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24.11 2014

Energy Market Overview, October 2014

Mathias Vaarmann

Market Analyst

LNG terminal opened in Klaipeda set to bring a new age to Baltic States’ gas markets

In this issue of the Energy Market Overview we will set our sights on in which way the LNG floating terminal opened in Klaipeda in the end of October is important to the strategic energy security of the Baltic region. We will also analyse the effect of befitting weather conditions which lowered electricity prices in October, talk about the biggest fall in crude oil prices during the last four years and about what the fall will bring with it. Of course, we will give an overview of the most important energy news in Baltic States.

October average electricity prices in Finland, Estonia, Latvia and Lithuania were lower than in September due suitable weather conditions which allowed wind power generators and hydro power plants to produce large amounts of electricity. Estonian electricity prices were lifted in the middle of the month mostly by the design alteration works on EstLink-2; Finnish and Estonian prices were both lifted by maintenance in a transmission cable connecting Sweden and Finland. Nordic countries’ electricity prices were lowered overall by a weaker German economy.

A strengthening dollar held gas prices high throughout October. We will have a look at a prediction that Iran gas exports to Europe will take at least five years and we will give an overview of European Union’s climate goals for the year 2030.

Eesti Energia’s revenue fell in the third quarter, earnings before costs rose by 3%, according to results released in October. Attarat Power Company, a subsidiary of Eesti Energia signed a construction contract in the end of October to build an oil shale power plant with a power rating of 554 MW in Jordan. Klaipeda LNG terminal was commissioned in Lithuania and the first shipment of liquefied gas arrived at the end of the month. In October, several energy companies made offers to Latvian households to sell electricity beginning from 2015.

Read more about the topics below

  • Electricity prices lower in October due to befitting weather conditions »

    In October the Estonian monthly electricity price on the Nordic electricity exchange Nord Pool Spot averaged at 40,22 euros per megawatt-hour. Even though daily prices were lifted considerably during days when EstLink-2 was out of order, prices fell in the second half of the month due to very suitable weather conditions for the Nordic electricity market. As a result Estonian average electricity market price came in at 6,4 percent lower than in September, when the monthly average was 42,97 euros per MWh. Estonian prices remained identical to Finnish prices for 83,9 percent of October hours.

    According to the Estonian Transmission System Operator Elering, operations of submarine cable EstLink-2 came to a halt in August and September due to technical failures which were caused by an error in the cable joint design. The technical error was fixed over October 12 – 20. During these nine days the cable was completely switched off, due to which the flow of cheap electricity from Finland to Estonia was limited. As a result electricity prices in Estonia rose above Finnish prices for each of the nine consecutive days. The largest difference in price came on October 14, when the Finnish daily average price was 36,11 euros and the Estonian daily average was 59,75 euros (a price difference on 23,64 euros between the two regions). Prices in the two regions stayed identical until the end of the month as the design alteration works came to an end.

    In the second half of October a strong Atlantic low air pressure dominated the most of Northern Europe (particularly Norway and Sweden). This brought about an uneasy, rainy and windy weather which lasted until the end of the month. Large amounts of precipitation after a long-lasting dry period lifted hydro levels considerably and the resulting fast flow of water allowed run-of-river power plants to produce large amounts of electricity. Strong bursts of wind increased wind power generator output throughout the Nordic region. In Estonia, for example, wind power output increased to above 200 megawatts for several days. During some hours, wind power output exceeded 260 megawatts – this is amounted to about a quarter of Estonian consumption. Large quantities of produced and sold-to-market electricity quickly lowered Nord Pool Spot’s electricity prices. The lowest daily average electricity price in Estonia and Finland was recorded at 27,01 euros per MWh on October 26.

    Among other factors the Nordic electricity market was also affected by lower thermal coal prices, which in cooperation with an overall slow-down of the German economy lowered energy prices in the region (Germany produces large amounts of electricity in coal-powered plants). Since Germany and Nord Pool Spot (NPS) countries trade electricity, lower German power prices also lowered NPS prices.

    Finnish market area electricity prices in October averaged at 36,72 euros per MWh, which is 4,2 percent less than in September (38,33 €/MWh). Finnish prices were lifted during October by maintenance of a 1500-megawatt cable connecting the Swedish first market area and Finland (Sweden has four market regions). The maintenance lowered the cable’s capacity to 400 megawatts. This in turn also lifted Estonian prices. Overall, price-lowering factors had a stronger effect on the market, due to which Finnish October prices averaged lower.

    Latvian and Lithuanian electricity prices differed in October for the first time since February this year. Latvian electricity market prices amounted to 53,73 euros per MWh (-6,5%, September 57,49 €/MWh), while Lithuanian prices were seen at 53,82 euros per megawatt-hour (-6,4%, previous month 57,49 €/MWh). The difference in price resulted from a limitation in transmission cables connecting the two countries. This was necessary by the Transmission System Operators in order to assure a safe electrical system due to overloads on the Estonian-Latvian cross border transmission cable.

    Latvian and Lithuanian electricity market prices are largely dependent on Estonian and Russian electricity exports until the end of the coming year, when a 700 MW submarine cable named NordBalt is completed. In addition to the submarine cable, a 1000 megawatt cable connecting Lithuania and Poland will also be built. 500 megawatts of the aforementioned power rating will be completed by the end of next year. The new cable will be named LitPol Link. The new cables will upon completion open the Latvian and Lithuanian electricity markets to new electricity sources, which may lower electricity prices in the two countries.

    Area Average
    Change compared to
    previous month
    Minimum Maximum
    Nord Pool Estonia 40,22 -6,40% 7,02 80,02
    Nord Pool Finland 36,72 -4,20% 7,02 79,98
    Nord Pool Latvia 53,73 -6,54% 10,05 85,01
    Nord Pool Lithuania 53,82 -6,38% 10,05 85,01
  • Wind power energy to amount to 20% of world’s total production by year 2030 »

    Global Wind Energy Council (GWEC) in accordance with Greenpeace released a report in the end of October which stated that overall wind power capacity may increase to 2000 gigawatts by the year 2030. Compared to 318 gigawatts at the end of 2013, it would equate to an increase of 530 percent. Currently wind power generators cover about 3% of the world’s electricity consumption. By 2030, according to GWEC that figure may be nearly 20%. According to the International Energy Agency, however, year 2030 total wind power output will increase to 964 gigawatts.

    Northern Europe has also seen a rise in wind power generation importance, which has pushed out more conventional methods of electricity production such as gas- and coal-fired power plants, as they are not as profitable any more. Fossil fuel powered production stations are mainly used in Finland and Denmark as an alternative to Norwegian and Swedish hydropower plants in case of supply disruptions. The importance of these power plants has fallen with the fast arrival of wind power generators.

    Denmark wishes to remove all coal-fired power stations by 2030 and produce all electricity and heat from renewable sources. According to expectations, wind power produced electricity will cover half of Danish electricity demand by 2020. For example, in 2013, 33,4% of Danish electricity was produced by wind power generators. The same figure in Sweden was 8%. Overall capacity of Swedish wind power generators have more than doubled since 2010 to 5000 megawatts.

    European Union agreed to new climate goals for 2030

    European Union member states in October agreed to a new climate policy set to be achieved by 2030. Its main goal is to fight against climate change. The 28-member Union agreed that carbon emissions are to be reduced by 40% by 2030 (compared to 1990 levels). The agreement which held up to now – a reduction of 20% by 2020 – is almost achieved.

    European Union currently emits about 10% of world’s greenhouse gases. The EU has up to now achieved the most in reducing emissions among major industrial blocs. Union leaders named the 40 percent goal as an ambitious signal to United States and China, from whom similar pledges are expected during the next United Nations Climate Summit to be held in France the coming year.

  • Price of CO2 fell, rebounded by the end of the month »

    The price of carbon emissions fell to below 5,70 euros per one tonne in the beginning of the month. As the month elapsed the price of CO2 recovered, rising bit-by-bit to above 6 euros and ending the month at 6,35 euros per tonne.

    The price of carbon dioxide was lifted in October by a draft document which leaked from European Union. The document lifted hopes within the carbon market that the Union’s leaders in principle agree to reform the carbon market. The proposed carbon market reform includes creating a Market Stability Reserve (MSR) which through holding and releasing of carbon permits balances the supply of permits in the European Emissions Trading Scheme.

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

    Export of Iranian gas to Europe may take at least five years

    In September of this year it was revealed that the European Union is planning to import natural gas from Iran as an alternative to Russian gas. The conflict in Ukraine and the resulting sanctions imposed on Russia have chilled European and Russian relations, due to which the EU has started to look for new sources to replace Russian gas. Thawing relations with Tehran have set Iran as a potential future gas trade partner.

    During the European Autumn Gas Conference held in London in October, gas industry experts said that in case the sanctions imposed on Iran were lifted, then from that point onwards it may take at least five years for gas exports to start. The most time consuming is building of gas-export infrastructure. In addition, gas price negotiations may prove to be lengthy. Industry experts also said that due to domestic economy growth of Iran its own gas needs may increase, which would limit the gas volumes available for export.

    Klaipeda LNG terminal opened in Lithuania

    Klaipeda Liquefied Natural Gas terminal was commissioned in October in Klaipeda, Lithuania. The first shipment of liquefied gas arrived at Klaipeda in the end of October on an LNG tanker named Independence. The new gas terminal offers the three Baltic States an alternative source of gas to Russian natural gas. According Lithuanian president Dalia Grybauskaite, the new terminal will provide energy security for the whole Baltic region and the commissioning of the terminal means that Russia will no longer be able to exert political pressure on Lithuania by manipulating gas prices. European Commission estimates that Lithuania paid 36% more than Germany for Russian gas in the first four months of 2014.

    According to Reuters data, Klaipeda terminal has the capacity to provide 4 billion cubic metres of natural gas per year, which amounts to about 80% of the Baltic States’ yearly needs. Klaipeda terminal was leased from Norwegian company Hoegh LNG.

    Unlimited export of gas to Latvia and Estonia is currently not possible, however. This is due to the existing gas transfer infrastructure only allowing to export 2 billion cubic metres of gas annually (at least until the end of 2015). Today the Latvian gas market still remains closed. It is expected to open in 2017. European Union directive, however, sees that the movement of goods – which includes natural gas – should remain unhindered. This also includes gas transit from Lithuania to Latvia and to Estonia. The appropriate transit agreements between the countries have already been agreed to.

    LNG terminal, Independence

    Price of Brent crude oil fell to four year low

    The fall in Brent crude oil continued also in October and by October 15, the price of one barrel closed on the Intercontinental Exchange at 83,73 dollars. In comparison, at the beginning of September, crude oil was still trading at slightly over 100 dollars and in June the price was briefly above 115 dollars. The price of crude oil has therefore fallen by 27 percent since June. The October low point was the cheapest Brent crude had been since November 2010.

    The main reason for the major fall in the price of crude oil is very high levels of worldwide crude oil production, while demand for ‘black gold’ has diminished mainly in Europe and China. Economic activity has slowed down in the two major industrial regions, which has also resulted in a lower demand for energy. Europe is continuing its battle with a very low level of inflation and Chinese industrial output and inflation have gradually fallen over the past months. Chinese inflation levels fell in September to its lowest in the past five years, which hints towards weakness in the second-biggest economy in the world.

    Crude oil has also been aided downwards by opinions of three key producers of the international oil cartel OPEC – Saudi Arabia, Iran and Kuwait – that the three major oil producers are willing to accept the lower crude oil prices in order to maintain their market share. Due to this OPEC is unlikely to limit its production. However, for several members of OPEC (for example Venezuela) it important to hold oil prices above 100 dollars. OPEC meets in Vienna on November 27 to discuss the issue. The markets widely await that OPEC will not intervene in the market by limiting oil production.

    World’s crude oil production levels have been lifted in the past few years by booming United States shale oil production. With the help of the United States small and medium enterprise drilling boom, US crude oil production has increased extremely fast – today, the US produces 3 million barrels per day more than three years ago. According to speculations, key members of OPEC are trying to push these enterprises out of the market with lower market prices in order to hold their own market share.

    In the middle of October, the International Energy Agency predicted that the world’s crude oil demand will fall in 2015 due to a weaker global economy. This prediction also had a dramatic effect on the price of oil – Brent fell by 3,85 dollars in one day, the biggest one-day fall in the past three years.

    Brent crude oil has also been pressured in the past months by a strengthening US dollar. Since crude oil is traded in dollars, a more expensive US dollar means a higher crude price for those whose main currency is not the dollar. This may in turn lower the price of crude oil.

    If in May of this year, one euro bought roughly 1,4 dollars, then by September that ratio had fallen according to the European Central Bank (ECB) to 1,31. On October 1, the single currency bought 1,26 dollars and on the final trading day of October, the ECB fixed the euro-dollar ratio at 1,2524. This means that since May the euro has fallen against the dollar by about 10%. Since the main price components of gas (crude oil, gasoil and fuel oil) are traded in dollars, a more expensive dollar means a more expensive natural gas.

    The quick strengthening of the dollar is due to diverging monetary policies of the ECB and the United States Federal Reserve (the US central bank). This stems from weakening of the European economy and the strengthening of the US economy.

  • Baltic State news »

    Eesti Energia’s revenue fell, earnings before costs increased by 3%

    Compared to the same time last year, Eesti Energia’s third quarter revenue fell by 9%, however earning before costs (EBITDA) increased by 3%. An important contribution to this increase was provided by the sale of subsidiary Eesti Energia Võrguehitus.

    Sales volumes of oil shale oil and electricity fell in the third quarter. Eesti Energia sold a total of 2,3 TWh of electricity, which is 9% less than a year ago. Electricity wholesales to electricity exchange Nord Pool Spot, however, increased. The corporation made investments totalling 71 million euros during the quarter, the most important of which went to the Auvere power plant and improvement of Elektrilevi electricity distribution network quality.

    Contract signed with the builder of Jordan power plant in the end of October

    On October 31 Chinese state enterprise Guangdong Power Engineering Corporation and a subsidiary of Eesti Energia, Attarat Power Company signed a construction contract of a 554 MW gross power rated oil shale power plant to be built in Jordan. According to the contract the plant will be designed by an international engineering firm WorleyParsons, Foster Wheeler will provide the circulating fluidised bed boiler island, the steam turbine generator will be delivered by Siemens. The construction of two energy blocks is planned to take three and a half years and the first of electricity produced from local oil shale is to reach the Jordanians in the end of 2018.

    Latvian home electricity end-consumers offered fairly similar open market prices

    Starting from 2015 Latvian home consumers will be able to purchase electricity from an opened electricity market. Price offers made by electricity sellers do not differ much, however a slight increase in consumer prices is expected. On September 18 the Latvian government adopted an electricity market law, according to which the state provides an electricity purchase social guarantee to less financially-secured households. This social guarantee allows these households to purchase fixed-price electricity from the open market with a lower price.

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