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16.10 2014

Energy market overview, September 2014

Mathias Vaarmann

Market Analyst

In September, electricity exchange prices in the Baltics increased due to failures in the EstLink submarine cables

In the present overview, we shall have a closer look at how the failures in the EstLink cable affected the exchange prices on the Estonian, Latvian and Lithuanian electricity markets. In relation to this, we shall explain how to ensure the electricity costs of your company against such fluctuations in exchange prices by fixing the price of electricity. We shall also discuss in further detail the price increase of natural gas that continued in September as well, and the potential plan of the European Union to import natural gas from Iran as opposed to Russia.

In addition to the simultaneous failures in Estlink-1 and EstLink-2, the transmission cables Fenno-Skan-1 and -2 between Sweden and Finland also underwent maintenance, which is why the price of electricity fluctuated in Finland, Estonia, Latvia and Lithuania in September. Thereby, the exchange prices in Latvia and Lithuania turned out to be at their highest level in the past 11 months. Also, demand for electricity increased due to the lower temperatures in September. Light precipitation in Northern Europe caused the hydroreservoirs to be filled only to critical levels, thereby increasing electricity prices in the region. The price of carbon credits dropped in September and the price of crude oil was lowered by continuously high production in risk areas and low demand for petroleum from Europe and China. Last month was extraordinary for the dollar rate as well, which climbed to the highest level in the past two years compared to the euro. At the same time, the Brent crude oil price dropped to its lowest level of the past 26 months.

In September, the Union of Electricity Industry of Estonia published a fresh study on the competitiveness of electricity consumption in Estonian industrial enterprises. In addition, it appeared that the Ministry of the Environment plans to fix the environmental fees for electricity generation in Estonia for 10 years instead of 5. The Eesti Energia Energy Forum was held on 11 September, which this year focused on energy security. The Supervisory Board of Eesti Energia elected Hando Sutter as the Chief Executive Officer of the company. In Lithuania, Rokas Maslius was appointed as the new Energy Minister. The Jordanian government signed contracts for establishing an oil-shale based power plant.

Read more about the topics below:

  • In September, electricity exchange prices in Estonia, Latvia and Lithuania increased due to failures in the EstLink cables »

    In September, the average exchange price of electricity in Estonia amounted to 42.97 euros for a megawatt-hour, which by today, month-on-month, has increased by a total of 9.9 per cent. Putting aside the price in July, which due to the planned maintenance work in EstLink-2 amounted to 44.17 euros, in September, the exchange price on the Estonian market was at its highest since October 2013.

    The formation of exchange prices in July and September was undoubtedly most affected by the work stoppage of the cables (EstLink-1 and -2) linking the Estonian electricity market to the Finnish market. In July, EstLink-2 was switched off during planned maintenance works and in September, the manager of the cables was forced to switch off both cables due to failures. On four consecutive days in September, both cables were unavailable for the market, which meant that the flow of cheaper electricity from Finland to Estonia was completely halted. On these days, the average exchange price of electricity in Estonia amounted to 64.75 euros for a megawatt-hour.

    Elering, the manager of the submarine cables, announced in September that a design flaw was discovered in EstLink-2. This means that the manager of the cable is obliged to develop changes in the design and implement these. As a result, EstLink-2 may in the future also be unavailable to the market in certain periods.

    In September, the electricity exchange prices in four regions – Finland, Estonia, Latvia and Lithuania – were also affected by regular maintenance of the cables Fenno-Skan-1 and -2 joining Sweden and Finland. On five of the nine days of the maintenance period, the two cables were completely switched off, which meant that 1,200 megawatts of transmission capacity was missing from the market. On the remaining four days, 800 megawatts of transmission capacity was ensured. The switching off of the two cables meant that the price in Finland increased to 47.08 euros, which, in turn, increased the price in Estonia and thereby in Latvia and Lithuania.

    According to Fingrid, the Finnish electricity transmission system operator, the northern neighbours are more and more dependent on the import of electricity. Due to the delay in the establishment of the Olkiluoto-3 nuclear plant and considerably lower import amounts from Russia, Finland is forced to import almost 3,000 megawatts of electricity to meet demand. The main part of this amount comes from Sweden. According to Fingrid, from January to August this year, Finland has imported 12.7 terawatt-hours of electricity from Sweden – 62% more than last year. In comparison, the annual consumption volume of Baltic States is about 25 TWh.

    The activity on the electricity market of the northern neighbours is important for Estonia mainly because the cheaper electricity transmitted to Estonia through the EstLink submarine cables comes directly from Finland (and thereby also from Sweden).

    The average exchange price of the Finnish market region in September amounted to 38.33 euros for a megawatt-hour, which is 5 cents less than in August. The last time the exchange price of electricity in Finland was higher than that was in January, when the average price was 40.23 euros.

    Also, the electricity price in the Nord Pool Spot countries was affected by the water levels in hydroreservoirs dropping to near the critical limit. More than half of the electricity produced in Northern Europe comes from hydroelectric power plants. In Norway, for example, 95 per cent of electricity comes from hydroelectric plants. Due to the long dry period, the hydrobalance – amount of water in hydroreservoirs, sub-surface and in the snow – was quickly dropping, which, in turn, increased the price of electricity.

    The average exchange price of electricity in Latvia and Lithuania in September amounted to 57.49 euros for a megawatt-hour. This is 3.9% more than in August (€55.31/MWh). The exchange price in Latvia and Lithuania is at its highest level of the present year; electricity prices in these two countries were higher than that in October of last year, when the average price of the month amounted to 64.18 euros for a megawatt-hour.

    Area Average
    €/MWh
    Change compared to
    previous month
    Minimum Maximum
    Nord Pool Estonia 42,97 9,9% 28,67 120,03
    Nord Pool Finland 38,33 -0,13% 28,67 93,05
    Nord Pool Latvia 57,49 3,94% 28,67 120,03
    Nord Pool Lithuania 57,49 3,94% 28,67 120,03
  • European Union planning gas imports from Iran to replace Russian gas »

    At the end of September, a source at the European Commission disclosed the plans of the European Union to start importing natural gas from Iran. At the moment, Russia is Europe’s largest supplier of natural gas, meeting about a third of Europe’s demand, for which about 80 billion dollars a year is paid. Over the past months, the relations between the western world and Russia have deteroriated due to the crisis in Ukraine and after the imposition of sanctions, the 28-member block has been paying increasingly more attention to achieving independence from Russia in energy-related matters.

    Iran is the second largest provider of natural gas in the world after Russia, so due to the warming of relations between the western world and Tehran, this islamic country has become a potential energy partner for Europe. However, any future partnership between Iran and the European Union is still in the planning stage and the sanctions imposed on Iran with regard to its nuclear programme must be eased to start gas supply, and infrastructures must be installed to gas pipes, which would allow greater import volumes.

    Currently, Iran exports natural gas to Turkey through the Tabriz-Ankara gas pipeline. Right now, the existing gas pipeline is the best option for exporting gas to Europe, however, the current capacity of the pipeline does not allow larger export volumes.

    At the end of September, the source at the European Commission declared that the European Union might plan gas imports from Central Asian countries as well.

  • Carbon credit price dropped in September »

    At the beginning of September, the market price of carbon credit was 6.42 euros per ton. During the month, the markets dropped and on the last trading day of the month, the right to emit one ton of greenhouse gas could be purchased for 5.84 euros. All in all, the price of carbon dioxide largely remained the same in the third quarter – at the end of June, carbon dioxide sold at 5.86 euros for a ton which means that, as a result of the quarter, the price of the greenhouse gas had dropped by 2 cents.

    The European Union is planning to reform the carbon market, which would create a so-called market stability reserve starting from 2021. The aim of the reserve would be to retain and then release carbon credits to balance the supply of credits to the market in the European carbon credit system. Germany wishes to establish a market stability reserve from 2017. The enforcement of market reform requires approval and voting by European legislators; in September, however, voting was put off until 2015, which, in turn, made the carbon markets drop.

  • About natural gas, crude oil and the dollar rate »

    Price of natural gas continued rising in September

    In September, the price of natural gas continued rising for Estonia and other European countries. Gas prices have been increased by the continuously strengthening rate of the US dollar towards the euro and balanced by the cheapening price of a cruide oil barrel. Also, Europe has continuously been affected by relations with Russia that have cooled a lot over the past months.

    In September, Poland, Slovakia, Austria and Hungary announced that the Russian state company Gazprom has delivered less gas to these countries than requested, after the European Union started supplying Ukraine with gas (Russia stopped gas supplies to Ukraine in June). The countries listed above have interpreted Gazprom’s move as a definite warning by Russia before the official beginning of the heating season on October the first. In September, the rate of the US dollar against the euro reached its highest level of the past two years and the highest level of the past six years against the Japanese yen. The third quarter that ended in September was the best in the past six years for the dollar.

    If, on the first trading day of July according to the European Central Bank, one euro bought 1.3688 dollars, then by August, this rate had decreased to 1.3395 and by the first trading day in September, to 1.3133. During September, the dollar continued its fast appreciation and on the last day of the month, the Central Bank fixed the euro-dollar rate to be even as low as 1.2583. The ever-appreciating dollar makes energy products listed in the US currency ever more expensive. The natural gas sold in Estonia is one of these products.

    The main factors behind the fast appreciation of the dollar are the US economy that gives out very strong signals and the conflicting decisions of the US and the eurozone on fiscal policy. In the last quarter, the United States has shown stronger and stronger economic results, which include, for example, a total 4,6 per cent annual economic growth in the second quarter, which for Americans is the fastest growth in the past two and a half years. The strengthening economy is a basis for the US Federal Reserve in making fiscal policy related decisions. The Central Bank has referred to a possibility that the base rate of the US Federal Reserve can be increased, which would make the dollar ever more attractive for investors.

    Contrary to the US economy, the economy of the eurozone has demonstrated considerably weaker signs. The inflation that remains very low on currency markets has caused the most anxiety as a general sign of decelerating economic activity. In order to vitalise economic activity, at the beginning of September, the European Central Bank with Mario Draghi as President lowered the base rate of the bank from 0.15 per cent to 0.05 per cent, which is directly opposed to the current direction of the US Federal Reserve.

    In September, the price of crude oil dropped to its lowest level in the past 26 months

    If in June, the peak price of Brent crude oil amounted to 115.06 dollars, then by the last trading day of September, the price of a barrel had dropped below 100 dollars, stopping at 94.67 dollars. This indicates a 17.7 per cent drop in a little more than three months.

    Over the past months, the petroleum price has been lowered by consistently high production volumes, especially in geopolitically risky countries – Libya, Iraq and Syria – where crude oil production assets have remained clear of domestic tensions and violence. According to OPEC, the international cartel of petroleum-exporting countries, in December, the production volume of the member states increased to its highest level in the past two years, especially due to the recovery of production volumes in Libya and the growth in volumes of Saudi Arabia. If in August, OPEC countries produced an average of 30.15 million barrels a day, then in September, daily production amounted to 30.96 million barrels. The last time this figure was higher was in November 2012 when production amounted to 31.06 million barrels per day.

    The drop in the price of petroleum has also been caused by a drop in demand of the largest petroleum consumers – Europe and China – due to slower economic activity.

    In light of falling crude oil prices, some OPEC member states have expressed their opinion that the organisation should artificially limit production in order to increase the price of crude oil – for some member states such as Iran, it is important to keep the price of petroleum above 100 dollars. At the OPEC meeting in Vienna in November, this topic will be under discussion.

    In the middle of September, the Russian Energy Minister met with the representatives of OPEC in Vienna. Russia is one of the largest petroleum producers in the world and this year, an average petroleum price of 104 dollars has been established in the budget of the federation. As the petroleum reserves in Russia are in danger of running out, the Russians have organised expeditions and drillings in cooperation with western companies (with US Exxon Mobil in the lead) to find new oil wells in the Arctic. As Russian petroleum companies lack developed R&D branches for bringing petroleum to the surface, they are dependent on their western cooperation partners. However, the sanctions imposed on Russia have prohibited Exxon from cooperating with the Russians, which is why the project came to a halt in September.

  • News from the Baltic States »

    The Union of Electricity Industry of Estonia published a study on the competitiveness of electricity consumption in Estonian industrial enterprises

    The report of the Union of Electricity Industy of Estonia, published on October 3, provides an overview of the effect of electric network service and state taxes on competitiveness. The main points in the report are that for large energy consumers in Estonia, the total cost of electricity consumption is €11-24 more expensive per MWh than in Poland, Sweden and Finland. The report also points out that in Estonia, the cost of electricity consumption is significantly lower than in Latvia and Lithuania. In addition, the report states that in order to improve competitiveness, in Estonia, major consumers can decrease their expenses related to electricity consumption by changing the price formation of network operators and differentiating excise duties and renewable energy fees on the example of competing countries.

    Total cost of electricity consumption (€/MWh) for industries consuming 20-70 GWh a year in European Union Member States competing with Estonia, in the years 2008 and 2013 (EUROSTAT).

    Ministry of the Environment plans to fix the environmental fees for electricity generation in Estonia for 10 years instead of 5

    The proposal of the Ministry of the Environment to fix the fees for up to ten years has been motivated by the Ministry’s wish to ensure stability for making investment decisions and security for making the natural environment cleaner. The implementation of this proposal would also improve the opportunities of Eesti Power Plant of Eesti Energia in offering long-term delivery contracts. According to the government’s regulation, the environmental fees fixed for now will be valid until the end of 2015, so new environmental fees are planned to be enforced until the end of 2025.

    Supervisory Board of Eesti Energia elected Hando Sutter as CEO

    At its meeting on October 3, the Supervisory Board of Eesti Energia elected Hando Sutter – to date the Regional Market Manager of the Baltic States and Russia at Nord Pool Spot – as the Chairman of the Management Board. Mr Sutter will start performing his new duties on 1 December. According to Erkki Raasuke, Chairman of the Supervisory Board, Eesti Energia has made meaningful and important progress under the leadership of Sandor Liive, so he thanked him for his long-term devoted work.

    Hando Sutter. Photo by Toomas Huik

    The Jordanian government signed contracts for establishing an oil-shale based power plant

    Attarat Power Company (APCO), which through its parent undertaking is partially owned by Eesti Energia, signed a 30-year electricity purchase and sale contract with the Jordanian government on October 2 as well as other project contracts for establishing a 554 MW oil-shale based power plant. Pursuant to the 30-year contract guaranteed by the Jordanian government, National Power Electric Company, the national electricity company of Jordan, will purchase all the electricity produced by the oil shale plant. The power plant planned according to Attarat Power Company’s project would be the first oil-shale based power plant in Jordan.

    The Jordanian government signed contracts for establishing an oil-shale based power plant

    This year, Eesti Energia Energy Forum focused on energy security

    On September 11, the annual Energy Forum organised by Eesti Energia took place. This year, a subject very topical in all of Europe was focused on – energy security. During discussions, answers were sought for the questions of whether energy independence really is important for Estonia and whether renewable or fossil sources should be preferred as energy sources. In addition, discussions were also held over how much work energy independence provides and how to increase the state revenues earned from energy independence.

    Rokas Masiulis appointed as new Energy Minister of Lithuania

    In the second half of September, Dalia Grybauskaite, the President of Lithuania, appointed Rokas Masiulis, who since 2010 had been managing the government-invested Klaipedos Nafta as the new Energy Minister. Before becoming the Minister, Masiulis Klaipedos managed Nafta as a company responsible for the liquified natural gas terminal project, which will allow Lithuanian and other Baltic consumers as early as at the beginning of next year to choose a cheaper gas service not only between terminals, but also between service providers supplying gas through pipelines. Earlier, Masiulis has worked at companies operating in the international audit and financial services sector.

    Rokas Masiulis. Photo by vilnews.com

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