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19.12 2014

Energy market overview, November 2014

Mathias Vaarmann

Market Analyst

In November’s market overview we will be taking a closer look at how the OPEC’s meeting in November affected the oil and petroleum product markets. We will also cover the unique situation in which for the first time, owing to the reliability of EstLinks, prices in Estonia and Finland remained comparable throughout the whole month.

Read more about the topics below

  • Exchange prices in the Baltics and Finland reach an exceptional low point »

    In November, the average market price of both Estonia as well as Finland on the Nordic electricity exchange Nord Pool Spot (NPS) was EUR 35.41 for a megawatt-hour. This is the first month since Estonia joining the NPS when the prices in the two neighbouring areas were perfectly aligned in all hours of November.

    For the Estonian exchange prices, this situation meant a 12-percent price drop when compared to October (40.22 €/MWh) and for Finland, a 3.6-percent drop (36.72 €/MWh). The reliability of the submarine cables EstLink-1 and -2 also contributed to the alignment of the prices between Estonia and Finland. There were also no important disturbances or maintenance works done in Estonian power plants which would have caused the submarine cables to work at maximum capacity. Electricity was moving through the submarine cables from Finland to Estonia during 677of November hours and in the opposite direction during 43 of the month’s hours.

    In Latvia, the average electricity price in November was EUR 50.43 and in Lithuania EUR 50.44 per megawatt-hour. Prices in the two countries remained comparable for 718 hours in November. There was a discrepancy between the prices in a period of two hours, caused by the system operators limiting the capacity of the cables connecting the two countries. According to Litgrid, the Lithuanian system administrator, limiting the capacity of the cables is still necessary to ensure the security of the electrical system due to the overload of the cable between Estonia and Latvia. The submarine cable between Lithuania and Sweden, planned for the end of 2015, and the underground cable between Lithuania and Poland will open Lithuanian and Latvian markets to new energy sources which is likely to reduce the load of the cable between Estonia and Latvia. The additional cables are also likely to curb electricity prices in both Lithuania and Latvia.

    The exchange rate in Nordic countries was in November mainly affected by varying production of wind generators, changes in electricity consumption due to changes in the ambivalent temperatures, and the electricity trade between Nord Pool Spot (NPS) and Germany. To a lesser extent, the higher prices on carbon dioxide also had their effect, counterbalanced by the price of coal dropping to a five-year low due to the fast drop in the price of crude oil.

    As in the Northern European common electricity market hydroelectric plants always provide more than half of the total electricity production, NPS prices are largely dependent on the amount of precipitation and the water level of hydro reservoirs. Thermal power plants, including the Estonian oil shale plants, produce less than 20% of the electricity: at some point their share can even fall to 10% or even lower. This means that fluctuations in the price of fuels on the world market do not have a significant impact on the NPS price.

    Area Average
    €/MWh
    Change compared
    to previous month
    Minimum Maximum
    Nord Pool Estonia 35,41 -11,96% 1,95 98
    Nord Pool Finland 35,41 -3,57% 1,95 98
    Nord Pool Latvia 50,43 -6,14% 5,08 98
    Nord Pool Lithuania 50,44 -6,28% 5,08 98
  • European Union wants to strengthen the cooperation between the member states in the area of energy »

    In December the European Union council of ministers will take place to find a solution for making the union less dependent on fuel imported from Russia.

    The Union’s goal is to make the block of 28 countries less dependent on imported fuel (especially from Russia). In November, before the council of ministers took place, a document was compiled according to which, for example, gas prices cannot be tied to oil prices and the price of gas must be formed in free market trading. Currently Finland, Estonia, Latvia, and Lithuania are buying a large portion of their gas from the Russian company Gazprom, which calculates its price on the basis of oil prices.

    According to the assessment of the European Commission, some European Union member states (like the United Kingdom, Ireland, Italy, Spain, and Portugal) are extremely secluded when it comes to energy – in these countries the cross-border capacity of various energy sources comprises only 3-5% of the total consumption. The political conflict between Russia and the European Union and Ukraine has brought the European Union’s attention to energy security, which can be achieved by allocating the resources more efficiently through an improved electricity and gas network.

    The compiled document gives priority to the integration of the energy markets. According to the document, by 2020 each European Union member state must achieve capacity which makes it possible to export 10% of the energy produced. A 15-percent capacity is expected by 2030. The European Commission also announced that in the light of the new energy policy they are also going to discuss the possibility of buying gas jointly through the EU to assert pressure on Russia for offering better gas prices.

    The position of the International Energy Agency is that the EU’s integration and separation from Russian energy cannot result in a situation of buyers’ cartel. According to Maria van der Hoeven, head of the International Energy Agency, the EU should combine their resources better on the European internal market to achieve energy security and competitiveness.

    The European Union can improve energy security and increase integration through developing renewable energy within the union. To contribute to this objective, the EU needs to follow through with the carbon market reform quickly, raising the price of CO2 and thereby increasing investments into carbon-free energy sources. Based on the estimate of the International Energy Agency, to achieve this a carbon ton should cost around EUR 30. By the end of November, the price of carbon dioxide was over EUR 7.

    Eesti Energia has also included reducing the CO2 emitted by the oil shale industry in their strategy with the Enefit280 oil plants. When oil shale is transformed into shale oil, more energy is returned and significantly less greenhouse gases are emitted.

    In addition to nuclear stations, the German government is also planning to close down coal plants

    The German government is preparing a new law on the basis of which energy companies are required to reduce pollution gases by at least 22 million tons by the year 2020 (today pollution gases amount to 341 million tons). The aim of this legislative amendment is to achieve Germany’s ambitious climate policy goal and it being adopted could mean eight coal power plants being closed down. Germany has already started closing down their nuclear power plants and by 2022 all nuclear plants in the country will be closed. At the same time, the country with Europe’s largest economy has made its goal to reduce greenhouse gases by 40 percent by the year 2020 (from the level of 1990).

    The plan of the government led by chancellor Angela Merkel is to produce 40-45% of energy in Germany from renewable energy sources by the year 2025. By the year 2035, this level is expected to rise to 55–60%.

    E.ON, German major energy company will be split in half

    On the last day of November, E.ON, the largest electricity company in Germany, announced that the group would be split. As a result, E.ON’s businesses in the area of electricity production, energy trading, and new energy sources will become a separate company. In the future, E.ON is planning to focus on activities related to the use of renewable energy, the electricity distribution network, and personalised energy efficiency services. According to the group’s representative, the reasons behind these changes include thorough changes in the global energy markets, technical innovation, and the clients’ expectations becoming more multifaceted.

    According to Johannes Teyssen, chairman of the company’s management board, the business model used by E.ON so far is not able to face the challenges of the changed business conditions. In recent years, the German electricity sector has been hit by a low demand for energy, low wholesale prices, and renewable energy rapidly replacing gas and coal power plants.

    E.ON’s production, energy trading, and new energy sources unit makes up about 35% of the groups EBITDA of EUR 9.32 billion.

    The Swedish energy company Vattenfall suspends their plans of constructing new nuclear reactors

    The Swedish national energy company Vattenfall announced in the end of November that they are suspending their plans of constructing new nuclear reactors. The decision was made due to resistance met to their plan in the new Swedish government (which includes the Green Party).

    After Sweden’s previous government decided not to abandon nuclear energy, Vattenfall applied to the Swedish regulator for the right to replace their ageing nuclear reactors. In Sweden’s new government, however, the Green Party is looking to close down the ageing nuclear power plant, while the social democrat coalition is against it.

    The Swedish government has made a proposition to raise taxes on nuclear energy by 17% starting from the year 2015. In addition to raising the price of electricity in Sweden, it would also partially mean an increase of the exchange prices of Finland and consequently Estonia. Nuclear energy accounts for about 40% of Sweden’s electricity production. A great amount of Sweden’s electricity production is exported to Finland, to a lesser extent also to Denmark and Poland.

    Vattenfall is planning to close down Ringhals 1 and 2, the company’s oldest nuclear reactors, in around ten years’ time.

  • Carbon prices reached past eight months’ record level »

    While in the beginning of October the prices of a carbon ton in Europe were below EUR 6, then in the course of November the situation changed. In the second half of November carbon prices passed over EUR 7 per ton. Last time when the prices were at a similar level was this year’s March.

    On the last day of November it was possible to buy the right to emit one ton of greenhouse gas this year for EUR 7.04. Prices were moving upwards during the month due to the speculative transactions of European electricity producers, especially coal power plants, in which CO2 prices were gradually rising.

    Electricity producers are waiting for the European Union to adopt the new legislation on the carbon market as a basis for reforming the CO2 trading system. As the application of the new system would cause a hike in carbon prices, then in November many electricity producers made the decision to lower their risks and buy their quotas in advance in large volumes.

    If the carbon market reform is adopted, it is going to be a powerful instrument against carbon emissions and for reducing pollution gases in the European Union. In October, the European Union member states agreed on a 40-percent reduction of carbon emissions by the year 2030 as compared to the level of 1990.

    In November both the United States and China joined the European Union’s commitment to reduce the level of pollution gases in the next 15 years to come. In their meeting in Beijing presidents Barack Obama and Xi Jinping promised that their countries will reduce their carbon emissions by more than 25 percent by the year 2025 (from the level of 2005) and by 2030 put a limit to their emissions. This is the first time when China has given an explicit term for limiting its pollution gases.

    The new international climate objectives will be agreed upon on the global level at the 2015 UN Climate Conference in Paris.

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

    OPEC’s decision on not limiting production brought oil prices to a new low

    The meeting of the international oil cartel OPEC (Organization of the Petroleum Exporting Countries) held in Vienna at the end of November was regarded as the most important one in the last few years in the light of falling oil prices. Regardless of the smaller member states being against it, the cartel decided that it is not going to limit oil production.

    Since the summer when the price of oil exceeded 110 dollars, the Brent crude oil price has fallen almost 40 percent, ending up at 70.15 dollars per one barrel by the end of November. After OPEC’s decision was made public, the price of a barrel dropped more than 6 dollars. The last time when oil was even cheaper than that was in May 2010, when the Brent crude oil price was 69.55 dollars. The fall in oil price is caused by very large production volumes all over the world, mainly due to the contribution of shale oil from the United States.

    The decline in oil price has also been influenced by the unwinding economies of the major energy consumers (Europe and China), with the demand for oil decreasing in these regions. The American dollar rapidly gaining strength has also had its impact.

    Before the official OPEC meeting, the main members of the oil cartel – Saudi Arabia, Kuwait, Quatar and UAE – made the decision not to support limiting the production of oil, so that the decision was basically already made before the cartel meeting.

    This means that OPEC in essence started a price war between the cartel and other oil producers, mainly targeting shale oil producers in the US. The lower oil prices are expected to have the effect of pushing aside the market participants with higher production costs. However, this approach can be a long-term one, because most of the oil producers already have sold their production to the market for the following year with the higher prices in risk management transactions, otherwise known as hedging. Shale oil producers have also started to invest into more productive shale fields and made great efforts to bring down the production costs. Regardless of all this, the plan to keep the prices low has born results – on the basis on the information published at the start of the month, there were 15% less permits issued for opening new shale oil sources.

    Developments in the exchange rate of the euro and dollar in world’s currency markets also have an important effect on the price of gas. Gas and oil products are listed in dollars which is why the dollar gaining strength in the last few months has also raised the price of natural gas. At the same time, oil prices have not had a chance to have an impact on the price formula of gas yet.

    The dollar, having gained strength since May, is moving on the same course also in November, but significantly slower than in the previous months. On November’s last trading day, the European Central Bank fixated the exchange rate of the common currency and the dollar at 1.2483 dollars for one euro. In October, the same figure was fixated at 1.2524 dollars to one euro. In the beginning of September, the relationship between the two currencies was still 1.3133, in May one euro bought a little less than 1.4 dollars.

    Currency investors are still troubled by the exceptionally low inflation in the euro zone, which is usually a sign of slowing economic activity. Due to the lower energy prices, inflation in the euro zone fell to the lowest level in the last five years, signalling that negative inflation (i.e. falling consumer prices) is a real threat to the European Central Bank.

  • News from the Baltic States »

    The new generation Enefit280 oil plant is testing top capacities

    The Enefit280 oil plant in Auvere which reached stable operation in the spring is testing its planned top capacities by processing up to 260 tons of oil shale per hour. For the first time in the world, electricity production has been integrated with a new generation oil plant, adding 54 MW of electricity production to capacity from the by-products of oil.

    One Enefit280 shale oil plant adds approximately 2 million barrels of shale oil and 75 million cubic metres of shale gas a year to the production capacities of Eesti Energia. The plant has an integrated 35 megawatt steam-driven turbine, which uses residual heat to generate electricity to run the plant. The plant is currently producing a stable 25 MW of electrical energy which is sufficient for covering the electricity needs of the plant and fuel delivery. The electrical energy produced is also sold to the electricity market.

    Shale oil was first produced in the new Enefit280 oil plant in December 2012 and since then the capacity and working time of the plant has been gradually increased. Global practice of chemical plant start-up has shown that reaching full capacity with new technology usually takes up to 3 years.

    Enefit280 oil plant

    The Supervisory Board of Eesti Energia approved the new composition of the Management Board

    Starting from December 1, in addition to Hando Sutter, the new CEO of Eesti Energia, the board of Eesti Energia also includes Raine Pajo and Margus Rink as members continuing from the previous management board. New additions to the management board are Margus Vals and Andres Vainola.

    Margus Vals administered the compilation of Eesti Energia’s strategy, has initiated several research and experimental programmes for industrial developments, participated in several key projects of Eesti Energia and built up the energy trading business unit. Andres Vainola is a renowned top-level manager in the field of energetics, whose prior international experience at Empower Group - a builder of infrastructure - adds strong competence to Eesti Energia in completion of complex projects.

    In addition to the new Management Board, Eesti Energia will have a new chief financial officer starting from December: the former Chairman of the Management Board of Olympic Entertainment Group and the Chief Financial Officer of Premia Foods, Andri Avila.

    New auction rules for the PTR-limited auctions were agreed upon in November

    As developments on the Baltic electricity market and experience with limited PTR auctions have highlighted the need to improve the principles of PTR auctions, the Estonian and Latvian system operators Elering AS and Augstsprieguma Tīkls (AST) agreed on the new PTR auction.

    Issuing of and trading with limited physical transmission rights is a long-term regional risk management instrument in electricity trading which has been created for the market participants operating on the Estonian-Latvian border. The participants of Baltic electricity markets have brought out the need to find better opportunities for lowering the risks related to Estonian-Latvian cross-border trading, which is why the main network enterprises in the Baltics conducted a survey in May to pinpoint the available and necessary risk management options for trading in the Baltic electricity market. The survey revealed that the market participants are interested in improving the auction rules for limited PTR auctions.

    In November, specific rules were agreed upon for the functioning of the auction rules, capacities and results, and the principles of organising the auctions. Based on them, the organiser of the auction is offering, issuing, and selling limited physical transmission rights at annual, quarterly, and monthly auctions. On November 13, the first such annual auction took place for the capacity of 200 MW.

    On November 11, Nasdaq OMX started to offer financial contracts between the Latvian price area and system price

    In the middle of November, Nasdaq OMX started offering financial contracts between the Latvian price area and system price (EPAD). The Estonian and Latvian system managers Elering and Augstsprieguma Tīkls have also agreed on new rules for lowering the price risk between the different areas (see above). The offer of financial contracts between the Latvian price area and system price started on November 11, the PTR auctions for the systems of Estonia and Latvia were conducted on November 13.

This market overview has been compiled by an analyst of Eesti Energia on the basis of the best knowledge available to them at the time. This is not an official position of Eesti Energia. Information provided herein is based on public information and sources cited in the overview. The overview is presented as an informative material and on no condition as a promise, proposition, or an official prognosis of Eesti Energia. Positions reflected in the market overview are subject to change and the person presenting them reserves the right to make changes to them. Given the rapidly changing regulation of the electricity market, this market overview or information provided herein is not final and may not correspond to the situations which may occur in the future. The market overview does not create, end, nor change legal relations (incl. contracts). Eesti Energia is not liable for any expenses or damages which may occur in relation to using the information provided in the market overview.

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