Nordic region “is very much at the top of the list” of destinations for ‘power-to-X’ projects. These involve using renewable energy to produce a commodity such as hydrogen, ammonia, chemicals or fuels, that can be labelled as ‘green’.
Allianz Capital Partners announced in July a €20 million investment in Fuella, a Norwegian developer of green ammonia and green hydrogen projects. This marks the asset manager’s second major investment in the Nordic region within the last year, after it invested €25 million in Nordic Ren-Gas, a Finnish green hydrogen and power-to-gas producer, last December.
The fact that green electricity is available and priced competitively in the Nordics – especially in the far north of the region – is a key advantage for power-to-X projects. Lukin notes that electricity costs constitute 60-70 percent of the cost of producing the final commodity.
As such, the Nordic countries boast a growing list of major industrial projects. One of Europe’s largest battery gigafactories is being constructed by Northvolt in northern Sweden. Another Swedish company began production at Europe’s first commercial ‘green steel’ mill earlier this year. Data centres are also increasingly attracted to the cool climate and green electricity available throughout the region.
Lukin points out that power-to-X projects are potentially more likely to win public support. “It’s fair to have a societal debate about what exactly is being exported,” he says. “If you’re going to use green electricity to produce some kind of a green commodity, then the value stays within the community and it’s much easier to convince everyone that that’s the way to export.”
In fact, the ramping-up of renewables in Northern Europe has not been without challenges. A study commissioned by the Norwegian government in 2022 found that interconnectors had actually raised power prices, while pressure to supply electricity to overseas consumers had exacerbated a lowering of water levels in the country’s reservoirs.
Harri Halonen, partner at Nordic-focused asset manager CapMan, says there can be opposition to wind projects even in sparsely populated areas. “Stakeholders in those areas are getting better organised and are making permitting processes significantly more challenging.”
Elin Löfblad, another portfolio manager in SEB’s Nordic Green Energy Fund, notes that “the energy production market is slow moving on a national and regional level”, partly reflecting public opposition to new projects.
A further challenge, she adds, is that local municipalities – which have historically owned energy and other infrastructure assets across the Nordic region – are “cautious” about selling assets, particularly to certain types of buyers.
Opportunities for consolidation
Halonen agrees that the tradition of municipal ownership has posed difficulties for investors seeking to enter the energy market, but he is optimistic that more opportunities are emerging for infrastructure funds.
“One thing that we’ve seen very concretely is that it’s becoming acceptable for private investors to own infrastructure assets,” he says. “Particularly in Finland, we’ve seen that municipalities are willing to sell. They are obviously also under budgetary pressures from their side, but they’re willing to sell infrastructure assets to professional investors.”
He predicts that greater private investment will result in benefits for the energy market as a whole. “There will need to be consolidation of the market to some extent to drive a little bit more efficiency both for operators and owners, but also the customers. It doesn’t necessarily make sense that even the smallest municipalities have their own district heating networks.”
The wide range of opportunities to generate – and use – green energy in the Nordic region is increasingly attracting the attention of both managers and investors. “The demand for Nordic-focused strategies continues to surge, not only among European LPs but also among North American and Asian investors,” says Jasmin Kotivuori, investor relations manager at Infranode, a Stockholm-headquartered manager. “The overall sentiment towards the Nordics from LPs is exceedingly positive.”