Energy Market Overview, June 2015

Mathias Vaarmann

Market Analyst

In June, the electricity price on the Estonian market plummeted to the lowest level of all time

In this market overview we analyse the June electricity prices, which fell due to the ample production of Scandinavian hydropower plants. In addition, we take a closer look at how and why it is possible to diminish electricity costs for new consumption locations through a timely electricity contract.

In the European news overview, we reflect upon the closure of the Swedish nuclear power station reactors, which has caused a market price increase of 3% for the supply planned for year 2018. After that we view the June oil market, where for the first time in two months the prices of Brent crude oil fell below the USD 60 mark at the beginning of July. All in all, the oil market monthly prices stayed stable at around USD 62 to 65. The euro took its highest position in mid-June and started a fall that lasted until the last day of the month and continued through the Greek poll in July.

Baltic news: We would like to announce that the Baltic and Nordic countries are creating a common electricity balancing market. We will also talk about Elering, the Estonian system operator that acquired Gazprom’s stake in the Estonian gas transmission network, and view the Lithuanian Government plan of uniting the three regulators into one organisation. Among other topics we note that the Latvian regulator has approved the lower transmission tariffs updated by the electrical system operator, and that the NordBalt sea cable connecting Lithuania with Scandinavia has been installed in the Baltic Sea.

In our clients section we speak about another Eesti Energia corporate client, the subsidiary of the shipping group Tallink Grupp — Tallink Hotels — the largest hotel group in Tallinn and second largest in the Baltics with its four hotels. In the article we introduce Tallink Hotels' activities and future plans in more detail and discuss how energy costs and their management affect the company's business.

Read more about the topics below

  • In June, the electricity price on Estonian market plummeted to its lowest level of all time »

The prices on the Estonian market have never been as cheap as this June since joining the Northern European common electricity market Nord Pool Spot (NPS). During the first summer month, electricity cost EUR 27.26 per megawatt-hour on average , which is 15.6% less than May (€32.30/MWh) and as much as 23.9% less than June of last year when the average electricity price was €35.81/MWh. June also saw the all time lowest average day price on the Estonian market — on 7 June, the price decreased to €8.69 per megawatt-hour.Similarly to the Estonian market, the electricity price on the Finnish market dropped to a record low level. In Finland, the average electricity market price in June was €21.52 , which is 16.8% less than in May (€25.87/MWh). The Estonian and Finnish market experienced a bigger price difference due to the decreased production of Estonian power stations. Thus the work load of the cables between the two countries increased, as more electricity had to be directed from Finland to Estonia using the underwater cables EstLink-1 and EstLink-2, to cover the electricity demand. During 69.4% of the June hours, the Estonia and Finland prices stayed unified, which also means that during 30.6% of the total hours, the cables between Estonia and Finland were working at maximum capacity.On the other hand, with the average €42.80 price per megawatt-hour, the Latvia and Lithuania electricity prices increased to their highest level this year. Connected to the above, a 14.6% increase was met (price in May €37.36/MWh). The prices in both countries have been rising since March, as Latvian power stations' production has been in decline. Latvia's decreased national production has put pressure on the electrical connections of the two neighbouring countries with third countries, which in turn has increased electricity prices both in Latvia and Lithuania./-/doc/8457332/news/turuylevaated/2015_06/keskmised_borsihinnad_eng.jpgAmple production from Scandinavia, coupled with its low production costs that lowers the prices even more plays an important role in the price formation of the Northern European electricity exchange, Nord Pool Spot (NPS). The cooler temperatures of the last months have hindered the melting of the Scandinavian mountain ice, hence the water reservoirs of hydropower plants have been filling more slowly./-/doc/8457332/news/turuylevaated/2015_06/kaart_eng.jpg


Average €/MWh

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It is remarkable that June's record low electricity price appeared despite the fact that the month lacked 20 to 60% of the nuclear power stations' production capacity of NPS. The largest deficit was caused by the breakdown of the most powerful nuclear reactor of NPS, the Swedish 1,400 MW Oskarshamn-3. The reactor was halted after a nuclear plant operator discovered a leakage from the water supply system.

During the June hours, the average production of the NPS countries' (Denmark, Finland, Sweden, Norway and Estonia) wind generators stayed around 3,200 MW. In May the same indicator was near 3,800 MW and in April it was slightly below 4,000 MW. Electricity consumption has gone through a general downward price trend characteristic of the summer months. In June, the combined hourly consumption of the Baltic countries was 2,479 MW, it was in May 2,595 MW and in it was April 2,769 MW.

  • How can unexpected electricity costs be avoided when new consumption locations join the grid? »

To avoid unexpected electricity costs in case of new consumption locations, we remind you to sign a grid contract together with an electricity contract.What are the reasons for higher electricity costs? When a new consumption location joins the electricity grid, a grid contract must be signed. However, as long as the location does not have an electricity contract, it shall be supplied automatically as a general service or in the context of imbalance price. However, the general service as well as the imbalance price are the so-called automatic comfort services that do not allow one to choose the price of the service nor do any planning in terms of how much is paid for electricity . Electricity connection is guaranteed even when an electricity contract is not signed directly after signing a grid contract, as at the beginning one will use the general service or the imbalance price and can sign the contract later. We suggest formalising the electricity contract immediately after signing the grid contract, so that the price of electricity will correspond to the company's consumption profile.How does one immediately conclude an electricity contract for a new consumption location? In order to find the most suitable solution for buying energy for a new consumption location, contact a key account manager at Eesti Energia, who will advise and help conclude a contract that best fits the needs of a new consumption location. When signing the contract at least 21 days before end of month, the contract entailing the solution and price chosen shall be valid the following day.

  • Owner of Swedish nuclear power plant announces closure of nuclear reactors »

During second half of June, the German energy company E.ON announced that due to low profitability, two of three Oskarshamn nuclear power plant reactors would be shut down. Market reaction to this news increased the electricity supply price for 2018 by 3%. The E.ON news is a continuation of the news published in April on the Vattenfall (the Swedish national energy company) plan to close two reactors at the Ringhals nuclear power station between 2018 and 2020 , also for profitability reasons. Both E.ON and Vattenfall noted that the nuclear power station closing plan was also pushed by the plan of Swedish Government to raise taxes for nuclear facilities as of August this year.E.ON noted that the second reactor of 638 MW shall be shut down as soon as possible. For now, the first reactor (473 MW) shall continue working and according to current plans it will be shutting down during 2017 and 2019. Although Fortum, the minority shareholder of the nuclear power station ownership, was against the plan, it is E.ON who will make the final decision, as it owns 54.5% of the Oskarshamn owner company. The final decision can be expected by the third quarter of this year.According to E.ON, larger reactors had to be shut due to permanently low NPS prices, the increased costs of nuclear reactors as well as the strict security measures resulting from the Fukushima catastrophe.The current taxes (prior to the government's planned tax increase) applicable to Swedish nuclear reactors make up approximately one third of the exploitation costs of the stations. Additional security measures can cost more than €100 million for a reactor.The nuclear area of Nord Pool Spot (NPS) includes 14 nuclear reactors: 10 in Sweden and four in Finland. After the closure of Vattenfall's Ringhals and E.ON's Oskarshamn reactors, the NPS market will lose over 3,000 MW of power, approximately 25% of the power of the NPS power stations.

  • In June, crude oil stability most affected by problems in Europe and China »

Crude oil prices, mostly stable in June, experienced their worst day of past five months during the first trading days of July, dropping by 8% after the Greek stated their firm "No" at the loan referendum. The fall of the Chinese stock exchange contributed to the markets' panic. Additional tension was wrought by Iran meeting the Western world in order to find a common denominator in the Iran nuclear programme. For the first time since mid-April, at the beginning of July the prices of Brent crude oil fell below US$60 for the above-mentioned reasons. /-/doc/8457332/news/turuylevaated/2015_06/toornafta_hind_eng.jpgThe price of crude oil and the euro-dollar exchange rate fell due to the Greek people declining the international support package. The possibility of Greece leaving the euro zone as a result of the referendum became more real, hence the relatively care-free common currency zone experienced some distress. The European Union is one of the world's largest oil consumers, using more than 18 million barrels a day. The euro experienced a fall against the dollar, decreasing the crude oil demand (noted in dollars).The 30% drop on Chinese stock exchange markets that started in June caused a fall in world commodities exchanges, with crude oil being no exception. The continuing slowdown of Chinese economic growth caused a rapid downfall on its stock exchanges. As China can consume up to 10 million barrels of oil a day, it is second in the line of oil consuming countries.If Iran and the Western world end their talks successfully, Iran will restart its large-scale oil export. In 2011, Iran exported 2.5 million barrels of oil a day, but by 2014 the figure had decreased, reaching 1 million barrels a day. According to the US financial services provider Morgan Stanley, by the end of 2015 and the beginning of 2016, every day 700,000 barrels of Iranian oil will be added, and this enhances the price decrease of oil. In addition, the slow market return of the US shale producers also affects the oil price (in light of higher prices that have prevailed for a couple of months).The price of oil per barrel was stable and stayed between USD 62 and USD 65 , but by 6 July it dropped to USD 56.54./-/doc/8457332/news/turuylevaated/2015_06/euro-dollar_eng.jpgThe euro, having reached its monthly peak on 18 June (euro-dollar relation 1.1358), also started its decline due to the Greek problems. By the last day of the month, the euro rate had declined to 1.1135. The decline continued during the first trading days of July and reached USD 1.1055 after the Greek referendum.

  • News from the Baltic States »

Baltic and Nordic countries creating a common electricity balancing market

The Baltic electricity systems operators — Elering, Augstsprieguma tīkls and Litgrid — and Finland's main transmission system operator — Fingrid (as the representative of the Nordic countries) — signed an agreement to create a Baltic-Nordic common electricity balancing market. Elering reports that the agreement goal is to create a common balancing area together with a regulative market that encompasses common products, coordinated management and unified balance providing. With the named cooperation, the parties are preparing to achieve a larger goal of creating a Baltic-Nordic common balancing and regulative market. According to the plan, the common balancing market launches in 2018.

Elering acquires Gazprom’s 37% stake in the Estonian gas transmission network

On 19 June, Elering signed an agreement to acquire the Gazprom group's stake in the holding company AS Võrguteenus Valdus which holds Estonian gas TSO’s shares. According to Elering CEO Taavi Veskimägi, after the deal with Gazprom, Elering owns 89.1% of Võrguteenuse Valdus’ share capital, that is the parent undertaking of Elering Gaas AS. According to Veskimägi, Elering’s goal is to own 100% of the shares; the deal took the company another step closer to the goal. Elering paid €19.9 million for Gazprom's 37% ownership. Elering’s final goal is to become the sole owner of the transmission network and bring management of the electricity and gas networks together under one company.

Latvian regulator approved the transmission tariffs of transmission system operator Augstsprieguma tīkls

In June, the board of Latvian Public Utilities Commission approved the new transmission tariffs of the local operator with lower differences, which shall apply from 1 August 2015. The transmission tariffs decrease by 0.8 to 8.1% according to the differences of electricity transmission network operator measurement points.

NordBalt cable installed in Baltic Sea

At the end on June, Topaz Installer finished the installation works of NordBalt, so during one year and two months, 400 km of cable was laid in the Baltic Sea. Construction works related to the cable are 90% complete. NordBalt's is unique in that it is the first connection between Lithuania (Klaipeda substation) and Scandinavia (Nybro substation). The 700 MW and 453 km underwater cable connects the Baltic countries with the power and infrastructure of Northern Europe, enabling an increase in imported electricity from Scandinavia to the Baltics by 70%.

Lithuanian Energy Market regulator and Communication Services regulator join

In Lithuania, a development process involving regulators from several sectors is about to start. During the next three years, one large organisation encompassing the current Energy Market regulator, Communication Services regulator and the National Energy Inspection will be created. Minister of Energy of Lithuania Rokas Masiulis notes that according to the preliminary prognosis, uniting the organisations helps diminish their annual costs by 5%.

  • Eesti Energia's corporate client Tallink: Optimising electricity costs is a strategic target »

In this market overview we introduce a corporate client of Eesti Energia, namely the subsidiary of the shipping group Tallink Grupp — Tallink Hotels. Tallink Hotels manages four hotels in Tallinn (Tallink City Hotel, Tallink Spa & Conference Hotel, Pirita Spa Hotel and Tallink Express Hotel) and one in Riga (Tallink Hotel Riga). Tallink Hotels is the largest (1,293 rooms) hotel chain in Estonia and second largest in the Baltics. All Tallink hotels offer tourists as well as corporate clients high-level accommodation and conference services and a multitude of additional services. Taavi Tiivel, Tallink Hotels board member remarks that the company's activities are stable, taking into account the Estonian hotel market. "We would like to maintain our position as Estonia's biggest successful hotel chain," Tiivel adds.One needs to pay close attention to electricity costs, which form a remarkable part of managing hotels. "Optimising electricity costs is an important and strategic goal of everyday operations as well as long-term investments. For example, all our hotel rooms are equipped with an energy-saving card-activated system that switches on when a client enters a hotel room and inserts their key card into a corresponding slot. After leaving the room, the client takes the key card with them and hence automatically turns off all the lights," cites Tiivel as an example of energy saving measures used at Tallink Hotels./-/doc/8457332/news/turuylevaated/2015_06/tallink.jpgEven the smallest energy costs do affect the expenses of a company that runs thousands of hotel rooms — e.g. the lighting solutions in restaurants and rooms. Photo: Tallink HotelsFor Tallink Hotels, optimising electricity costs also means changing the current equipment to more economic ones (e.g. lights, kitchen appliances). "Technologies are developing and the pressure for environmentally friendly solutions has put engineers to work, and as a result the market offers several complex solutions that also includes electrical transportation. To ensure we make best choices, to know our costs and to leave a green footprint, we analyse the options with providers and specialists," Tiivel explains.Eesti Energia has been the energy retailer and partner of Tallink Hotels since they were established and first opened their doors in 2004. Tiivel emphasises that "When a couple of years ago the energy market opened up, we signed a contract with Eesti Energia and recently we concluded a follow-up contract for the upcoming years". "Cooperation with Eesti Energia has been impeccable and we have always received answers and solutions to all questions and problems. On top of our regular energy purchasing, we have also received lots of help regarding small or large electricity works in our hotels," he adds, hence highlighting several cooperation possibilities the energy company offers to the hotel chain.

This 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.