Energy Market Overview, May 2015

Mathias Vaarmann

Market Analyst

Price increase in the Baltics caused by breakdowns of EstLink-2

In this Energy Market Overview we take a closer look at May energy prices, which increased in the Baltic market mostly due to the 18-day breakdown of the EstLink-2. In May, prices in Estonia, Latvia and Lithuania were 5–7 % higher than in April. To guarantee a reasonable price for electricity, in the current Energy Market Overview we suggest making use of a long-term price offer to avoid further additional price increases resulting from the decision made by the European Union in July regarding its CO2 politics.

The Overview will address crude oil prices, which maintained their highest level during the current year, and the euro-dollar exchange rate that remained almost unchanged. In addition, we will introduce the most important news in the Baltic countries: the Estonian system operator Elering signed a financing contract regarding the third Estonian-Latvian electrical connection, and that the goal of the Estonian gas market development plan is to achieve an effective market by 2020. We shall also examine the changes that the Latvian Ministry of Economy would like to add to the energy market act, and explore the plan of Lietuvos Energija and Fortum Heat Lietuva to build a co-generation plant at Kaunas for nearly EUR 199 million.

Read more about these topics below

  • Price increase in the Baltics caused by breakdowns of the EstLink-2 »

The electricity market prices of the Northern European Nord Pool Spot (NPS), which had been experiencing a constant downward trend this year, continued the same trend in May. A breakdown of the underwater cable EstLink-2 and its subsequent repair had an impact on prices in the Baltics, causing prices to increase. Due to the cable breakdown, a bottleneck developed between Finland and Estonia — this hindered the flow of electricity produced in Scandinavia into the Baltic countries. For this reason Estonia, Latvia and Lithuania were temporarily isolated from the electrical markets of Finland and the rest of Scandinavia.Operation of the EstLink-2 halted for 18 days. At the same time, EstLink-1 continued working, guaranteeing a 342-MW interconnection capacity between Finland and Estonia. In homogenising the Estonian and Finnish markets, however, this capacity is not enough; hence electricity prices went up, causing a resulting increase in prices in Latvia and Lithuania. Hence the Estonian exchange price was EUR 32.3 per megawatt-hour , which is 5.9 per cent more than in April when the average exchange price was EUR 30.50. During the underwater cable breakdown, the price in Estonia exceeded the Finnish by only EUR 9.52 on average; prices in Estonia and Finland were harmonised only for 47,8 per cent of hours in May.In May, the price of electricity in Finland was EUR 25.87 per megawatt-hour (–14.02 % as compared to April when electricity cost 30.09 €/MWh). This is the second lowest electricity price observed on the Finnish market and the lowest in the last three years. This month, the market prices in Latvia and Lithuania stayed uniform and reached EUR 37.36 per megawatt-hour (the price in Latvia increased 7.3 % and in Lithuania 4.9 %; in April they were 34.81 €/MWh and 35.61 €/MWh respectively)./-/doc/8457332/news/turuylevaated/2015_05/keskmised_borsihinnad_eng.jpgIn May, temperatures in the NPS countries stayed approximately 1 ⁰C below the norm (on average ca. 10 ⁰C), which slightly increased the electricity demand in these countries. Despite this, prices in the NPS system stayed low, as the productivity of wind generators was still high and water reservoir levels stayed rather high. Due to adequate precipitation, in May the water reservoirs in the NPS countries kept their water level approximately 10 terawatt hours higher than normal. The water level is measured by the potential electricity volume the hydropower plants can generate using available water . The electricity volume of 10 terawatt hours would cover the entire yearly energy consumption of Estonia with leftover surplus.After restoring the EstLink-2 in the second half of May, mass supply of electricity resumed from Finland to Estonia and Estonian electricity prices levelled out with those of Finland and the NPS countries. Nevertheless prices in Estonia stayed somewhat higher than Finland, as there was a decline in generation in Estonian power plants. By the last day of May, the market areas of the NPS, Estonia, Finland, Latvia and Lithuania achieved record low day-ahead prices — in Finland EUR 13.78, in Estonia EUR 14.91 and in Latvia and Lithuania EUR 19.71 per megawatt-hour./-/doc/8457332/news/turuylevaated/2015_05/kaart_eng.jpg


Average €/MWh

Change compared to previous month



Nord Pool Estonia





Nord Pool Finland





Nord Pool Latvia





Nord Pool Lithuania





  • Launch of carbon market reform approved by Members of the European Parliament (EP) »

During the last week of May, the EP Committee on the Environment, Public Health and Food Safety assembled and its members approved my majority vote the market stability reserve (MSR) to start January 2019 .However, to formulate a legislative act of the MSR, full approval of the European Parliament is required. The issue will be voted on in June. Despite this, the MSR has already been approved by all diplomats representing the 28 Member States.On the same day the EP Committee voting took place, the International Emissions Trading Association (IETA) published the results of their annual survey. For the first time in four years, the members of the European Union carbon market are waiting for average prices to increase.122 IETA members participated in the survey as well as, among others, energy and trading companies and banks. According to the respondents' expectations, during the trading period up to 2020 the average price of CO2 will be EUR 10.79. The prognosis for the trading period 2020–2030 is that the average price of carbon dioxide will be EUR 18.40. In May, trading closed at EUR 7.36 per ton of CO2, thus, for the next decade the markets expect the price of carbon dioxide to rise 2.5 times./-/doc/8457332/news/turuylevaated/2015_05/co2_eng.jpg

  • Anticipating an increase in electricity prices: obtaining an offer for a longer period »

The past weeks have brought some significant changes in the prices of later periods on the electricity market. Artur Teesalu, Head of Large Business Customer Services at Eesti Energia , brings light to the fact that even if a downward trend was observed for prices from 2016–2019, they have already harmonised and are moving upwards in the long-term."The main reason for this is the CO2 price reform that is today being discussed in the European Union and subject to a final decision in July this year. Compared to today's price level, the reform will be accompanied by a triple price increase for CO2," Teesalu explained."If clients consider the price of electricity to be important, I suggest they review their contract expiry date and ask their operator for a price offer for periods up to 2019. Once they have an offer, the client can decide whether to risk waiting for the final decision from the European Union concerning CO2 policy or decide about upcoming periods right away," Teesalu said concerning clients' options.

  • The price of crude oil stayed at its highest annual level. No significant change in the euro and dollar exchange rate »

During May trading, the price of Brent crude oil stayed greatly unchanged and ended the month at USD 65.56 per barrel . April ended with USD 66.78 per barrel of crude oil, hence a slight monthly drop, just below 2%, was observed. In May, crude oil maintained its highest level of the year; nevertheless, in mid-January, an oil barrel still cost less than USD 48, in March less than USD 54 and in April the highest price of the year was recorded — USD 67.77./-/doc/8457332/news/turuylevaated/2015_05/toornafta_hind_eng.jpgIn May, prices fluctuated slightly and the main factors that impacted the market were the decision of the Central Bank of China to lower its interest rates, the ongoing battles in Yemen and the fluctuation of the dollar on global exchange markets.For the third time in May, the Central Bank of China lowered its interest rates, giving rise to expectations that the Chinese economy will return to fast growth, which in turn will raise oil demand on global markets, increasing the crude oil market price. Next to the US, China is the second largest consumer of oil in the world and consumes approx. 10 million barrels daily. The economy of the People's Republic of China is experiencing its worst year in the past 25 years; this is reflected by consistently declining inflation and a decrease in foreign demand.The ongoing battle in Yemen and the air strikes by Saudi Arabia against Yemen injected fear onto the markets that the Middle East's oil production and export capacity might suffer ; it also contributed to keeping the price of oil at its highest level of the year. Yemen is a relatively small oil producer, yet the strategic position of the country near the oil tanker shipping routes has raised concern on oil markets on whether its instability could challenge the Middle East's oil export capacity.Oil prices were also influenced by the fluctuation of the U.S. dollar As oil products are quoted in dollars, the fluctuation of the U.S. dollar impacts the price of oil for those whose main currency is not the dollar. Hence the strengthening of the dollar makes oil more expensive, and vice versa — weakening of the dollar makes it cheaper./-/doc/8457332/news/turuylevaated/2015_05/euro-dollar_eng.jpgMay was an erratic month for the value of the U.S. dollar to the euro. On the weakest day of the Greenback currency, May 14, the European Central Bank fixed the dollar-to-euro exchange rate to 1.1419 . The strongest day of the dollar was May 27, when one euro was worth USD 1.0926. The month ended at 1.0970. By the beginning of June, the euro-to-dollar rate returned to 1.11. The value of the dollar to euro has for months remained more or less on the same level as at the end of April when the rate was 1.1215.The meeting of the oil organization OPEC that took place in Vienna on 5 June also received a lot of attention on the oil markets. OPEC decided to continue with the strategy it had executed so far, which corresponds to the market expectation. Its strategy encompasses maintaining market share and production amounts.

  • News from the Baltic States »

Elering signs financing contract for third Estonian-Latvian electrical connection

In May, Elering, the Estonian system operator, signed a EUR 112 million contract with the European Commission, under which the European Union would finance the construction of the third Estonian-Latvian electrical connection. Elering will cover its own contribution using profits from the Estonian-Latvian cross-border trading capacity auction, which has been quite controversial though functioning well. The third Estonian-Latvian connection will comprise 330kV high-voltage power lines from Harku to Sindi and from Kilingi-Nõmme to Riga. This is expected to increase transmission capacity between the two countries by approximately 600 megawatts. After deciding on the project route in Harju and Lääne counties this fall, the next stage will include finding and organising builders. Elering is planning to announce the tenders in September and December this year respectively.

Estonian Gas Market Development Action Plan Goal — a Functioning Market by 2020

Elering is currently preparing a gas market development action plan for Estonia with the goal of developing a competitive gas market with many market participants by 2020. A draft action plan has been sent out to market participants for public consultation; it was first introduced in a gas market advisory council meeting on May 27.Over the coming months, Elering will finalise analyses to ensure gas accessibility to protected consumers. To safeguard the security of supply, the Estonian-Finnish gas connection project Balticconnector is of crucial importance. At the same time, the Estonia-Latvia connection has to be strengthened and made usable on both sides. To ensure the gas market's effective functioning, emphasis will be placed on the functioning of measuring data transmission processes. To simplify the process, a data exchange platform or data hub (Andmeladu) like the one used in the electricity market, must be created.To guarantee a liquid market and transparent gas pricing, a regional gas exchange will be created. On the Estonian and Lithuanian markets, this could be launched in a couple of years and Latvia and Finland will join once they have completely liberalised their markets.

Latvian Ministry of Economy drafting a new energy act

The goal of the main changes of the Latvian Ministry of Economy draft of a new energy act is to liberalise the Latvian gas market. The recent, most important changes are connected with the current gas monopolist JSC Latvija Gaze and propose dividing the monopoly from 1 January 2017 into two parts. According to the proposal, one company would be responsible for the distribution system and the infrastructure, functioning as its operator and owner. The other would work as the main transmission network operator, continuing to sell gas to clients. The energy act amendments also say that the State of Latvia will have priority in acquiring the infrastructure operator and should the state refuse this the option, the legal right shall be passed on with governmental consent.

Lietuvos Energija and Fortum Heat Lietuva plan a co-generation plant in Kaunas

Lietuvos Energija and Fortum Heat Lietuva signed a contract to build a co-generation plant in Kaunas. For project planning, a new company named Kauno Kogeneracinė Jėgainė will be established. It will be supervised by the national company Lietuvos Energija. As soon as the contracts have been signed with the corresponding parties, the names of project investors will be revealed. According to the data of Lithuanian newspaper Verslo Žinios, the modernisation project of the Kaunas thermal energy sector will require approximately EUR 199 million.

  • Värska Vesi, the business customer of Eesti Energia: the time for fixing electricity prices is crucial »

Today we would like to introduce Värska Vesi Ltd., a large customer of Eesti Energia — many of you have probably seen their products in stores. Bottling and marketing mineral and drinking water, Värska Vesi has been in business since 1993. Their product "Värska Originaal" has been in production since 1973, being bottled in Värska.Georg Mahla, company board member , reveals that the first mineral water well was made in Southern Estonia, Värska, in 1967. "The bottling of mineral water begun in 1973 and the water comes from a 470-metre-deep well," Mahla explains. Over time, 17 million bottles of mineral water have been bottled since 1987, which in addition to Estonia were also sold in Latvia, Pskov Oblast, St. Petersburg, Russia, and Belarus. The production of flavoured water and still drinking water started in the early 1990s; today these are sold in Estonia, Latvia, Lithuania, Russia, China and Finland./-/doc/8457332/news/turuylevaated/2015_05/varska1.jpgVärska Vesi has been using a new factory since 2008 and they have updated their production with new production lines and a new warehouse; now 9,000 bottles of mineral and drinking water are bottled an hour. The company that sells on average 30 million litres of Värska drinks has one-fifth of the market share among the largest food industry producers in Estonia. Georg Mahla says that the company's next goals are to grow on the current export markets as well as find new markets. "Today we have achieved stable positions both in Finland and China and we can see that the Chinese water market has enormous potential," explaining the background of the plans. Mahla also affirms that the company is planning to expand its production and bring new products to market.As for production costs, Mahla admits that electricity and gas are crucial energy sources for operating the company machinery as well as ensuring the heating. "The lower and more predictable these costs are, the better it is for us to run our company," he ensures./-/doc/8457332/news/turuylevaated/2015_05/varska2.jpgIn administering electricity and gas costs, Värska Vesi has chosen fixing the prices. "During the contractual period, this guarantees some certainty regarding the costs applied and also eliminates unpleasant surprises," Mahla reasons. "When prices are fixed is also important; for example our electricity prices were fixed April last year when the future contracts were offered with the lowest prices of all time," he adds. Mahla continues to say that a later analysis of exchange rates showed a clear win regarding the fixed prices as they are now.According to Mahla, key account managers at Eesti Energia have been hugely helpful in making reasonable electricity purchases. "So far, our cooperation has brought good results. It is important to have your own person inside the energy company, who focuses on the issues of Värska Vesi and finds those necessary solutions".

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.