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15.10 2015

Energy market overview, September 2015

Mathias Vaarmann

Market Analyst

The price of electricity was lower in Estonia compared to Finland in September

In this market overview, we analyse the reasons why the electric energy market prices in Estonia were lower than those in Finland for the first time in two years this September. Furthermore, we will discuss the price drops in Latvia and Lithuania, which may be furthered by the new NordBalt and LitPol Link transmission lines later this year.

Regarding events on the natural gas market, we will discuss the establishment of a new pricing mechanism in Europe by Gazprom, and the reasons why Finland cancelled the plans for the new Gasum LNG import terminal.

Furthermore, we will provide you with interesting news from the Baltic energy markets, where both new transmission capacity rules and access to the Latvijas Gāze natural gas infrastructure were agreed upon.

This September's customer section will feature Pindi Kinnisvara describing their experience with managing their electric energy expenses. They differ from those of many other operators, because a real estate manager needs to provide for the various wishes and needs of many customers.

Read more about these subjects below

  • The price of electricity was lower in Estonia compared to Finland in September »

    This September was a noteworthy month for the Estonian electricity market – for the first time in two years, the price of electricity in Estonia was lower than in Finland. While in Finland the average price in September was 31.75 Euros per MWh, in Estonia the average price per MWh was 31.70 Euros. Compared to August, the price in Finland increased by 2% (31.12 €/MWh in August) and in Estonia by 1.6% (31.20 €/MWh in August).

    On the Latvian and Lithuanian common market for electric energy, prices decreased from the higher levels of earlier this year, with the average price in September coming to 44.30 Euros per MWh. Accordingly, the prices in both Latvia and Lithuania dropped by 4.5% compared to August (when electric energy cost 46.40 €/MWh). The Latvian and Lithuanian market price continues to be the highest in the Nord Pool Spot area – up to twice the price in Sweden, and up to four times the price in the cheapest market area in Norway. Both Latvia and Lithuania are characterized by electricity production deficits and a lack of access to cheaply produced Scandinavian nuclear and hydroelectric energy. The situation should improve towards the end of this year with the completion of the NordBalt and LitPol Link transmission lines which will connect Lithuania with the Swedish and Polish markets, respectably.

    In September, the transmission lines connecting Estonia and Finland capped trade for just four hours – during the morning and afternoon of September 3rd, when the transmission capacity from Finland to Estonia was completely turned off for maintenance on the Estonian side. During that time, the price in Finland was higher than in Estonia, and the prices on the two market areas could not equalise due to the lack of transmission capacity.

    Despite available transmission capacity, Estonian and Finnish prices also diverged for two hours in the late afternoon of September 29th, with the price lower in Estonia for one hour and in Finland for the other hour. Due to these five hours, the average price in Estonia was lower than in Finland in September. During the other 714 hours of September, prices were equal between the Estonian and Finnish areas.

    The Nordic market for electric energy is still dominated by excess production due to excellent hydroelectric reservoir levels, especially in Norway. 95% of the electric energy produced in Norway originates from hydroelectric plants, the water levels of which are the highest they have been for 20 years. As of the end of September, Nordic reservoirs held a total of 111 TWh of potential electric energy, or approximately 20 TWh more than same time last year. For comparison: 20 TWh equals three years' total consumption in Estonia, or about a year of full capacity production in a 2.2 GW nuclear power plant.

    The low prices of electricity have forced several European electricity producers to shut down their plants. For example, the German energy producer E.ON announced the shutdown of two reactors in its majority-owned Oskarshamn nuclear power plant in Sweden. The Swedish state-owned energy company Vattenfall announced the shutdown of two reactors in the Ringhals nuclear power plant for similar reasons.

    Area Average
    €/MWh
    Change compared to
    previous month
    Minimum Maximum
    Nord Pool Estonia 31,7 1,60% 3,43 69,99
    Nord Pool Finland 31,75 2,02% 3,43 69,99
    Nord Pool Latvia 44,3 -4,53% 10,2 85,05
    Nord Pool Lithuania 44,3 -4,53% 10,2 85,05
  • Gazprom tested a new natural gas pricing mechanism in Europe »

    In early September, the Russian natural gas giant Gazprom tried out a new method for selling their natural gas in Europe. The new method enables the buyers to purchase natural gas on auctions, where the buyers can make their own price offers. Furthermore, the buyers were offered an opportunity to sign long-term agreements. Until now, most of Gazprom's natural gas sales in Europe have been based on the so-called gas price formula, and buyers have not been able to directly influence the price of gas. The gas price formula means that the price of natural gas is tied to the average historical price of crude oil or oil-based products over the past 6–9 months. 3.2 billion cubic meters of natural gas were on offer for the supply period of winter 2015–2016, to be supplied to several locations in North-Western Europe.

    The new method enabled Gazprom to sell a total of 1.2 billion cubic meters of natural gas, worth approximately 250 million Euros. The bidders included, among others, German E.ON, French Engie, U.S. investment bank Goldman Sachs, and Russian Novatek.

    Gazprom has come under severe criticism in Europe in the past few years. The EU accuses the Russian natural gas giant of abusing its dominant market position in Eastern Europe, where Gazprom charges approximately 40 percent more for its natural gas. More than half of Gazprom's revenue comes from Europe, and pressure from the EU has forced the natural gas giant to establish more fair gas pricing methods.

    Gazprom announced that in 2016–2017 auction sales may constitute 10% of its European exports. This year, Gazprom plans to sell a total of 158 billion cubic meters of natural gas to Europe.

  • Finnish Gasum announced they will not build an LNG import terminal »

    The first days of October brought an announcement from the Finnish natural gas operator Gasum, regarding cancellation of plans to establish a new regional LNG (liquefied natural gas) import terminal and a gas transmission pipeline connecting the Finnish and Estonian natural gas markets. The reasons stated by Gasum included a dropping demand for natural gas and the generally poor economic outlook of the project. According to Gasum, the demand for natural gas in Finland declined to 29.3 TWh (2.8 billion cubic meters) in 2014, which is 12% less than in 2013.

    Gasum's decision is good news for Gazprom, who at this time is the only supplier of Finland with natural gas and holds a 25% share in Gasum (the other 75% being held by the state of Finland). However, the Finnish government confirmed that connecting the Finnish and Estonian natural gas markets is still on the agenda. The plan will be implemented by a new state-owned company, which will apply for EU funding for the construction of the Balticconnector pipeline jointly with Estonia. The cost of the pipeline is estimated to be 200 million Euros.

  • Crude oil price somewhat stable in September »

    Compared to the second half of August, the crude oil market was more stable in September. In August, a barrel of Brent crude sold for 42.69 dollars at the lowest, and 54.15 dollars at the highest – a monthly price fluctuation of almost 11.5 dollars. This is even more significant considering that the lowest and highest prices were only six trading days apart. In September, the low-point for the price of a barrel of crude oil was 46.37 dollars, and the high-point 49.75 dollars – a monthly price fluctuation of just 3.38 dollars. The August trading closed at a price of 54.15 dollars per barrel, which means the price of crude oil decreased by 10.7% during that month.

    The crude oil market continues to be influenced by traders' insecurity regarding the economic outlook of China and other Asian countries. China, the second largest consumer of crude oil in the world, has experienced a significant slowing of economic growth this year, which has put great pressure on the demand for crude oil by the People's Republic. The Chinese manufacturing sector is decreasing, and internal demand continues to decline. Furthermore, the economic giant's weakened economy is felt in other Asian countries as well, including South Korea, Japan, Singapore and others. The Asian stock markets dropped to their three and a half year lowest this September.

    Significant overproduction by Middle-Eastern producers (OPEC countries) continues to exert a strong influence on the crude oil markets. OPEC countries have opted to hold their market share instead of decreasing production. This strategy was adopted due to the rapid market-entry by the U.S. fracking industry.

    A decreasing crude oil supply from the United States, the single largest consumer of crude oil in the world, exerted an upward influence on oil prices in September. The U.S. economy shows signs of significant growth in the long term, which would entail a growing U.S. demand for crude.

    In late September and early October, a rise in crude oil prices was fuelled by speculations regarding the potential cooperation between OPEC and Russia to raise prices. This resulted in the price of Brent crude exceeding the 50 dollar mark in the beginning of October. These speculations were based on a meeting by the Russian energy minister and the OPEC Secretary General to discuss the situation on the crude oil market.

  • News from the Baltics »

    Revolutions in the energy sector discussed on the Eesti Energia Environment Day Seminar

    In the beginning of October, Eesti Energia held its annual Environment Day Seminar, this year focusing on the challenges faced by the oil shale industry in reducing airborne emissions. The new regulations of the European Union Industrial Emissions Directive take full effect in Estonia from January 1st 2016. The Directive imposes lower limits on airborne emissions levels of large combustion plants.

    Compliance with these regulations is a step forward in fulfilling the 2030 climate and energy policy agreements signed by EU heads of state. Hando Sutter, Chairman of the Management Board of Eesti Energia, recognized the present revolutionary situation in the energy sector. In this rapidly changing environment, a more efficient use of oil shale, smart solutions and technological advancements will be key to successful energy production.

    The Eesti Energia Narva open-pit mine celebrated its 45th year in operation

    On October 2nd, the Narva open-pit mine held an anniversary event for its employees, retirees, and partners. Exactly 45 years ago the first 300 tons of oil shale were extracted in the Vaivara open-pit mine in Ida-Virumaa. Today it is the largest open-pit oil shale mine in the world. Over the years, the Narva operation has been joined by colleagues from prior open-pit operations in Sirgala, Viivikonna and Aidu – today there are a total of 750 people working in the Narva open-pit mine.

    The extraction of oil shale began in 1936 in the oldest part of the open-pit mine in Viivikonna. The total extracting permit area of the Narva open-pit mine is in excess of 163 km2. A large part of the Narva open-pit mine is now covered by a new forest, which is planted on exhausted areas two years after the end of oil shale extraction.

    Estonia and Latvia agreed upon new rules for electric energy trading

    The Estonian and Latvian network operators Elering and Augstsprieguma tīkls (AST) agreed upon new rules from 2016, which will enable market actors to reduce risks concerning the trading of electricity between Estonia and Latvia. Next year, market participants will be able to purchase risk-hedging instruments (limited PTRs) on a yearly, quarterly, or monthly basis. Elering announced the sale of 300 MW of limited PTRs for the coming year – which is half as much as last year. The total amount of quarterly PTRs will be 50–100 MW, and 50–150 MW for monthly PTRs. For the Latvian consumers, this entails better offers for the purchase of electricity at a fixed price.

    The Latvian regulator imposed rules of access to the Latvijas Gāze natural gas infrastructure

    In the beginning of September, the Latvian regulator confirmed new rules of access to the infrastructure owned by Latvian natural gas transmission and distribution operator Latvijas Gāze. These changes include better transparency and access to the natural gas transmission network and to the Inčukalnsi underground gas reservoir. Furthermore, better visibility of allocated capacities is foreseen, in order to ensure equal conditions for all market actors. Until now, existing agreements with Latvijas Gāze inhibited infrastructure access for new entrants.

    Baltpool's gas market operator license revoked

    The Lithuanian national energy price and energy market commission decided to revoke the license to operate a natural gas market issued to the Lithuanian energy exchange Baltpool. The Lithuanian Energy Ministry revoked the license pursuant to the operator's own request and the relevant decision made on June 1st. This means the only remaining gas market operator in Lithuania will be UAB GET Baltic, in which Eesti Energia holds a membership. Baltpool merged with GET Baltic and will continue operations on the biofuels market.

    Lesto and Lietuvos Dujos become Joint Distribution Network Operator

    Electric energy distribution network operator AB Lesto and natural gas distribution network operator AB Lietuvos Dujos are assigned the role of Joint Distribution Network Operator after merging. Lesto and Lietuvos Dujos furthermore notified the Nasdaq Vilnius stock exchange of changes to their management structure due to restructuring of the merged organisation. The joint operator plans to begin operations on January 1st 2016. The operator's authorised capital is 259.443 million Euros, or the sum of the current authorised capitals of Lietuvos Dujos and Lesto.

  • Pindi Kinnisvarahaldus on managing electricity costs: people like to be able to control and forecast their costs »

    Pindi Kinnisvarahaldus has been managing real estate for 18 years now. They consider one of their greatest challenges to be the provision of suitable solutions to all of their customers – this includes determining the best electric energy buying solutions.

    A subsidiary of Estonia's largest real estate agency AS Pindi Kinnisvara, Pindi Kinnisvarahaldus provides a full complement of real estate management and maintenance services – both in packages and on an individual basis. Furthermore, they provide ancillary services, such as window-washing, major cleaning after construction or renovation, landscaping, snow and icicle removal from rooftops, etc. While Pindi Kinnisvarahaldus is mostly active in Tallinn and Harjumaa, they do have representation in Tartu, Narva and Võru as well.

    Margit Preegel, Chief Executive of Pindi Kinnisvarahaldus, says that they are doing well and have recently had several years of strong growth, which shows that the company goals and vision are well formulated.

    "We have constantly increased our market share by providing a stable high-quality and customer-oriented service. To us, it is very important that our customers recommend our services to their friends and acquaintances," Preegel said. The Chief Executive stated that their long-term goal is to provide a comprehensive real estate management and maintenance service in small towns as well.

    "In the case of multi-apartment buildings and management thereof, management service provides comfort for the residents. Their experiences show that in most cases buying property management service is more reasonable than doing the work by themselves," Peegel commented. "A manager of an cooperative housing association should have engineering, legal, and people skills. Management of a single cooperative housing association is definitely not a worthwhile use of such talents."

    Thus, Pindi Kinnisvarahaldus provides multi-apartment buildings with the opportunity to hand over the entire burden of property management, including the purchase of electric energy. "Electricity cost is one of the main running costs of people living in apartments," Preegel explained. "Because we manage everything in connection with multi-apartment houses, we are able to reduce our apartment owners' running costs, including the price of electricity, which is lower for a large customer, such as a multi-apartment house, compared to an individual buyer."

    Preegel says that there are in general two types of cooperative housing associations and communities managed by Pindi Kinnisvarahaldus. Some prefer a new fixed electricity price each year, and participate in joint procurements, while others prefer the fluctuating market price.

    "After the opening up of the electricity market, nearly all multi-apartment buildings we manage decided to take part in our joint procurement, and this is still the case. People are generally glad to be able to control and forecast their expenses," Peegel stated. She added that the property manager has signed electricity procurement agreements with new multi-apartment buildings as well, because the new owners prefer this arrangement. "We will definitely let them take part in any future fixed-price electric energy procurements as well," she added.

    Pindi Kinnisvara works with Eesti Energia to provide the best electric energy purchase solutions to their customers. The Chief Executive highlights the conditions for the purchase of electric energy from Eesti Energia which were favourable compared to the offering from the Estonian Union Of Cooperative Housing Associations. "Eesti Energia has proven to be really pleasant to work with. All communication takes place quickly, and they always try to find the best solution for our customers," Preegel commended their electricity supplier.

The market overview has been prepared according to the current market knowledge of the Eesti Energia analyst. The 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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