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11.02 2016

Energy Market Overview, January 2016

Mathias Vaarmann

Market Analyst

Cold weather causes electricity prices to rise

In terms of the energy market, this year has gotten off to quite a remarkable start. One example are the unusually high prices in the Estonian market area is one of the examples, which were last seen at the same level in October 2014. It is worth mentioning that last month, the hourly price of electricity reached EUR 100 during 20 hours and exceeded the EUR 200 level during three hours, but in Latvia and Lithuania even during 14 hours. In this market overview, we take a look at how and why these price increases occurred.

Холодная погода рекордно увеличила также электропотребление, поэтому в январе компании Eesti Energia удалось поставить собственный рекорд по выработке электричества за весь период после восстановления независимости. В то же время в Европе цены на выбросы углерода упали до самого низкого уровня с середины 2014 года, а цена на нефть в январе ушла ниже 30-долларовой границы.

Помимо анализа цен, мы сообщим вам самые важные новости с энергетических рынков Балтии и объясним, что значат январские обсуждения о сжигании древесины в Эстонии. В конце обзора о своем опыте управления потреблением газа расскажет клиент Eesti Energia, компания Baltic Clean AS.

Read more about these topics below

  • Cold weather causes electricity prices to rise »

    January 2016 was remarkable for Nord Pool (formerly Nord Pool Spot) was remarkable in many ways. The average market price in the region, EUR 37.63 €/MWh, turned out to be the highest since October 2014, when the average price was 40.22 €/MWh. Compared to December price (26.72 €/MWh), prices increased 41%. It was also remarkable that, in January, the cost of electricity was lower in Estonia than in Finland, where the price was EUR 37.83 €/MWh (26.56 €/MWh in December plus 42.4%). Since the Estonian electricity market fully opened up in 2013, there have only been five months when something like this has happened.

    The fact that in January, Estonia exported unusually large amounts of electricity to Finland was also extraordinary (usually the electricity transit flows from Finland towards Estonia). In January, 52 563 MWh of electricity moved from Estonia to Finland on average, which is more than twice the entire amount of electricity amount that moved from Estonia to Finland in 2015 (24 499 MWh). This is why the hourly price of electricity reached EUR 100 for for a period of 20 hours in January and spiked as high as EUR 200 for a period of three hours. This was experienced in other Nord Pool countries as well in addition to Estonia. Due to especially heavy demand, Eesti Energia managed to set a record for energy production since the times Estonia regained independence — during its peak, the Eesti Energia grid produced more than 2 gigawatts of energy.

    In January, Latvian and Lithuanian average prices in Latvia and Lithuania were EUR 50.01 and EUR 50.32 €/MWh, respectively. In the two countries, the prices increased 30.4% and 31.2%, respectively, from month to month. In Latvia and Lithuania, there were 14 times when the hourly rate rose above EUR 200 on 14 occasions. 19 January 19 turned out to be a noteworthy day for the electricity market. This was when the average prices in Latvia, Lithuania and Estonia were lower than the average prices in Finland and Sweden. In general, Swedish prices are always lower than those of the Baltics.

    The record price increase in the electricity wholesale market was caused by a mass of Arctic air mass that reached Scandinavia and the Baltics, resulting in some very low temperatures. Exceptionally cold weather caused an increase in Nordic consumption to the highest level seen in years — in this region, electric heating is very widespread in the region, and in order to cover demand, electricity prices increased several times. For example, Norway set a record for the past three years on 20 January, when a total of 24 190 MWh of electricity was consumed during the morning hours of 7–8 AM. Heavy Scandinavian demand also caused a larger than usual electricity exports to the Nordic countries.

    There are enough nuclear and hydroelectric stations in Sweden that are capable of producing a lot of cheap energy that the Swedes can use both for their own needs and for export purposes. Some active energy trading is taking place with Finland and, in addition, electricity is also being sold to Denmark, and somewhat also to Poland as well. Finland has poor production capacity and thus has a power deficit, meaning that it needs electricity from other countries to cover its consumption needs. As electricity is always moving in the direction of the most expensive price area, it moves from Sweden to Finland and from there, in general, to the Baltics. Since prices in Finland exceeded those in Estonia for several hours in January, a great deal of electricity moved from Estonia to Finland instead of the other way around.

    By the end of last year, the NordBalt, the cable between Lithuania and Sweden was completed. When it opens up completely for market use, direct energy trading between Sweden and the Baltic countries should begin. This means that cheaper hydropower and nuclear power will move to Lithuania and from there to Latvia, which may result in somewhat lower electricity prices in both countries.

    Area Average
    €/MWh
    Change compared to
    previous month
    Minimum Maximum
    Nord Pool Estonia 37,63 40,83% 4,69 200,06
    Nord Pool Finland 37,83 42,43% 4,69 214,25
    Nord Pool Latvia 50,01 30,44% 15,36 200,06
    Nord Pool Lithuania 50,32 31,25% 15,36 200,06
  • Enefit: the three unknowns in the energy market in 2016 »

    Lithuania's energy sector faces interesting changes this year. Energy prices for business and domestic consumers will depend on the situation in three important areas: electricity and gas markets, as well as the implementation of the EU’s requirements on energy efficiency. During the next six months, three key questions have to be answered: what changes to the electricity market will be brought about by the new power links with Sweden and Poland? How long will the retrospective discount affect the gas market? What requirements for businesses will be provided for in the new law on energy efficiency?

    Read more »

  • In January, European carbon prices decreased by 30 »

    In January, the prices of EU CO2 quotas fell rapidly, reaching their lowest level since mid-2014. At the time of the writing of this market overview, a tonne of CO2 cost EUR 5.63.

    On the first trading day of the year, greenhouse gas had a price of EUR 8.11 per tonne, and at its peak in 2015, a tonne of CO2 cost EUR 8.75. This means that during the first month of this year, the price has decreased 30.4% and was down nearly 36% since its October peak.

    At the same time, the quick drop in price (which began in 2014 after the EU started planning the carbon reform) put an end to the steady increase of the price of CO2 price.

    In January, the decrease in the carbon dioxide market decrease was caused by a general downward trend in European oil and energy markets. Cheaper oil means the price of natural gas is lower and, in turn, gas contains less CO2 than the traditional fossil fuels. The cheaper the gas is, the more reason there is to burn it for energy production. This, again, means less demand for CO2 quotas.

    The interests of electricity producers in selling their future production up front has also resulted in a decrease in the number of European future transactions regarding the price of electricity. This, in turn, has decreased demand for CO2 because electricity producers do not need to set the price of future production costs that are yet to come.

  • In January, the price of oil fell below USD 30 a barrel »

    In January 2016, Brent crude, which has been dropping for over a year now, reached a new low when it fell below USD 30 a barrel, reaching USD 27.9 on 20 January. The price of a barrel of oil was still cost USD 37.2 at the beginning of last month. At the end of January, the price was finished again with a USD 34.7 a barrel. At the time of the writing of this market overview, the price of oil had recovered a bit, again reaching USD 35.5 a barrel.

    In January, the price of oil was decreased as a result of the same factors that were affecting the market for so-called black gold during the previous year: low demand in developed industrialised countries and ample supply by OPEC countries and producers.

    During the second half of the month, cold weather prevailing in Europe and the USA increased energy demand on both sides of the Atlantic ocean, nudging the price of oil upward. On 22 January 22, the price of oil increased by almost 10% when the market was hit by a short-lived demand and the price of oil jumped to USD 32.2 from USD 29.3.

    In January, the euro-dollar rate remained relatively stable. The month started with a rate of USD 1.09 per euro and ended at USD 1.092.

    During the first days of February, the value of the European common currency started to rise quickly. On 3 February, the euro-dollar rate was still 1.093 but reached USD 1.12 the next day. For more than two months, the biggest drop in the dollar was caused by a buying frenzy that started after William Dudley, the president of the Federal Reserve Bank of New York, announced that one has to take the poor condition of the US economy had to be taken into account when making future decisions regarding the base interest rate of the US central bank. The base interest rate has a significant impact on the economy and markets, and, in general, comments by key people who set the rate have a significant impact on short-term currency exchange rates.

  • News from the Baltic states »

    Eesti Energia’s deed of the year quadruples shale gas burning capacity at energy block quadrupled by Eesti Energia's Deed of the Year

    A cooperation project between Narva power stations and the oil industry was recognised as Eesti Energia’s deed of the year for 2015. As a result of which the project, a second energy block is capable of burning four times more shale gas for the production of energy than before for producing energy.

    "Oil production also results in the production of shale gas, and we have to burn it at our power station regardless of whether the price in the energy market is high or low. As a result of the completed project, the second block of the Estonian power station’s second energy block is capable of burning four times more shale gas than before for producing energy production, and we can stop the other energy blocks when the market conditions are unfavourable," said Tõnu Aas, a a board member of Eesti Energia Narva power stations said. He said this makes electricity production more flexible at Narva power stations. It is also important that, in 2015, the project saved EUR 850 000 for Narva power stations.

    During the project, the engineers from Narva power stations came up with a technical solution together with the experts from Enteh Engineering. During the pilot project, additional equipment was built for the the second block of the Estonian power station boiler, and tests were carried out on increased amount of shale gas was tested.

    "The tests were successful. Before, the boiler could burn 1 800 m3 of shale gas an hour but now the capability is 8 500 m3 an hour. The share of gas being burned has risen from 7–8% to 40%," reported Tõnu Aas, board member of Eesti Energia Narva power stations.

    Auvere power station and the value of the Utah project decreased by Eesti Energia

    On 18 January 18, the board of Eesti Energia decided to decrease the combined value of Auvere power station and its Utah project together by EUR 65.5 million. "The reason for lowering the value of these assets is that energy markets are experiencing low prices. In two years, prices in the electricity market prices have dropped 28%. The world market price for oil has decreased as well over two years by 43%, reaching EUR 24 per barrel yesterday. The need to decrease the value of these assets is obvious if you look at what is happening in electricity markets," explained Hando Sutter, Chairman of the Management Board of Eesti Energia.

    This decrease in the value of Eesti Energia’s assets will be reflected in the economic performance for the fourth quarter of 2015. The exact impact on the company’s economic results will be revealed on 25 February 25 in the company’s annual report. The decrease does not have a direct impact on Eesti Energia’s daily business or its ability to meet its obligations to its creditors.

    Auvere power plant now being managed by Eesti Energia

    Eesti Energia provided General Electric with a functional test certificate for Auvere power plant, which means that Eesti Energia, as the manager of the plant, will now start operational tests. After successfully finishing the tests, Eesti Energia will assume control over Auvere, during the first half of the year, taking it over from the company that built the power station builder.

    Auvere power station is Eesti Energia's most effective energy production facility with the best state-of-the-art technology. Due to increased efficiency, the station is able to supply the electricity market with power much more frequently compared to the company’s earlier energy blocks. Before signing the final handover protocol and beginning the guarantee period, operational tests of the station have to be carried out at the station: operating the station in different work regimes and testing fuels being tested.

    Eesti Energia sets production record since independence

    Eesti Energia’s production year of Eesti Energia has started with record-shattering results. Already at the beginning of January, Narva power plants set several production records, reaching a production capacity of 1 789 MW on 6 January 6 and 1 900 MW on 9 January. On January 15, however, these records were shattered when, at 10:35 AM the production capacity of Narva power stations reached 1 982 MW, with the new Auvere power plant providing 276 MW, i.e., nearly 15% of the entire production of Narva power stations. The last time Narva power stations worked with this capacity was 25 years ago, before Estonia regained independence. That day, the production capacity of Narva power stations reached 2 109 MW, which is also the peak for the past 25 years. The electricity production of Eesti Energia's co-generation plants and wind parks is also added Narva power stations' production.

    Contracts for financing Jordan power station signed with Chinese banks

    In mid-January, two large Chinese banks of China — Bank of China (BoC), Industrial and Commercial Bank of China (ICBC) — and the Attarat Power Company (APCO) (which partly belongs to Eesti Energia through its parent company) signed financing contracts for funding the construction of an oil shale power station and its quarry in Jordan. The loan is guaranteed by the China Export Corporation Sinosure.

    According to Hando Sutter, Chairman of the Management Board of Eesti Energia, there is plenty to do before financing can be concluded, i.e., signing contracts for the sale of a majority share in Eesti Energia. "According to the contract signed with the Government of Jordan, Eesti Energia will remain a minority shareholder in APCO for at least five more years after finishing construction of the power plant construction," Sutter added. Through its parent company, Enefit Jordan BV, ATCO is owned by Eesti Energia, the Malaysian company YTL Power International Bhd and to Near East Investments Limited of Jordan.

    Latvian distribution network operator changes distribution tariffs

    On 20 January, Sadales tikls, Latvenergo’s distribution network operator, proposed a project to the Public Utility Commission (PUC) with the aim of balancing out electric energy distribution network services (distribution tariffs). The project is aimed at decreasing the supply price for network operators by 20% and applying a fixed fee for all customers for offering network services that do not depend on how much electricity the customer actually uses.

    The proposed change is aimed at diminishing inequality in a situation where the maintenance costs of the electricity network are borne only by electricity-consuming customers despite the fact that the network operator also has maintenance costs regarding the servicing of consumption locations. Due to these changes, some customers will experience a price increase and others a price decrease. Today, Latvia has approximately 120 000 customers that consume electricity in very small amounts or not at all. Large quantities are located in rural areas where there are ca 3 000 km of electricity lines that need constant maintenance work.

    Uniper Ruhrgas International sells its partial holding of Latvijas Gaze

    On 28 January, an exchange notice was published stating that the Marguerite fund had purchased a 28.97% share of Latvijas Gaze, the company responsible for forwarding, distribution, storing and supplying natural gas in Latvia. The shares were sold by Uniper Ruhrgas International GmbH (formerly E.ON Ruhrgas International GmbH), which has been a shareholder in Latvijas Gaze since April 1997. Once the sale is complete, Uniper Ruhgras International will still own 18.26% of Latvijas Gaze.

    The Marguerite fund, which acquired the shares, was established by six leading financial institutions (Caisse des Dépôts et Consignations, Deposit and Loan Fund (Caisse des Dépôts et Consignations), European Investment Bank, Instituto de Crédito Oficial, KfW and PKO Bank Polski) and European Commission with the goal in 28 member states to make changes of capital investments into infrastructure.

    At this point, Gazprom is the largest shareholder in Latvijas Gaze, owning a 34% stake in the natural gas company. The Marguerite fund will now hold a 28.97% stake, Uniper Ruhrgas International GmbH 18.26%, Itera Latvija 16% and small shareholders 2.8%.

    Lithuania's negotiations with Statoil on LNG price decrease

    Lithuanian Prime Minister Algirdas Butkevicius announced that the contract for the LNG supply deal with Norwegian Statoil had been amended. According to the newly agreed terms, the contract has been extended from 5 to 10 years while the volume Lithuania will import from Norway increased from 2.7 billion cubic metres to 3.7 billion cubic metres. The annual sales volume will decrease from 540 million cubic metres to 350 million cubic metres as Lithuania’s gas consumption declines.

    Dalius Misiunas, head of Lietuvos Energija, revealed that the price had dropped by 15-20% due to Lithuania’s falling demand. The revised price is forecast to be in the range of between EUR 16 and EUR 20 per megawatt-hour, closer to the price of gas supplied by Gazprom.

    Lithuania’s gas supply deal with Russia’s Gazprom expired at the end of last year, but the contract included an option for Lietuvos Energija, the national energy group, to buy a certain amount of gas from Gazprom also in 2016, Misiunas told Reuters.

  • Baltic Clean AS: Gas purchasing solution offered by Eesti Energia enables us to better plan our costs »

    In addition to electricity, four years ago Eesti Energia also started selling gas to corporate clients four years ago, becoming the first market participant to allow customers to set their gas price. As of today, Eesti Energia has ca 13% market share in the Estonian gas market and continues competing and strengthening of its position. In today's customer story, one of Eesti Energia's customers, Baltic Clean AS, shares its experience in gas purchasing and consumption management.

    Baltic Clean AS provides laundry services mainly to hotels and shipping companies. The head of Baltic Clean AS, Mati Pärnamägi, reveals that the company started in 2001 and employs nearly 90 people by today. They also have the largest laundry facility, the size of which is even remarkable even in the European context.

    "Our company was active during a period of relatively stable development and tight competition. Like all businesses, we are constantly striving to improve efficiency and optimise energy usage,” Pärnamägi explains. This is necessary especially necessary considering that laundry is being brought in by containers, including from Finland, for example. Baltic Clean's competitive advantage is that its machinery is recognised in Europe and it provides premium quality and also competitive prices that enable access to Nordic markets.

    The head of the laundry facility explains that doing laundry requires a lot of energy, and expenditures on gas account for a rather large portion of the costs. "We concluded a cooperation contract with Eesti Energia, as the gas supply conditions they offer are more favourable than other contracts so far,” Pärnamägi says. "In addition, the chosen price package enables us to better plan our costs." Pärnamägi is happy to have chosen Eesti Energia for its gas energy purchase. "Cooperation with Eesti Energia has been good, and all risen questions raised have been resolved in an expert manner,” he said.

    Artur Teesalu, head of the Large Business Customer Services Department at Eesti Energia, mentions that, in a similar manner to Baltic Clean AS, many other large companies have found a suitable gas purchasing solution that fits them from Eesti Energia.

    "In the Estonian gas market, today, both private and corporate customers can choose the gas seller that suits them best regardless of the locations connected by the service provider’s network,” Teesalu explains. "Our business as a gas seller gives Estonian companies an opportunity to use competing offers and hence to find the most suitable product and price." To receive gas purchasing offers, Teesalu suggests corporate clients turn to their key account manager at Eesti Energia.

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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