Energy Market Overview: In May, prices decreased compared to both the previous month and the same month last year

In May, electricity prices decreased by approximately 8% compared to April, reaching €67.6 per megawatt-hour. The price decrease was supported by the drop in natural gas prices in April, high renewable energy production in Lithuania and Estonia, and continued hydropower generation in Latvia. Compared to the average May price over the past ten years, this year’s electricity price was 23% higher (the ten-year average May price is approximately €55.1 per megawatt-hour).

Despite significantly lower hydropower generation in Latvia and the absence of the EstLink 2 interconnection during both periods, electricity prices in May this year remained nearly 11% lower than at the same time last year.This can be attributed to the decline in the prices of raw materials needed for energy production, higher renewable energy production (particularly from Lithuania), a drop in carbon allowance prices and lower oil shale production in Estonia.

Estonia’s electricity price does not depend solely on domestic electricity production. For us, cross-border interconnections play a vital role – via EstLink, we receive more affordable Nordic hydro and wind energy through Finland; from Latvia, we mainly receive hydro and gas-generated electricity; and through Lithuania, electricity imported from elsewhere in Europe, including a growing share of wind and solar power. The Baltic countries largely operate as a single region – producers work closely together to meet the overall demand, which in turn results in similar electricity prices across all three countries. Despite the absence of the EstLink 2 interconnection and several transmission capacity maintenance operations in the Baltic countries, electricity prices have remained at the same level across the region for more than 90% of the time this year. The highest levels of price alignment were recorded in 2020 and 2024, with prices being exactly the same for 98% of the time.

The continuous alignment of electricity prices clearly illustrates the price dynamics of the entire Baltic market: the highest prices usually occur when Estonia’s oil shale power plants are needed to cover the final shortfall in demand. Moderate prices result from Latvian hydropower and gas-fired power plants in Latvia and Lithuania. The lowest prices occur when Estonia and Lithuania generate high amounts of solar and wind power (as wind and solar capacity in Latvia is relatively small).

In May, Lithuania produced approximately 43% of all electricity generated in the Baltic region (878 GWh), Estonia 21% (419 GWh) and Latvia 17% (348 GWh). It is noteworthy, however, that in May, solar, wind and hydro power covered approximately two-thirds of total electricity consumption across the Baltic region. This is an increasingly clear indication of a new trend in which the entire Baltic region is becoming largely – or even fully – reliant on green energy.

Of the Baltic countries, Lithuania consumed the most electricity – 45% of the region’s total consumption. Estonia followed, consuming approximately 30%, and Latvia 25%, of all electricity used in the Baltic region. In Estonia, we consumed mostly wind and solar energy (40% of national consumption), in Latvia hydropower (48% of national consumption) and in Lithuania wind and solar energy (54% of national consumption). In all countries, the shortfall was mainly covered by fossil fuels and imports.

According to Elering, the EstLink 2 interconnection between Finland and Estonia will be operational on 25 June, earlier than the previously announced mid-July. There is reason to expect significantly lower electricity prices, particularly during evening hours. In other words, the restoration of the EstLink 2 interconnection is expected to bring a large proportion of the €200–300 evening peak prices down. During summer evenings, when solar generation drops after sunset, EstLink 2 enables the import of more affordable nuclear, wind and hydro energy from Finland, primarily replacing Estonia’s more expensive oil shale power plants and Latvia’s gas-fired power stations.

However, the restoration of EstLink 2 does not mean the end of market volatility. In situations where cheap solar energy disappears in the evening, the weather is calm with little wind and there is no opportunity to import cheaper electricity from neighbouring countries, we may see days when electricity prices fluctuate by hundreds of euros per megawatt-hour.

According to the latest forecasts, the average electricity price in July and August is expected to be up to two times lower while EstLink 2 is operational, mainly due to the impact of reduced peak prices, compared to a situation where EstLink 2 is not in service.

The price of natural gas started May at €31 per megawatt-hour and rose by over 6% during the month, reaching €35 per megawatt-hour. The price peak occurred on 27 May, reaching €38 per megawatt-hour. The relatively low price at the beginning of the month was supported by warm spring weather, which in turn reduced heating demand across Europe. The price was also influenced by sufficient LNG imports.

Prices rose rapidly in the middle of the month due to negotiations between Ukraine and Russia. After the publication of the Russian delegation list, the market realised that meaningful agreements were unlikely to be reached and that a large-scale return of Russian gas to the European market was not to be expected. At the same time, the European Union also announced a reduction in gas storage filling requirements, which partly eased the price increase.

In the second half of May, a fault at Troll, one of Europe’s largest gas facilities, pushed prices up by reducing Norway’s daily gas exports by over 30 million cubic metres and putting upward pressure on prices. At the end of the month, a heatwave in Southern Europe drove up gas prices by increasing the demand for electricity generation and, consequently, for gas. In the final days of May, the natural gas price rally subsided.

Trading on the carbon market started at €67 per tonne and rose to €70 per tonne by the end of May. Market volatility was mainly driven by news related to natural gas (weather conditions, demand for fossil fuel-based production assets) and a significant agreement between the European Union and the United Kingdom, which aims to link their carbon allowance trading systems.

The linking of the carbon trading systems between the European Union and the United Kingdom is particularly significant as it signals the strength and continued presence of carbon markets. However, the price increase was slowed during the month by news of US tariffs on EU goods, which in turn sparked speculation about a potential decline in economic activity.

Karl Joosep Randveer, Energy Trading Analyst at Eesti Energia

The market overview has been compiled by Eesti Energia according to the best current knowledge. The information provided is based on public information. The market overview is presented as informative material and not as a promise, proposal or official forecast by Eesti Energia. Due to rapid changes in the regulation of the electricity market, the market overview or the information contained in it is not final and may not correspond to future situations. Eesti Energia is not liable for any costs or damages that may arise in connection with the use of the information provided.