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13.03 2015

Energy market overview, February 2015

Mathias Vaarmann

Market Analyst

In this market overview we are taking a look at the exchange prices for February, which remained at the same levels as in January on the Estonian, Finnish, Latvian and Lithuanian markets alike.

The Baltic news section takes a look at Eesti Energia’s financial results for last year and at Litgas’ plans to start importing liquefied natural gas from the United States.

The corporate client section of this market overview highlights a large customer of Eesti Energia that is not a typical manufacturing or management company. The Estonian Evangelical Lutheran Church, or EELK, is an association including several agencies whose consumption sites lie in different geographical locations and which, accordingly, must pay particular attention when it comes to managing energy costs.

Read more about the topics below

  • Exchange prices of electricity remained largely unchanged in February »

    In February, the market price of electricity in the Estonia / Finland market area remained largely the same as in January. The exchange price of electricity averaged EUR 33.42 per megawatt-hour in Estonia, whereas electricity cost EUR 33.18 on average in Finland. Although the price of electricity declined, month on month, by just 1.24% in Estonia and 1.83% in Finland, the February average exchange price in either market area was the lowest in the past ten months. The last time exchange prices were lower in Estonia and Finland was in April 2014, when the prices of the market areas settled at 31.64 €/MWh and 31.53 €/MWh, respectively.

    On the single Nordic electricity market, Nord Pool Spot, electricity is traded daily, and it is this trading that gives electricity its market value. It is characteristic of the electricity market that the exchange price of electricity may fluctuate very significantly from hour to hour, from day to day, and even from month on month. For instance, the highest price per megawatt-hour in the Estonian market area in February worked out to be EUR 63.54, whereas December saw the highest price hit nothing short of EUR 200.05.

    The hourly price of electricity may be influenced by many factors. Since Nord Pool Spot is a transnational combined market, developments in one area of the combined market may affect what the price of electricity is going to be in another region. These factors may include, for example, output from wind turbines in Denmark, air temperature fluctuations in Scandinavia or precipitation quantities in Norway and Sweden, but also the exchange prices of electricity in Germany. Prices are greatly influenced by the reliability of transnational cables or by malfunctions and maintenance at the Swedish and Finnish nuclear power plants. As a result of maintenance on cables and at power plants, the market price of electricity averaged as much as EUR 44.17 in Estonia, in July 2014.

    Area Average
    €/MWh
    Change compared
    to previous month
    Minimum Maximum
    Nord Pool Estonia 33,42 -1,24% 21,24 63,54
    Nord Pool Finland 33,18 -1,83% 21,24 70,27
    Nord Pool Latvia 39,43 -0,88% 23,95 63,54
    Nord Pool Lithuania 39,44 -0,85% 23,95 63,54

    The February exchange price was kept at levels comparable to January by weather conditions in Northern Europe that suited the electricity market: high output from wind turbines resulting from optimal wind velocity, air temperatures that remained relatively high and copious quantities of precipitation, brought on by an Atlantic low-pressure system that largely dominated the month. However, pressure on prices in the opposite direction was exerted by higher coal prices resulting from higher oil prices and by work stoppages at nuclear power plants due to malfunctions or maintenance (for instance, at the end of the month the production capacity of the nuclear power plants in Sweden and Finland was 10% – 15% below maximum capacity).

    Of the 672 hours in February, the Estonian price stayed on par with its Finnish counterpart for 651 hours. A bigger kind of price differential materialised on the last day of February, when the price in Estonia rose above that in Finland, since EstLink’s cables were pushed to their maximum capacity as a result of constraints on the output from Estonia’s power plants.

    In February, the electricity prices in Latvia and Lithuania settled at EUR 39.43 and EUR 39.44 per megawatt-hour, respectively. Similarly to the markets in Estonia and Finland, the prices in Latvia and Lithuania remained largely unchanged: the decline being 0.88% and 0.85%, respectively, month on month.

  • The biggest change in the EU energy policy in the past half-century »

    In late February, the leaders of the EU unveiled new plans for updating the energy policy of the Union. This is also the biggest change in the energy policy of the EU since 1951, when the European Coal and Steel Community was established. Under the new energy policy plan for the Union, gas and electricity are to move freely in every EU Member State.

    In the estimation of the European Commission, the crisis in Ukraine has prompted the biggest need of all time in the Union to combine and share energy supplies, in order to move away from energy imported from Russia. Today, Russia provides a third of the energy used in the EU.

    The energy policy changes are based on an improvement in the intra-Union energy infrastructure, the end of the regulation of energy pricing, an increase in the number of liquefied natural gas or LNG terminals and a more rigorous enforcement of the EU competition laws. Furthermore, the European Commission would like for countries and companies to consult with them when they are negotiating with big energy providers (such as Russia). This way, an end can be put to a situation where some buyers of energy get a better deal than others from the same provider.

    In the assessment of the Commission, better intra-Union energy infrastructure will help energy consumers save up to EUR 40 billion a year.

  • EU politicians supported the beginning of the carbon market reform in 2018 »

    On 24 February, EU politicians discussed the start date of the carbon market reform, which was voted to launch in late 2018.

    The Emissions Trading System (ETS) of the EU is its biggest weapon for fighting greenhouse gasses. Through it, companies emitting carbon dioxide are compelled to buy carbon quotas, the quantity of which on the market has increased significantly in recent years. The surplus in the number of quotas on the market is due to slow economic growth in Europe, which, in turn, has dampened industrial output and the demand for energy. The large quantity of quotas on the market has brought their prices very low, and this, in turn, is slowing down the fight that the EU is waging against climate change.

    The carbon market reform will help to create a mechanism whereby the availability of quotas on the market is reduced and, thus, the price of carbon dioxide, is raised.

    Whereas carbon dioxide emissions cost EUR 20 – 30 per tonne in 2008, the same quantity could be bought for an average of EUR 7.33 last February.

  • The price of oil recovered and showed a big increase in February »

    The price of Brent crude oil closed January at USD 52.99 per barrel. In January, the price even dropped to USD 46.59 – the lowest price of crude oil in the past six years. In February, the price of crude oil began to recover, with a barrel of oil costing USD 62.58 on the last day of the month. In a month, the price of crude oil rose 18.1 per cent, the biggest surge for black gold since 2009. The recovering price of oil also triggered an uptick in the price components for gas.

    The global oil markets continue to be ruled by ample over-supply, which sent oil prices into a nose dive in the second half of 2014, from their June peak of USD 115. However, in February the markets began looking to the future. The price was buoyed by, among other things, an expected increase in the demand for oil in China this year, the continuing decline in the number of oil wells in the United States and decreasing investments in new oil sources, signalling an imminent drop in supply by oil producers in the United States. Increasing oil demand may be also expected in both the euro zone and in Japan.

    As a result of trading during February, the rate of the euro against the dollar remained largely unchanged. Whereas on the last day of January, the rate of the euro against the dollar closed at 1.1305, one euro bought 1.1240 dollars by the end of February. As at the time of writing, the dollar had strengthened significantly, with the euro to dollar ratio already nearing 1.10.

    All February, the value of the euro was affected by the debt talks between Greece and the EU. As the month ended, the dollar got a second wind from the cut in China’s interest rates, strengthening against several global currencies (including the euro).

  • News from the Baltic States »

    Eesti Energia produced a record quantity of shale oil

    Last year, Eesti Energia produced the largest quantity of shale oil in history. Liquid fuel output by the company grew 24% in 2014, to 256 000 tonnes.

    Regardless of the sales revenues, which were lower than before, the company posted earnings of EUR 312 million before interest, taxes, depreciation, and amortisation (EBITDA) last year, up EUR 1.8 million from 2013. Net profit was EUR 159 million. Last year, Eesti Energia had a turnover of EUR 880 million.

    The sales revenues were affected most by the lower-than-planned volume of electricity production. Last year, electricity prices were lower than forecast; however, the frequency of emergencies at power plants was higher. Accordingly, Eesti Energia produced 9.7 TWh of electricity in the year, approximately 8% less than in the previous year.

    Although late 2014 saw the sales price of shale oil decline as well, the negative impact of the decline in the prices of both electricity and oil were mitigated significantly by timely hedging transactions on the financial markets.

    Lithuania’s Litgas may start importing liquefied gas from the US

    Lithuania’s LNG (liquefied natural gas) importer Litgas announced in February that it had signed a preliminary agreement with the US liquefied natural gas supplier Delfin LNG to supply liquefied gas to Lithuania via the floating terminal in Klaipėda. The signed agreement does not oblige either party to buy or sell.

    The Klaipėda LNG terminal, completed late last year, can receive 4 billion cubic metres of gas per year. The annual gas demand in the Baltic States is 4 to 5 billion cubic metres. With its LNG terminal, Lithuania is also able to supply gas not originating in Russia to the other Baltic States.

    In the light of the LNG terminal and potential new gas sources, Lithuania’s national energy enterprise, Lietuvos Energija, announced that it might not extend its agreement with Russia’s Gazprom at the end of this year.

    Among others importing liquefied natural gas from Lithuania is Eesti Energia, creating an excellent alternative to Russian gas.

    Lithuanian LNG terminal gets better logistical solutions

    AB Klaipėdos Nafta wants to build a smaller liquefied natural gas terminal on land, to simplify the logistics and distribution of natural gas. This plan was presented by Prime Minister of Lithuania Algirdas Butkevičius after a meeting of the committee responsible for the LNG terminal in early February.

    According to the Prime Minister, there are plans to build a new terminal with a capacity of 5000 cubic metres and to buy a ship, needed to transport natural gas, to transport natural gas from the Independence floating terminal to the smaller terminal on land.

    As reported by Klaipėdos Nafta, 11 companies operating in the Baltic States, Poland and Germany are planning to use the services of the smaller terminal due to be created. Of these companies, seven have indicated their initial wishes, based on which demand for the terminal may be planned at 270 000 cubic metres.

    According to Mantas Bartuška, General Manager of Klaipėdos Nafta, work to design the terminal is already under way and funding from the EU has been secured; accordingly, the project may be expected to be completed by 2016. According to preliminary estimates, investments under the project will reach EUR 10 – 20 million.

  • Large customer of Eesti Energia: association of the non-profit associations of the Estonian Evangelical Lutheran Church »

    This time, we would like to profile one of Eesti Energia’s large customers that is not a typical manufacturing or management company. The Estonian Evangelical Lutheran Church, or EELK, is an association including several agencies whose consumption sites lie in different geographical locations and which, accordingly, must pay particular attention to managing its energy costs.

    The Estonian Evangelical Lutheran Church is an Estonia-wide association of non-profit associations, the bulk of which consists of 165 congregations. In addition, several foundations – Institute of Theology, Mission Centre, Talu Youth Camp and other legal entities, such as Kiriku Varahaldus OÜ – operate through the Estonian Evangelical Lutheran Church.

    “The plans and visions of the church foundations are aimed at strengthening the primary activity of the Estonian Evangelical Lutheran Church and laying a sounder economic foundation for it,” said Mati Maanas, head of OÜ Kiriku Varahaldus, outlining the rationale behind the operations of the foundations. In addition to the primary activity, he cites, for instance, property development projects under asset management and foundations set up for the restoration and refurbishment of churches.

    Maanas stresses that the Estonian Evangelical Lutheran Church is definitely not a typical manufacturing or management company. “Our specific circumstances are completely different; however, we cannot do without electricity – its consumption plays a significant role in our life,“ Maanas says. “Our church associations consume electricity at significant levels, the lighting and heating of churches alone accounting for a big share of all our energy costs,” Maanas notes. He adds that approximately 70% of the congregations have very limited economic viability, and electricity costs are a significant burden on managing them.

    As the decision-maker on electricity purchases at the church association, Maanas clarifies that the agency has opted for an unequivocal principle to control electricity costs: spend as prudently as possible and err on the side of frugality. “For instance, we have begun to use energy-efficient light bulbs, since the lighting of churches is a significant cost item for us. Furthermore, we have thought out our strategy for sourcing electricity. As a result, the Estonian Evangelical Lutheran Church is a large customer of Eesti Energia and receives offers at tailored prices for buying electricity,” Maanas says. Currently, the Estonian Evangelical Lutheran Church ranks among those large customers of Eesti Energia who have opted to fix the price of electricity as insurance against electricity costs.

    “For us, the experience with Eesti Energia has been positive in every respect – their constant overviews and offers are very well received,” Maanas outlines the business relationship to date. Given that the church association has nearly several hundred agencies across Estonia, Maanas is pleased that new sites, too, have been flexibly included in the general purchase agreement, without a hitch.

The market overview has been prepared according to the current market knowledge of the Eesti Energia analyst. Information provided herein is based on public information and sources mentioned in the report. The overview is presented as informative material and on no condition as a promise, proposition, or an official prognosis of Eesti Energia. The opinions presented 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 comply with situations that may arise in the future. The market overview does not create, end, nor change legal relations (including contracts). Eesti Energia is not liable for any expenses or damages which may occur in relation to the use of the information presented in this market overview.

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