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19.01 2016

Energy Market Overview: 2015 Trends

Mathias Vaarmann

Market Analyst

This market overview includes a summary of last year's trends and shifts on the energy markets. We will analyse the significant price-drop on the energy market and reasons thereof, consider the decline of crude oil and of the Euro, and look ahead to what this year will bring on the world's energy markets. The customer section features RETAL Lithuania, a major producer of reusable PET-packaging, discussing with us their strategy for purchasing electric energy.

Read more about the topics below:

  • Exchange prices dropped significantly in 2015 »

    Last year brought a large price drop in all the Nord Pool Spot (NPS) bidding areas: average price over all regions decreased from 33.7 €/MWh in 2014 to 25.1 €/MWh in 2015, an average electric energy price drop of 25.5% in the NPS.

    The downturn was steepest in the 4th Norwegian market area in northern Norway: the prices dropped an average of 11 €/MWh (from 31.44 Euros in 2014 to 20.43 Euros in 2015) – a whopping 35% decrease. Norway as a whole saw an average price drop of 30,3%, to 20.4 €/MWh. In Denmark the prices decreased 24.6% to 23.7 Euros, and in Sweden 31% to 21.8 Euros.

    The Baltic States and Finland saw a price drop as well, but it was not as dramatic as in the other NPS countries. Because these four countries have insufficient access to the cheap hydroelectric and nuclear energy produced in Norway and Sweden, the price drop was just about 17.5% in Finland and Estonia, and 16.5% in Latvia and Lithuania.

    In Finland, the annual average price of electric energy on the NPS exchange came to 29.66 €/MWh, and on the Estonian market it came to 31.08 €/MWh. In Latvia and Lithuania, the annual average prices were 41.85 €/MWh and 41.92 €/MWh, respectively. Regardless, this year's average prices in Estonia, Latvia and Lithuania were the lowest since joining the NPS power exchange. In Finland, the last time electricity was cheaper than now was in 2004, with an average price of 27.68 Euros.

    It is worth noting that the Estonian market region average price dropped to 26.72 €/MWh in September 2015. In Estonia, December brought an all time low hourly electric power price of 0.32 €/MWh, and the lowest monthly average price since joining the power exchange.

    Area Prices of
    electricity 2015
    Change compared
    to previous year
    Minimum Maximum
    Nord Pool Estonia 31,08 -17,36% 0,32 150,06
    Nord Pool Finland 29,66 -17,66% 0,32 150,06
    Nord Pool Latvia 41,85 -16,50% 4,05 200,11
    Nord Pool Lithuania 41,92 16,38% 4,05 200,11

    The 2015 drop in the price of electric power was facilitated by external factors. According to the World Meteorological Organization, 2015 was the second-warmest year in European history, and globally the warmest year in history.

    Warm temperatures reduced the demand for electric power. Because electric heating is widespread in Scandinavia, the mild winter significantly reduced market-demand for electric energy.

    On the other hand, supply was boosted by high precipitation in Scandinavia, which kept the Norwegian, Swedish and Finnish hydroelectric reservoirs at a very high fill-level – especially during the second half of the year. Last year's snowmelt was late and took full swing during the first week of august, starting to quickly fill the hydroelectric reservoirs. The annual peak was achieved in the last week of September, when the reservoirs held a total of 111 TWh of potential electric energy, which constituted 91.4% of their total capacity. In 2014, a total of 91.3 TWh of electric energy was available, with the reservoirs 75.2% full.

    By the last week of 2015, the Nordic hydroelectric reservoirs retained a whopping 98.2 TWh – 18 TWh more than same time last year – and were 80.9% full. The median reservoir level during the last week of the year was 68.6%, or 83.3 TWh. Again, this shows the low demand for, and high supply of electric energy last year.

    The Baltic electricity market was augmented with cables between Lithuania and Poland, and Lithuania and Sweden

    One of the most significant events for the Baltic electricity market in 2015 was the completion of the cables connecting Lithuania with Sweden and Poland. The 700 MW NordBalt, which connects the Lithuanian market with Sweden, was completed in November, and is undergoing tests at the time of writing this market overview. Once the submarine transmission cable is fully deployed, there should be a price drop on the Lithuanian and Latvian markets.

    Concurrently with NordBalt, the first 500 MW arm of LitPol, connecting the Lithuanian and Polish markets, was completed. The other 500 MW arm will be completed in a few years. While NordBalt is bound to reduce prices on the Latvian and Lithuanian markets, LitPol may have the opposite effect during certain hours if the prices in Poland are higher than in Lithuania and Latvia.

    The addition of these two cables may bring a further equalization of Estonian prices with Finnish prices, as the load in the EstLink-1 and -2 cables connecting Estonia with Finland decreases.

    Sweden's plans for their nuclear power plants may bring a future price-increase

    Last year, the Nord Pool Spot (NPS) electricity market was also influenced by news of Sweden closing down reactors in their nuclear power plants due to low profitability. In October Vattenfal, a major shareholder of the Ringhals nuclear power plant, confirmed that they will close down its first and second reactors in 2020 and 2019, respectively. Furthermore, German E.ON and Finnish Fortum announced closure of the first and second reactor in their jointly owned Oskarshamn nuclear power plant. The first reactor will be closed down between 2017 and 2019, and the second one will supply its last MWh in 2020.

    The combined capacity of these four reactors is approximately 2900 MW. This relatively large drop in supply may increase the NPS price per MWh by several Euros by 2020.

  • What happened to crude oil and carbon prices, and the EUR-USD exchange rate in 2015? »

    The price of crude oil dropped by a third in one year

    The price of Brent crude, which took a steep turn down in 2014, continued the same trend in 2015. A barrel of crude oil, which cost 115 Dollars in June of 2014, dropped by more than a half by the beginning of 2015 – in the beginning of January 2015, a barrel of crude oil cost 56.4 Dollars. Over the following year, Brent lost another 34% of its January value, coming to just 37.28 Dollars per barrel of crude on the last day of the year. By the time of writing this review, the price of Brent crude has decreased further to 33.15 Dollars, which is the lowest it has been in close to 12 years.

    Last year, oil prices were forced down by a global oversupply on oil markets, set off by the US shale oil revolution and gaining momentum after the 2014 OPEC summit, where the cartel of oil-exporting countries, headed by Saudi Arabia, decided not to limit production, in order to maintain their market-share.

    In September 2015, OPEC was producing 31.62 million barrels per day – close to an all-time record. Since OPEC's October 2014 decision, its production has increased by almost 1.4 million barrels per day. In July, OPEC pumped almost 31.88 million barrels per day – a level it has not achieved in more than 15 years.

    Last year, the Western powers decided to end sanctions imposed on Iran, which lets Iran start exporting oil to Western markets once again. Iran has promised to increase its production capacity by half a million barrels per day as soon as possible, and by another half a million by the end of 2016. The return of Iran to the oil markets adds further crude oil supply.

    The decline of oil prices was further influenced by an overall decrease in demand for crude oil in 2015, due to the slowing global economic growth , especially in China. The People's Republic is one of the largest consumers of oil in the world, and its poor economic outlook has resulted in significantly lower national demand for oil, which is felt on the global market as well.

    The third factor in the decreasing price of crude oil was another strengthening of the USD last year. Because crude oil is traded for Dollars, a stronger Dollar means higher purchase prices for countries which do not use the Dollar as their main currency. Thus, the rising Dollar tends to further force the price of crude oil down.

    The Euro weakened by 10% over the past year

    USD started strengthening considerably in May of 2014, when the EUR-USD exchange rate was approximately 1.4 Dollars per Euro according to the European Central Bank (ECB). By the end of 2014, the exchange rate had dropped to 1.2 Dollars per Euro – a 14% strengthening of the Dollar (or weakening of the Euro).

    The Dollar achieved its 2015 peak in April, when the two currencies were close to parity: 1 Euro bought slightly more than 1.05 Dollars. By the end of the year, the Euro had somewhat recovered, and ECB reported the year's final exchange rate as 1.0887. This still means the Euro weakened by almost 10% over the year.

    The 2014 and 2015 rise of the Dollar was caused by a surge in the US economic growth and an opposite trend in the Eurozone, the economy of which has been somewhat lagging. A decisive factor in the dropping exchange rate was the monetary policy of the European Central Bank, called quantitative easing and meaning that the central bank maintains extremely low interest rates and “prints” new Euros, injecting them into the economy to accelerate economic growth.

    The US Federal Reserve took a completely opposite direction in its December 2015 meeting, increasing its base interest rate for the first time in ten years. This is significant because by setting base interest rates central banks can exert extremely powerful influence on each country's or countries’ economies. The market participants follow the central banks’ decisions very closely, and any sudden news from central bank press conferences usually have significant impacts on currency and stock exchanges.

    In 2015, the price of CO2 rose higher than it has been in several years

    The price of CO2 (2016 emission quotas) increased steadily in 2015. By the end of October, the price of emission quotas came to a three-year-high of 9 €/t. The year's trading opened at 7.2 €/t, and closed at 8.3 €/t.

    The last time CO2 was more expensive was in November 2012. In 2011 still, the price of CO2 was 23 €/t.

    Carbon prices took a sudden turn downward from their 2011 peak, after the supply of CO2 quotas on the market started to significantly exceed demand for them. The European demand for quotas was negatively influenced by the financial crisis at the end of last decade and the following economic standstill, while the European Union member states kept supplying the same volume of quotas. The years of significant oversupply caused a drop in carbon price, and the price of quotas has not recovered to this day.

    However, the EU plan to reform the European carbon market is beginning to increase the price of quotas slightly. In July of 2015, the European Parliament approved a plan to review the market for CO2 quotas beginning in 2019. The reform is based on the establishing of a Market Stability Reserve, which will control the supply of carbon emission quotas on the market. In case of oversupply, some quotas will be removed, and in case of undersupply, new quotas will be injected. This enables the European Union to control the CO2 quota market price, and to once again raise the price to a level which would force emission-generating actors to invest in solutions for reducing their emissions.

  • News from the Baltic States »

    Eesti Energia's wind power production up by 14%

    Over the last year, Eesti Energia produced a record of approximately 223 GWh in its four wind farms (Aulepa, Narva, Paldiski and Virtsu) – enough to supply 90,000 average homes for a whole year. The transmission system operator Elering reported that Estonian wind power plants supplied a total of 692.5 GWh of electric energy last year.

    According to Innar Kaasiku, the Head of Renewable Energy of Eesti Energia, good wind conditions in 2015 favoured production of wind power. “Good maintenance and operation of wind power plants is as important for high production as are good wind conditions. These factors have enabled us to fully harness the strong winds,” Kaasik added. He says Eesti Energia will continue to diversify its production mix, and will look for new ways of producing renewable energy. At this time, Eesti Energia operates a total of 44 wind power plants with a combined capacity of 111 MW, making it one of the largest wind energy producers in the Baltic States.

    Eesti Energia's Aulepa wind farm

    The waste-to-energy block of Iru Power Plant produced a record amount of energy

    In Eesti Energia's Iru Power Plant waste-to-energy block, a total of 245,000 tonnes of mixed household waste was processed in 2015, an increase of 20,000 tonnes compared to 2014. A total of 300,000 tonnes of mixed household waste is produced annually in Estonia. Eesti Energia Board member Raine Pajo said that the Iru Power Plant waste-to-energy block has been in operation for more than two years, and reached its full cogeneration capacity in 2014.

    “The Iru waste-to-energy block is capable of burning up to 250,000 tonnes of waste per year, or approximately 80% of all mixed household waste generated in Estonia. Therefore it can be said that the completion of the Iru Power Plant waste-to-energy block marks the end of mass-landfilling of mixed household waste in Estonia,” Pajo noted.

    In 2015, the waste-to-energy block produced total of 270 GWh of heat for the residents of Tallinn and Maardu, and approximately 130 GWh of electric energy to the grid – enough to supply 50,000 average homes for a year. The heat produced in the Iru Power Plant waste-to-energy block makes up approximately 15% of the total heat supply of Tallinn.

    Eesti Energia's Iru Power Plant

    Lithuanian energy minister Rokas Masiulis visiting Estonian energy production: we're planning to buy out LNG terminal

    On the second week of January, Lithuanian energy minister Rokas Masiulis visited Estonian energy production - Eesti Energia's Auvere electrcitity plant and VKG Ojamaa oil shale mining. During the visit, Hando Sutter, the CEO of Eesti Energia gave Lithuanian and Estonian ministers an overview of Eesti Energia's business. Also, discussions were held on possible co-operation in the field of energy. Ministers of both countries discussed the possibility of desynchronizing the Baltic electricity market form the Russian frequency area and the possibility of equalizing the competition conditions on electricity trade between countries of EU and electricity producers from third countries.

    During the visit, Lithuanian minister brought out in the interview to Äripäev that game rules on the gas markets have also changed and LNG-terminal, GIPL and Balticconnector are leaving behind the period when market position could be used for dictating a high price. Masiulis stressed that there must be permanent alternative channels, and therefore, Lithuania is planing to buy out a LNG-terminal, that is currently leased for 10 years, in order to form a permanent solution from it for 30-40 years.

    Visit of Lithuanian energy minister Rokas Masiulis. Photo: Estonian Ministry of Economy and Communications

    A fifth of Estonian natural gas imports comes from Lithuania

    In December Elering announced that in last November natural gas vendors imported 9.9 million cubic meters of natural gas from Lithuania, which was 21.9% of Estonia's total natural gas imports. Among those were imports by Eesti Energia. Last year's November volume was 21% lower than in 2014 due to warm weather.

    Changes in the Eesti Energia Board

    In a December 18th 2015 special meeting of the Eesti Energia stockholders, it was decided to recall Peep Siitam from the board. The general meeting assigned Rannar Vassiljev as the new Board member.

    The Eesti Energia Board comprises Chairman of the Board Erkki Raasuke, and Board members Meelis Virkebau, Märt Vooglaid, Danel Tuusis, Ants Pauls, Väino Kaldoja, Veiko Tali and Rannar Vassiljev.

    Lithuania imposed a natural gas excise tax for business customers

    In the beginning of December, an excise tax (based on European Union regulations) on natural gas used for heating was imposed on business customers in Lithuania. Home consumers, charity organisations and state-supported organisations are exempt from the tax. However, because some areas use taxed natural gas for heating residential buildings, this may lead to an increase in the cost of heating for home consumers as well.

    Starting this year, the conditions will change for non-profit organisations, establishments and non-state-supported organisations as well, and they will have to start paying 1.08 €/MWh for natural gas. This will lead to an increase in the price of a cubic meter of gas in Lithuania by one Euro cent, while the business customers will have to pay an excise tax of 0.54 €/MWh.

  • Salvest AS: thanks to Eesti Energia, the gas market now has competition »

    In today's customer story, we introduce Salvest, the grand producer of Estonia’s food industry, which makes some 200 items, including canned soups, Põnn baby food, pickles, and Meie Mari jam. The company uses 108.297 m2 of territory and has been tackling the issue of making its energy usage more efficient and minimising energy costs.

    Some 134 people work at the Salvest factory in Tartu. Salvest is a company with one of the longest traditions in the food industry — it will have been active for 70 years as of next year, having developed from the Tarty Fruit and Vegetable Plant and its successor, the Tartu Canned Food Plant.

    "All this time, our business has been based on production that uses local raw materials and respects Estonian taste preferences. “We consider our strengths to include our expertise in terms of local tastes and and our use of local raw materials to the maximum extent possible,” says Salvest’s executive manager, Lauri Betlem. "Close to 80 per cent of the raw materials we use comes from within a 100 kilometre radius. "We know our farmers and know exactly which field the raw materials come from."

    Betlem mentioned that during the last two years, the company had seen an increase in turnover of more than 30%. "Our growth is mainly due to a sharp rise in export sales. Baby food is the main product group that we sell more of in export markets than here at home," Betlem said. “The baby food we export is 100 per cent ecological, made from carefully selected raw food and developed in cooperation with pediatricians,” he added.

    Salvest executive manager Lauri Betlem pictured with baby food that is being sold more for export than here at home.

    Salvest has made plenty of investments over the years in order to minimise energy costs and to ensure more environmentally friendly production. The company's executive manager said that they are planning to make several investments next year as well in order to make better use of residual heat and to increase the general efficiency of their energy usage.

    According to Betlem, electricity and gas also play key parts in production. "We use gas as our main source of energy. We have our own gas station where we produce heat and steam that are needed during production processes and also for heating houses," Betlem explained, adding that, this year, Salvest concluded a new gas contract with Eesti Energia – Estonian energy company that has its branches Enefit UAB and Enefit SIA in Lithuania and Latvia.

    In addition to gas, Salvest also buys its electricity from Eesti Energia. "For us, it is important to avoid surprises; hence, we have decided to fix prices for a year in advance. We concentrate on our main activity — producing food — and trust more competent parties to trade energy on the stock exchange," Betlem said, explaining the reasons for Salvest's energy purchasing strategy.

    When speaking about cooperation with Eesti Energia, Betlem highlighted positive emotions. "The most important aspect is that, thanks to Eesti Energia, there is at least some kind of competition in the gas market now. I like that our account manager is competent, specific and proactive. This is how we get quick answers and support when making decisions.”

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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