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10.03 2016

Energy Market Overview, February 2016

Mathias Vaarmann

Market Analyst

Warm weather and a new link to Scandinavia lowered electricity prices in the Baltic States

This time, the market overview presents a summary of how average prices in the Estonian market area, registering EUR 200 as recently as last January, have dropped to EUR 28.28 per megawatt hour and of how much the NordBalt cable between Sweden and Lithuania, stably on the market for the first time, has lowered electricity prices in Latvia and Lithuania.

We share tips on choosing the best electricity purchasing strategy and draw attention to the fact that, in the light of the all-time lowest prices on future transactions, it is sensible precisely now to fix the price of electricity in full or in part.

Explore the topics of this market overview and you will find out why the European Union Member States were allocated free CO2 quotas in February, how much the price of oil rose in February, what kinds of results last financial year brought for Eesti Energia and its subsidiaries, and whether this year for the first time Lithuania really is supplying more gas from the Norwegian Statoil than from Gazprom.

Read more about the topics below

  • Warm weather and a new link to Scandinavia helped to lower electricity prices in the Baltic States »

    The cold weather that ruled North Europe in January eased in February, as a result of which electricity demand declined in Scandinavia and in the Baltic States. A significant reduction in electricity consumption was reflected also in the electricity exchange prices in February, with the average price in the Estonian market area then settling at EUR 28.28 per megawatt hour, having registered hourly prices of EUR 200 as recently as January.

    It is worth remembering that the prices cited in this market overview are the statistical hourly averages for the month. When buying electricity, however, it should be taken into account that clients with hour-based metering receive a separate price of electricity for every hour. Every client’s individual average monthly price depends on the distribution of its consumption over the course of the hours of the month: whether it falls mostly on costlier or cheaper hours.

    February proved historic for the Baltic electricity market also for the reason that, for the first time during the period of the open electricity market, stable energy trade was conducted via the newly launched NordBalt submarine cable officially still in its testing phase. NordBalt links Lithuania’s electricity systems with Sweden’s. Thanks to the link, February saw Lithuania import cheap electricity produced by nuclear and hydroelectric power plants in Sweden, which helped the market prices in Lithuania and Latvia to drop to their all-time lowest levels on the markets in both countries. Aided by warmer weather, the price of electricity in Latvia and Lithuania worked out to be EUR 29.65 per megawatt hour, translating into a 41 per cent price drop compared to January on these markets.

    On 17 February, Lithuania’s electricity transmission system operator Litgrid announced that NordBalt had successfully passed system testing and that from 18 February the submarine cable would enter its test operation phase. This means that 700 megawatts of Swedish electricity was added to the markets in the Baltic States. Since the submarine cable has not been unveiled yet officially, there is no guarantee that the additional transmission capacity will be fully available every day or hour. Nonetheless, 164.5 GWh of electricity was delivered from Sweden to Lithuania in February.

    The additional electricity helped prices in Latvia and Lithuania to drop to levels very close to those in Estonia and Finland. In Finland, prices dropped 31%, and our northern neighbours’ monthly average worked out to be EUR 26.09 per megawatt hour.

    Area Average
    Change compared to
    previous month
    Minimum Maximum
    Nord Pool Estonia 28,28 -24,85% 5,24 50,48
    Nord Pool Finland 26,09 -31,03% 5,24 50,48
    Nord Pool Latvia 29,65 -40,71% 13,72 50,48
    Nord Pool Lithuania 29,65 -41,08% 13,72 50,48
  • Now it is a good moment to revise your prices and ask a new price offer from Enefit, even if your contract expires at the end of this year »

    Attractive levels of market prices have made the timing right for fixing the electricity price in whole or at least partially. Enefit’s sales Project manager Edvardas Štabokas brings out couple reasons why one should consider asking for a new price offer from Enefit.

    “Exchange prices have been at attractive levels thanks to the warm winters of the past two years and to the added cable links. Therefore, low prices are now useful for the clients who would like to fix the electricity price in whole or at least partially,” clarifies Poriķis/ Štabokas.

    He adds that forward prices on energy market have been historically low in the end of February and the beginning of March, when the average price in Helsinkin market area was at one point 24,6 euros per MWh and on Riga’s market 33,02 euros per MWh. However, some days later the prices already increased by couple euros.

    “Customers always want to get a good price and want to know what kind of energy costs they should keep in mind when planning their business costs. Opportunity to fix the electricity price at the low point guarantees the low energy costs for the rest of the contract period,” stated Štabokas. He emphasized that the clients should not wait until their contract is expiring, but can ask for new offers whenever the price is the most suitable for them.

    In order for every company to identify the most suitable energy purchase solution and the best timing for fixing the price, Štabokas advises the clients to get the advice from Enefit’s client managers.

  • Carbon prices nearly at a three-year low »

    Carbon prices, which had trending down since January, continued to decline in February. Whereas on the first trading day in January carbon dioxide still cost EUR 8 per tonne, the price had declined to EUR 6 by late January and as low as EUR 4.7 per tonne by mid-February. The month closed at a price of EUR 5.01. This means that by the end of February, the price of CO2 had dropped from the levels of early January by more than 38 per cent.

    An overall downward trend on the market of pollutant gases has been caused by a significant reduction in the demand for emission quotas, due to a broad decline on the European and other global energy markets.

    In an additional factor, the carbon market was impacted in February by the issue of free quotas for the European Union States, providing the market participants with 535 million free quotas. Some market participants were allocated free quotas for the purposes of helping these mostly industrial companies to remain competitive compared to companies in countries where no environmental regulations as tough as those in the European Union have been introduced.

  • The price of oil showed signs of recovery in February, Dollar changeable »

    Late February witnessed a recovery in the price of Brent crude to a level of USD 35.97 per barrel. This means that February saw the price rise to its highest levels since the beginning of the year. By mid-February, a barrel cost USD 30, whereas a barrel of crude oil could be had on the market for USD 27.9 at the lowest point in January. As recently as early last December, crude oil cost more than USD 40 per barrel, having cost over USD 50 last November. Nevertheless, the price of crude oil remains at a 12-year low.

    The decline in the price of crude oil began in mid-2014, when large quantities of oil began to be supplied on the market as part of the shale oil revolution in the United States. This exerted intense pressure on prices, which still topped 100 Dollars per barrel at the time. The drop in the price of oil accelerated; however, the members of OPEC led by Saudi Arabia announced that the oil cartel would not constrain its production. Instead, the cartel accelerated its oil output in order to push smaller producers off the market and hold on to its market share.

    Record output volumes together with declining economic activity in China and Europe sent the price of oil into a decline. In January this year, oil prices dropped to the USD 28 mark per barrel, their lowest level since 2003.

    In February this year, OPEC announced that diplomatic efforts would be begun in collaboration with external partners, that is, Russia, in order to address the global over-production of oil. On 16 February, Saudi Arabia, Qatar, Venezuela and Russia jointly announced that the volume of their oil output would be left at the January level, in other words, that their output would not be increased. As a result of this, the price of Brent crude began to recover and has been rising, with varying success, up to the time of the writing of this market overview, with the price settling at USD 37.4 per barrel.

    The rise in the price of oil gained short-term impetus also from movement in the Euro to Dollar ratio last February. Whereas the value of the Euro moved little against the Dollar as a result of the month’s trading, the first half of February saw the Euro appreciate very rapidly, rising from the USD 1.08 level to USD 1.13 on 11 February. The month ended closed at a price of USD 1.09.

  • News from the Baltic States »

    Government of Estonia supports efforts by oil shale industry

    On 3 March, the Government of Estonia decided to reduce the operating costs that result for the oil shale industry from national taxes. This sends a signal to companies and creditors that the State wishes to preserve the oil shale industry in Estonia through more flexible action as long as it creates value for the State. The measures linked to the Government’s decision will take effect from 1 July 2016 at the latest.

    “We produce electricity and oil from oil shale. These are products whose final prices are shaped on competitive markets. Our competitiveness is directly linked to the production costs of both electricity and oil. To reduce our costs, we have increased the efficiency of production significantly over the course of the year. The decision of the Government will improve the competitiveness of the industry even further and support our efforts to survive a challenging period,” explained Hando Sutter, Chairman of the Management Board of Eesti Energia.

    At the proposal of the Ministry of Finance, the Government decided to set the price of oil shale mining rights at a level of EUR 0.275 and the environmental fees, impacting the oil shale industry the most, at the 2009 levels. Eesti Energia also supports the plan of the State to introduce from 2018 a new system of environmental charges dependent on the market price of the final oil shale product, in case of which the oil shale resource charges would be directly linked to the global market prices of liquid fuels, which impact the price of the final products of the oil shale industry. If the market price drops, the resource charges of shale mining will be reduced as well; if, however, the market price rises, under the plan the resource charges will rise above the existing levels.

    Eesti Energia earned a net profit of 40 million Euros last year

    Eesti Energia’s turnover declined 12%, to 777 million Euros last year. Its operating profit before taxes was 266 million Euros, down 15% from the year before. Its net profit worked out to be 40 million Euros. Andri Avila, Financial Director of Eesti Energia, explained that the lower turnover and profit figures were due to low prices on energy markets.

    “Over the past year, we have been making a strenuous effort at Eesti Energia in order to improve the efficiency of the company’s operations and cut its costs,” said Avila. “For instance, we have saved 63 million Euros, or 11%, in business expenses compared to 2014. We have been aided by more efficient solutions, including flexible electricity production at Narva Power Plants, selling more to the wholesale market during the hours of higher prices and less when prices have been low,” Avila elaborated. In 2015, the price of electricity declined 17% in the Estonian region of the Nord Pool electricity exchange, whereas the price of oil on the world market dropped 37%.

    Last year, Eesti Energia sold a total of 7.2 TWh of electricity, down 21% from 2014 due to the decline in prices on the electricity market. On its four wind farms, the company produced a total of 223 GWh of electricity, or a third of Estonia’s entire 2015 wind energy output. The Iru waste-to-energy unit produced 270 GWh of heat and 128 GWh of electricity from waste. A record result was achieved with shale oil, 315 000 tonnes of which was sold in 2015. Output from the Enefit280 oil plant accounted for over 40% of the Group’s oil output.

    Last year, the Group invested 246 million Euros, down 11% from the year before. The write-downs on the assets of the Auvere Power Plant and the Utah project were 39.6 million Euros and 26 million Euros, respectively. Furthermore, there was a write-down on the 11 million Euros loan provided for the Jordanian oil project. The revaluation of assets reduced Eesti Energia’s net profit by 76 million Euros.

    In 2015, Eesti Energia paid its shareholder 62 million Euros in net dividends. 65 million Euros in labour taxes and excise duties, plus 28 million Euros in resource charges and 30 million Euros in pollution charges were contributed to the state budget.

    Enefit finished 2015 with profit

    Independent electricity supplier Enefit generated EUR 22.3 million in income and earned EUR 0.26 million in revenue in 2015. Although the company’s income decreased last year, the loss incurred in the previous years has turned into profit. Having reintroduced fixed-price contracts in the beginning of the last year, Enefit plans to increase sales and offer renewable energy products this year.

    “We achieved our goal for the last year and, just as we planned, we ended 2015 with positive performance results. Physical transmission rights (PTR) auction capacities were increased considerably on the border between Latvia and Estonia in 2015, helping electricity suppliers to accurately estimate price fluctuation risks. As a result, Enefit was able to offer electricity at fixed prices to its clients as of the beginning of last year. This will have a major impact on 2016 performance results,” says Enefit CEO Janis Bethers.

    According to Mr Bethers, the company’s major goal for this year is to increase electricity sales volumes and offer new energy solutions that will satisfy the needs of its clients. “Fixed-price products as well as enhanced projects linked to real-time exchange prices help our clients to choose the solution that suits their needs best, while the Green Energy product will offer the possibility to choose ecological energy,” says Mr Bethers.

    In 2015, compared with 2014, the company’s income decreased by a third: from EUR 33.3 million to EUR 22.3 million. The company earned more than EUR 260 thousand in net revenue last year, compared with the net loss of EUR 1.25 million in 2014.

    Last year, Enefit supplied 470 GWh of electricity to its customers in Lithuania, compared with 712 GWh supplied in 2014. At the end of 2015, Enefit was supplying electricity to more than 3,100 points. The company’s clients included Neo Group, Statoil Fuel & Retail Lietuva, Thermo Fisher Scientific Baltics, Žemaitijos pienas and others.

    Eesti Energia, Enefit’s parent company, which operates on the Lithuanian market, reported EUR 777 million in income for 2015 today. The company’s 2015 net profit stood at approximately EUR 40 million. Last year, Eesti Energia produced 7.689 TWh of electricity and remained the largest electricity producer in the Baltic states. The company increased its production of shale oil by 36.6% to 315 thousand tonnes. Eesti Energia increased its market share in the Baltic states to 26% last year.

    Eesti Energia built the first underground sedimentation lagoon at Estonia mine

    Eesti Energia is reducing the environmental impacts of underground mining by constructing a sedimentation lagoon and a pumping station inside exhausted board-and-pillar units at Estonia mine. The large dimensions of the underground sedimentation lagoon extend the time for suspended matter to settle, and water discharged on the ground is of better quality than before. The natural environment is being also conserved for the reason that the need for constructing a sedimentation lagoon on the ground, that is, land under forests or fields, falls away.

    The need for the construction of a new sedimentation lagoon and pumping station arose due to the southward movement of mining operations at Estonia mine. Given the objectives of reducing environmental impacts and raising production efficiency, the engineers of Estonia mine designed the pumping station to be located on the eastern flank of the mine and the sedimentation lagoon to lie underground, inside exhausted board-and-pillar units. The maximum volume of the underground settlement lagoon is 1.1 million cubic metres, exceeding twice the volume of the biggest aboveground settlement lagoon. A higher volume enables mining water to be sedimented or treated longer before it is discharged into nature. Constructed underground, the sedimentation lagoon with a surface area of 2 square kilometres frees up valuable space aboveground.

    Eesti Energia introduces the biggest buckets in the Baltic States

    From this year, Eesti Energia is introducing buckets with higher holding capacity at Narva quarry, raising the efficiency of mining by approximately 10%. Made of light alloy metal, the buckets are the biggest in the Baltic States. At the same time, the company is updating the control systems of its excavators, resulting in an extension of the working life of the machinery by 10 years on average.

    “To produce the new bucket, Eesti Energia’s engineers used light allow metals enabling an increase in the holding capacity of the bucket from 15 to 17 cubic metres, whilst reducing the weight of the bucket by 3.5 tonnes. The testing of a bigger bucket currently fitted on a dragline excavator will last for a couple of months, whereupon the plan is to fit updated buckets also on the remaining ten dragline excavators at Narva quarry,” said Andres Vainola, Member of the Management Board of Eesti Energia and Chairman of the Management Board of Eesti Energia Kaevandused AS.

    “This project will increase mining efficiency by approximately 10%. With bigger buckets, we can remove the overburden and reach the oil shale layer significantly faster, whereas costs will remain practically at the same levels as before. This way, we will keep the production cost of oil shale at competitive levels, on which, in turn, the production cost of our final products – electricity and oil – depend,” Vainola added.

    Lithuania buys more gas from Statoil than Gazprom

    This year is exceptional for Lithuania, which is buying less than half the annual quantity of gas from the Russian-owned Gazprom, which has been Lithuania’s sole supplier to date. Launched in Klaipėda a year ago, a liquefied natural gas (LNG) terminal has enabled Lithuania to supply liquefied natural gas and end the supply of gas from one provider only, which lasted decades.

    This year, two Lithuanian companies – LDT and Achema – are supplying from Statoil approximately 1.35 billion cubic metres of gas reaching the terminal on tankers. The remaining quantity, or 0.7 billion cubic metres, are supplied via Gazprom.

    Latvia’s support system for electricity production remains the same

    The Latvian regulator approved the 2016 support system for electricity production, which will remain the same as in previous years. In February, the Latvian regulator approved the preferential rate of electricity production, left the same as in 2015 and 2014. Accordingly, from 1 April the preferential rate will be EUR 0.02679 per kWh, or EUR 26.79 per MWh.

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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