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24.11 2015

Energy Market Overview, October 2015

Mathias Vaarmann

Market Analyst

Electricity prices increased in all market areas

In this Market Overview we look at the reasons why the price of electricity rose in October even as high as EUR 150 and EUR 200 per megawatt-hour.

In addition, we look at EU carbon prices, which in October increased to their highest for the past three years — EUR 8.68 per ton. We explore why Lithuania wants to break away from Russian natural gas even more after the national LNG terminal was opened; this actually coincides with a decrease in the demand for natural gas anyway. We then examine the Finnish-Estonian plan for building a gas transmission line and analyse the October relationship between oil and the dollar.

In our Baltic news section, we give an overview of the Energy Forum of Eesti Energia as well as the company's third quarter economic performance. Among other issues, we also tackle the developments in opening the Latvian gas market.

This month's client story about SEB's principles of energy consumption and electricity purchase choices.

Read more about all of these topics below

  • In October, electricity prices increased in all market areas »

    In October, all Nord Pool Spot (NPS) market areas experienced a price increase. With the increase from EUR 31.7 to EUR 34.97 per megawatt-hour in September, the Estonian market price experienced a 10.3 per cent rise. At the same time, at the beginning of the month hourly rates increased to an exceptionally high level — 8 October saw the highest hourly rate of the Estonian market area of this year -EUR 149.95 per megawatt-hour. That day, the average daily price was EUR 66.48.

    With the September level at EUR 31.75, in October the corresponding Finnish price increased by 5.5% to EUR 33.49. Due to a 27.4% growth in October, Latvia and Lithuania experienced the fastest leap of the four market areas. In October, the prices of these increased to EUR 56.44 per megawatt-hour. In September, prices in Latvia and Lithuania reached EUR 44.30 per megawatt-hour on average.

    Area Average
    €/MWh
    Change compared to
    previous month
    Minimum Maximum
    Nord Pool Estonia 34,97 10,32% 6,89 149,95
    Nord Pool Finland 33,49 5,48% 6,89 149,95
    Nord Pool Latvia 56,44 27,40% 6,89 200,11
    Nord Pool Lithuania 56,44 27,40% 6,89 200,11

    Proportionally, the biggest increase was seen by the Oslo, Kristiansand and Bergen market areas of Norway, where the prices increased 65.7% month by month. The prices of these three market areas are still relatively low – the October average was EUR 21.44 per megawatt-hour. Electricity prices for the three other Norwegian areas (Molde, Trondheim and Tromsø) reached EUR 20.30–22.30. In October, prices for the four Swedish market areas remained between EUR 22.10 and EUR 24.80. In the two Danish market areas, on average, electricity cost EUR 26.30–26.80 in October.

    Also in October, a considerable price rise in all NPS market areas was caused by dropping air temperatures that increased the demand for electricity. In Scandinavia, electric heating is very common, and so the cold weather causes a large increase in demand. During four days at the beginning of October the average temperature in Finland dropped from 10 degrees to 1.2, according to Reuters. The price increase was accelerated also by the slow-down of water flows at Scandinavian hydro-power plants, which prompted hydro-power producers to ask for higher electricity prices. The emergence of quick and cheap water energy and record levels of water reservoirs have reduced electricity prices to their lowest level in recent years.

    At the beginning of last month, planned Swedish-Finnish cable maintenance works took place — this limited the access of Finland and the Baltic countries to the nuclear and hydro-power electricity produced by Sweden and Norway by 1130 MW. At the same time, the air currents moving in from the Arctic due to northern winds made the air temperatures of the region drop, this being the reason for the fast growth in demand for electricity. Due to the common impact of these two factors, hourly electricity rates in Finland, Estonia, Latvia and Lithuania increased to their highest level so far this year — in Estonia and Finland close to EUR 150 per megawatt-hour and in Latvia and Lithuania more than EUR 200 per megawatt-hour.

    The deficit prevailing on the Latvian and Lithuanian markets also contributed to the extremely high hourly prices there. In October, very little was offered in our neighbouring countries— supply was limited due to Estonian-Latvian cable maintenance works as well as by the limitations of the cable connecting Lithuania with Belarus. In addition, the start of the winter working period of the Vilniaus Energija natural gas co-generation plant was postponed, which in turn also increased the electricity deficit.

  • EU carbon prices increased to their highest level for the past three years »

    In October, the prices of EU carbon dioxide emission allowances reached their highest level for the past three years, reaching EUR 8.68 per ton. The only instance of prices being higher in recent times was in November 2012, when emitting a ton of carbon cost EUR 8.90.

    Prices reached their highest level yet after after the German government held its October auction, in which the demand for carbon emission allowances was high. According to market participants, the market is experiencing a growth trend and analysts predict the constant rise of CO2 prices.

    The Emissions Trading System (ETS) of the EU regulates approximately half of the European carbon emission volume. The ETS obliges over 11,000 European electricity stations, plants and airlines to purchase emission allowances as they emit greenhouse gases, whereby one allowance corresponds to one ton of greenhouse gas.

    Due to the poor economic situation and decreased production in recent years, the carbon market has in fact leftover allowances, which in turn has force prices down. The European Union wishes to increase the price of carbon, to which end the carbon market reform was carried out this summer. A market stability mechanism will be formed as a result and it will control the availability of CO2 allowances on the European carbon market.

  • Now more than ever, Lithuania wants to break away from Russian natural gas »

    During the Singapore International Energy Week held in October, Rokas Masiulis, the Lithuanian energy minister, denoted that since the national liquefied natural gas (LNG) terminal was opened, Lithuania wants more than ever to break away from Russian natural gas; this actually coincides with a decrease in the demand for natural gas anyway.

    In recent times, natural gas is being increasingly replaced with biomass, which is 30% cheaper despite the fact that the price of natural gas has gone down considerably this year. Nowadays, biomass forms all in all 70% of Lithuanian heat production.

    Regarding gas purchases for the next year, Lithuania is still negotiating with the Russian gas giant Gazprom. Other offers are also being considered, e.g. that of the US LNG company Cheniere Energy Inc. The energy minister said that if Lithuania manages to get a good price from Gazprom for the next year, the contract will be extended. If not, there will be a total transfer to LNG usage. Masiulis said that the Lithuanian gas system increasingly wishes to have gas that is not of Russian origin. For example, there is a more positive attitude towards US gas, which is suitable also in terms of indicators.

    The long term contract between Lithuania and Gazprom ends in December, but the country still has unused gas reserves that can be used next year. Lithuania has unused gas amounts to provide for consumption for approximately a year and a half.

    Lithuania now has a LNG contract with the Norwegian Statoil, according to which they will buy 540 million cubic metres of gas during 5 years. The LNG terminal opened last year in Klaipeda is capable of importing up to 4 billion cubic metres of gas per year. This forms 80% of the yearly gas demand of Estonia, Latvia and Lithuania.

  • Finland and Estonia apply for EU funding for gas transmission line construction »

    After the Finnish gas company Gasum announced that it is cancelling plans to establish a regional LNG terminal and a gas transmission pipeline connection with Estonia, Estonia and Finland are applying for EUR 250 million from the EU to establish an underwater gas transmission line between the two countries.

    After cancelling the Gasum plans, the Finnish government decided to establish a new company, Baltic Connector OY, that will be responsible for setting up the project. Elering Gaas, the operator of the Estonian gas network, will operate as the partner of the Finnish company.

    The planned gas line will be 148 km long, of which 81 km will be under water. The gas transmission line will connect the Finnish gas network with the planned Paldiski LNG terminal. The gas line works are due to start in 2020.

  • October oil prices were volatile once again while the dollar was considerably stronger »

    At the beginning of October, the price of Brent crude oil quickly increased. The price of crude oil closed at USD 47.69 during the first trading day of the month, and by October 8, the price of a barrel of oil had increased to USD 53.05. This means that the price increased by 11.2% during five trading days. In the following trading week, the price of a barrel of oil had again dropped to USD 48.71 or 8.2%. USD 46.81 was the lowest price of October and the month ended with the price of USD 49.56 per barrel.

    The dollar experienced an sharp rise and the quickest weekly rise of the past six years after the Federal Reserve of the United States signalled that the US Central Bank is not in a hurry to raise interest rates. In addition, the PIRA Energy Group, which has considerable influence on various markets, announced that they are expecting a price rise on oil markets. PIRA noted that by the end of next year, oil prices will finally reach USD 70, and that by 2017, this will further rise to USD 75.

    The price rally did not last for long, as in general there is a much greater supply on the oil market than the actual demand. Therefore, prices are also forced down to lower levels. In addition, markets are still influenced by the economy of China, which this year has been showing signs of stagnation, hence indicating an even smaller demand on oil markets.

    The US dollar has influenced the price of oil as well. After a weaker period lasting a couple of months, it again managed to gather strength at the end of October. According to the European Central Bank, at the beginning of October, the dollar-euro exchange rate was USD 1.1153 per euro and in the middle of the month even USD 1.1439 per euro, but by the end of the month the dollar-euro exchange rate reached 1.093. As of writing this review, the dollar-euro exchange rate has reached 1.088.

    The dollar (in relation to the euro) was given a quick boost in strength by Mario Draghi, President of European Central Bank, who after the monetary policy meeting of the end of October, announced that in order to lift the lagging European economy, the ECB is ready to use all possibilities offered by monetary policy. The markets perceived this as a signal of the central bank getting ready for another programme of banknote printing.

  • News from the Baltic States »

    At the Energy Forum of Eesti Energia, this time focus was on the smart energy industry

    On 3 November, at the Energy Forum that took place in Kultuurikatel, the focus was on innovative and smart solutions within the energy industry that aimed at coping with changes in energy markets, technological developments and environmental demands. During the forum, Eesti Energia's strategic challenges and industrial innovation were discussed alongside general technological developments in the oil shale industry and opportunities for cooperation with other companies and scientists. Smart energy consumption and the future of energy grids and markets were also discussed.

    During the discussion panel of the forum, Grüne Fee and Solarhouse shared their experience regarding electricity micro- and co-generation. It was acknowledged that the increasingly advantageous possibilities of consumers producing their own energy will soon create a situation, also in Estonia, in which energy production will turn out to be a natural activity of each energy consumer.

    Eesti Energia more than doubles shale oil sales

    Due to low energy prices, the third quarter turnover of Eesti Energia decreased, but the company managed to stay profitable. Despite the complicated situation, it was still possible to increase shale oil sales amounts and turnover.

    According to Andri Avila, Financial Director of Eesti Energia, during this low point for energy markets, it was strict cost management and greater efficiency that helped keep the company profitable. "Risk management deals have also played an important role, but in the future we cannot expect more from them, as in the context of the current low energy prices, it is quite impossible to make profitable future deals," Avila said.

    "The environment of our activities is well characterised by the fact that in August the price of Brent crude oil dropped to its lowest in recent years, reaching USD 42 per barrel," Avila explained. "In a yearly comparison, the oil price has dropped 41% and in the Estonian area, the exchange price of electricity has dropped 28%.“

    Despite the low price of oil (which affects the profitability of shale oil production directly), the sales volume of Eesti Energia liquid fuels more than doubled, 138%. In one quarter, Eesti Energia produced a record amount of 81,200 tons of shale oil. The Enefit280 oil plant contributed greatly to the growth of produce, as 37,000 tons were produced there. "On top of growing oil sales, we are also happy about the increasingly stable work and growth of production of the new oil plant. We plan to reach the designed capacity of the plant by the end of the year," Avila commented.

    During the third quarter, electricity sales profit dropped 28%, or to EUR 81 million. The decreased sales profit and sales volume are the result of the historically low exchange prices of electricity that have been caused by the ample hydro-power produced in Scandinavia. In one quarter, Eesti Energia produced 1.8 terawatt hours of electricity.

    According to Andri Avila, the market situation poses larger challenges to energy companies, and we need to economise and be flexible in tackling these issues. "We have to be smart and effective in order to be competitive, otherwise we simply won't have room on the market," Avila said. 69% of Eesti Energia's sales profit comes from an open market.

    Latvian Parliament ready to support the opening of the gas market

    After the first reading of the draft law on the opening of the gas market, the Latvian Parliament expressed its support of opening the market in April 2017. In this context, dividing Latvijas Gaze, the company responsible for gas supply, into parts by the end of 2017, was supported. The purpose of the draft law is to separate the supplier and depositor of natural gas from its distribution and sales, and to assign market participants clear rules, in order to liberalise the market and create competition that operates on the principles of a free market. There are two more draft law readings to come.

    Klaipėda–Kuršėnai gas transmission line ready

    As of the beginning of October, the Klaipėda–Kuršėnai gas transmission line construction works have been completed. The 110 km gas line was ready in record time (27 months) and runs through the Klaipėda, Plungė, Telšiai, Rietava and Šiauliai municipalities, offering additional power in transporting liquefied natural gas from the LNG terminal to Lithuania and other Baltic state clients. The diameter of the new line (now 800 mm) was previously just 300 mm, which means that the system only managed to let though 40% of the daily supply volume from the Klaipėda LNG terminal. Thanks to the ready-made gas transmission line, it is possible to fully integrate the LNG terminal into the gas transmission system and thereby cover 80% of the gas needs of the Baltic countries.

    Lithuanian public service provision quotas declared null

    Due to Lithuanian public service provision quotas being declared null, as of next year Lithuanian co-generation plans (CHP) will not receive any compensation gathered with renewable energy fees. With the October 7 decision of the government and Prime Minister Algirdas Butkevičius, a new compensation system at Lithuanian co-generation plants and electricity plants is being considered, whereby the decision was also taken to end the support system that had applied until now. This year the public service quota of the Elektrėnai Lithuanian electricity plant was up to 1.1 billion kWh and the public service quota of the Vilnius, Kaunas, Panevezys, Klaipėda, Alytus and Pasvalys co-generation plants altogether reached 600 million kWh.

  • On managing SEB energy costs: green energy is one of the principles of our bank »

    Today, SEB is one of the largest banks on the market of corporate as well as private clients, offering a wide range of services from daily banking to loans, leasing, investment opportunities and pension funds. SEB is now available to its clients 24/7 through mobile banking, internet banking, call centres as well as ATMs, and it also has a network of 23 branches.

    In addition to these innovative solutions, it is one of the bank's biggest goals to diminish the carbon footprint of its activities. Therefore, when communicating with clients and offering them services, attention is drawn to sustainability and green investments. This is why SEB has undertaken to diminish its energy consumption every year by 2.5% and considerably diminish the use of paper in its offices. 25% of the Estonian population already sign documents using their ID card or mobile ID, which in the case of a paper-free bank branch means saving 24 tons of paper a year. This is how, every year, the lives of approximately 650 trees are being saved.

    Green thinking and energy saving also apply in terms of electricity consumption. In addition to fixed electricity prices, the bank has, for example, chosen a green energy product which means that the electricity used by the bank is produced from sustainable energy, using, among other means, Estonian hydro-power and wind energy. Leho Lugna, the director of the administrative division of SEB: "We are today using green energy at our largest consumption locations — our main buildings in Tallinn and Tartu". He highlights that using sustainable energy in other business spaces would be very welcome, but as a tenant the bank does not always have this option. "Currently our bank does not have any real estate in Estonia; we occupy rented space because we want to be focused on our main activity, i.e.banking, not real estate business. At the same time, we have to manage energy costs anyway via rental costs, and this forms a considerable part of our administrative costs".

    Lugna explains that green thinking is being applied in all countries where the SEB group conducts its business. Also in Estonia attempts are being made to find ever more opportunities to save energy and the environment. "We deal with energy costs on a daily basis and try find ways to diminish energy consumption in our offices. The largest projects in recent years have been connected with our 20,000 square metre headquarters in Tallinn, and its energy consumption is the largest of any of our locations in Estonia," Lugna explains. "A while ago we started renovating this 17- or 18-year old building, and so far we have managed to renovate half of 24-storey structure. This means that we have new lighting, we have used plastic on windows and automated heating and air-conditioning systems so that they work in combination with each other," Lugna explains and highlights that the large glass building in Tornimäe in summer usually has even greater energy consumption with all the cooling systems than during winter.

    According to the director of the administrative division, the results of accomplished works show that during just a couple of years the bank has been able to diminish energy costs considerably. "For example, during the past years we have have used plastic on windows, and the figures show that because of this we have saved 20% of our energy costs in terms of air-conditioning. In the places where we last year managed to complete basic renovation works, we can now start analysing the results of bigger changes," Lugna explains and also states that precise comparisons are not quite possible as this winter was warmer than those before, and the summer was exceptionally cool, which also decreases energy consumption in general. "The factors that have been available for comparison clearly show positive results and that we are on the right track with our activities," Lugna justifies investments for energy saving purposes that have turned out to be profitable. "We will definitely continue with our vision, and when starting renovation of an office space, we will base plans on our own intentions and needs so that the space is as economical as possible".

    In addition to energy saving and green energy use, SEB bank has chosen an Eesti Energia fixed-price product in order to manage their energy costs. Lugna affirms that this was the right choice, allowing for better management of the cost base when concluding the contract. In terms of electricity purchases, close cooperation has been established with an Eesti Energia key account manager and suitable solutions have always been found. "Communication with the manager has always been excellent, they inform us quickly and are able to find answers to our questions regarding electricity purchases. We are totally satisfied!" Lugna praises cooperation with an Eesti Energia key account manager.

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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