Iseteenindus

2014 Energy Market Summary

09.01.2015

Mathias Vaarmann

Market Analyst

First, we take a look at the Estonian market and analyse how the undersea cable EstLink-2 levelled the prices in Estonia and Finland. In addition, we recall various events and examine how the electricity prices in Estonia were impacted by the reliability of Scandinavian power stations, the servicing of transmission lines, weather conditions, and Central-European electricity trade. It appears from the summary for last year that, due to fluctuating prices, most of the business clients of Eesti Energia decided to fix their electricity and gas prices in 2014.

The relationship between Russia and Western nations, in which a so-called new page was turned, played the decisive role on the European markets last year. Uncertainty in gas supply, due to the Ukrainian crisis, forced Europe to consider new gas partners. In this context, the big event in the Baltics was undoubtedly the opening of the LNG gas terminal in Klaipeda, giving the Baltic States a greater degree of independence from Russian gas.

2014 also brought changes to the liquid fuels market, where oil prices dropped unexpectedly. Prices will most likely remain low throughout the current year. However, the Organization of the Petroleum Exporting Countries (OPEC) decided to preserve its market share and not to restrict production. The US dollar began to rise in the second quarter, which led to an increase in the price of gas sold in Estonia.

In 2014, the most important key word for the Baltic countries and Europe was security. The Energy Forum held in the autumn, marking the 75th anniversary of Eesti Energia, was also dedicated to energy security. The long-term contract between Litgas and Statoil for supplying the Klaipeda LNG terminal with gas, and the first official gas transit from Lithuania to Estonia in December were also important milestones. Latvia celebrated its first year on the Nordic energy market last summer.

In the last part of the annual energy market summary, we will take a look at how the largest cinema operator in Estonia, Forum Cinemas, manages its energy costs. The company’s cinemas are visited by more than 1.25 million people annually.

Read more about the topics below

  • Opening of the undersea cable EstLink-2 levelled the electricity prices in the Nordic countries »

    The official opening and launching of the submarine cable EstLink-2 can be considered the most important event of the previous year on the Estonian electricity market. Adding the 650-megawatt undersea cable to the current cable EstLink-1 raised the electricity transit volume between Estonia and Finland to 1000 megawatts, ensuring that the Baltic States have better access to low-cost hydro and nuclear energy produced in Finland and Scandinavia. For the Estonian electricity market, the biggest impact of the addition of the cable was the drop in electricity exchange prices – the average price per megawatt-hour in the Estonian market area in 2014 was EUR 37.61. It was the lowest annual average price since Estonia joined the common Nordic electricity market Nord Pool Spot (NPS). The prices can vary significantly, depending on the year. For example, the average cost of a megawatt-hour of electricity in Estonia was EUR 43.14 in 2013.

    The deeper connection of the Estonian electricity market with the Nordic market also means that the price of electricity at home is more dependent on external factors. The most important of these are the reliability of the power plants and transmission lines of the partner countries, the water reservoir levels of Swedish and Norwegian hydroelectric power stations (depending on the amount of precipitation), and the electricity demand in Scandinavia and Finland depending on the air temperature. Determining factors also include the output of the Nord Pool Spot electric system’s wind turbines, dependent upon wind speed, as well as the NPS electricity trade with Germany.

    The previous year confirmed a fact that we have already stated in our earlier market overviews - the Nordic electricity market partly depends on the oil prices on the world market. In the second half of the year oil lost more than half of its value, which lowered exchange-traded prices, CO2 emission allocation prices, and the market price of coal to the lowest level in several years. This, in turn, brought down the sales prices of coal-fired plants. Although they are not used much in the NPS countries, coal-fired plants play an important role in Germany and other countries in Continental Europe. The decreased prices of Continental Europe’s electricity market also had an impact on the drop in market prices in the NPS (including Estonia).

    The annual average electricity exchange price in Finland was EUR 36.02 (EUR 41.16 in 2013); in Latvia, EUR 50.12 (EUR 48.39); and in Lithuania, EUR 50.13 (EUR 48.93).

    Area Average €/MWh Change compared
    to previous year
    Minimum Maximum
    Nord Pool Estonia 37,61 -12,82% 1,95 210,08
    Nord Pool Finland 36,02 -12,49% 1,95 200,05
    Nord Pool Latvia 50,12 3,58% 5,08 300,01
    Nord Pool Lithuania 50,13 2,45% 5,08 300,01

    Cable between Norway and Great Britain approved by the Norwegian Government

    In October 2014, the Norwegian Government approved the project for building the world’s longest submarine cable. Norwegian electricity system operator Statnett will take the final investment decision in the Q1 2015. In case the green light is given, the 700 km long EUR 2 billion cable will connect the Norwegian electricity market to the market of Great Britain. The cable is expected to be completed by 2020, and its capacity will be 1400 megawatts.

    Completion of this project is highly important to the entire Nord Pool Spot market, since it also opens the NPS exchange market to Great Britain’s electricity market. In this island nation, electricity has usually cost significantly more than in Northern Europe. This means that voluminous electricity export to a more expensive area may increase the NPS prices, since electricity producers will no longer have to sell their entire production in the NPS market area with its lower prices.

    Completion of Finnish nuclear power plant Olkiluoto-3 postponed

    Another important event in 2014 was the postponing of the completion of Finland’s newest nuclear power plant, the 1600-megawatt Olkiluoto-3, to 2018. Construction of the fifth and largest nuclear reactor in the country began in 2005, and was originally planned to be completed in the beginning of 2009. It has been postponed once again. The objective of the new power plant is to contribute considerably to Finland’s energy independence, and to bring down Finnish and Estonian electricity prices through the volume added to the market.

    Cables connecting Lithuania to new market areas will be completed

    In April 2014, construction works began on the NordBalt cable, which will connect Lithuania to Sweden, and in May, construction of the cable between Lithuania and Poland, LitPol Link, began. The cables will be partly completed by the end of 2015. The 700-megawatt NordBalt and 1000-megawatt LitPol Link will open the Latvian and Lithuanian markets to new electricity sources, and will improve the power supply of both countries, making our neighbours less dependent on the electricity exports from the east and Estonia. The addition of the cables may also mean a lower electricity exchange price for areas in Latvia and Lithuania. The first half of the planned 1000-megawatt capacity LitPol Link will be completed by the end of 2015, and the other half by 2020.

  • Eesti Energia’s clients preferred to fix their electricity price in 2014 »

    EstLink-2, which the market started using last year, provides Estonia with better access to the cheaper electricity produced by the hydro and nuclear power plants of the rest of the Nord Pool Spot countries. However, with the import of cheaper electricity, the joined markets of Estonia and Finland still remain dependent on Sweden and the transmission cables between the regions. As a result, there may be vast fluctuations in the exchange market price of electricity on a month to month basis, which may in turn be reflected on electricity bills.

    This is the main reason why last year’s summary on the preferences of Eesti Energia’s business clients revealed that most of the companies prefer to either partially or fully fix their electricity price, to provide security and better manage electricity costs. “In addition to the fixing of the price, a significant number of the companies also chose the long-term electricity purchase strategy last year. It means that large business customer service managers were able to provide their clients with a better price for a longer period, since the periods with lower prices were in the future last year,” explained Artur Teesalu, Head of Large Business Customer Service at Eesti Energia.

    Another strong trend among large business customers last year was to purchase electricity and gas products from the same partner. Eesti Energia, which has achieved an 14% market share on the gas market, considers the main reason for its success to be providing customers with the convenience of making their energy purchases through a single partner. According to Teesalu, Eesti Energia provides the options that best suit the client’s needs when buying gas: “We stand out from the market standard, providing customers with additional purchase possibilities. Those who find price security to be important could, and still can, lock in the price of gas for the entire year, either in whole or in part.

    In finding the most suitable energy purchase solution from the market, the clients are assisted by Eesti Energia’s corporate client managers who act as a partner to their clients in all matters concerning energy. Based on the 2014 customer satisfaction survey, our clients’ evaluations of our service, products, and the entire company have risen to the highest level in recent years.

  • Russian and Western relations impacted the European energy markets »

    In the second half of last year, an important factor on the energy markets was the freezing of Russian and European relations, triggered by the events in Ukraine and the mutual sanctions arising from the crisis. Although the biggest impact was on the liquid gas and gas markets, electricity markets also felt the effect. As we mentioned in our market overviews throughout the year, it can now be stated with certainty that the end of warm relations between Russia and the Western countries meant the beginning of a new chapter in the world of energy.

    In 2014, the European Union made the energy policy decision to break away from fossil fuels imported from Russia and gain as much energy independence as possible by increasing the share of renewable energy. For the electricity market, this mainly meant additions to the number and capacity of wind turbines and other renewable energy sources, and stepping away from the traditional methods of energy production. This trend may lower the price of electricity in the long run.

    Production from fossil fuels will also begin to be deterred in the future because of the suggestion by the largest EU countries in the second half of 2014 to reform the market for carbon emission quotas, which would multiply the market price of carbon dioxide. Upon adoption of the reform, the higher price of CO2 may also noticeably increase the price of electricity.

    Germany took some big steps towards renewable energy last year. Namely, its government declared a plan to produce 40–45% of all energy from renewable sources by 2025, and to increase that share to 55–60% by 2035. For that reason, in the last quarter of 2014, the closing of eight coal-fired power stations was planned. By today, Germany has already implemented the plan for full closure of nuclear power plants, which should be finalised by 2022. In the light of changes on the market, it was announced in November that Germany’s energy giant E.ON will be split in two, with electricity production being moved outside of the group. Inevitably, the breakup of E.ON symbolises a new direction in the European energy sector.

    The most successful European country so far in moving towards green energy has been Denmark. Last year, the kingdom produced 39.1% of its own electricity using wind farms. This result is also a new world record. In 2013, the highest current level was 32.7%. By 2020 however, Denmark is planning to increase the share of wind energy to 50 per cent.

    To avoid dependence on Russia, the European Union also began planning on breaking away from Russian natural gas. The EU currently imports approximately one third of its gas from Russia. Due to the changed political landscape, new gas partners were sought in 2014; and in the future, the potential gas supplier of the EU may be Iran. The importance of liquid gas is also increasing throughout Europe.

    Russia also reacted to the situation and terminated South Stream, the large-scale gas transit pipeline construction project. On the Russian side, construction works on the gas pipeline had already begun at the end of 2012. Upon completion of the project, the 2380 km pipeline passing through five countries would have transported 63 billion cubic metres of gas each year from Russia to Austria and Italy. South Stream would have covered a little more than 13% of the EU-s annual gas need.

    Klaipeda LNG terminal opened in Lithuania

    Greater independence from Russia was brought to the Baltic States’ gas market with the opening of Klaipeda LNG terminal. The new liquefied natural gas terminal in Lithuania is capable of providing four billion cubic metres of gas each year, covering approximately 80% of the gas needs of the entire Baltic region. The Klaipeda terminal is supplied by liquefied gas from Norway.

    LNG ship terminal, Independence

  • 2014 brought drastic changes to the oil market »

    Last June, the price of oil hit the highest price of the year, rising to over USD 115 per barrel. The price of liquid fuels was lifted higher by fear on the markets from a decrease in supply caused by geopolitical crises around the world (in Ukraine, and also in Iraq and Libya). In July, oil prices started to drop, and by the end of the year they had fallen to half of what they were at their peak in June. On the last trading day of the year, the price of black gold was USD 57.33, which is the lowest price in the last five years. At the time of the writing this report (in January 2015), the price had dropped even lower - to USD 51.45.

    The drop in the price of oil was mainly impacted by the recovery of production in large oil producers Iraq and Libya, and strong oil production from U.S. shale, which significantly increased the amount of oil on the market. The price was also significantly influenced by a slowing down of the economic activity of the world’s largest oil consumers - Europe and China - and the international oil cartel OPEC’s decision not to restrict the production of oil. In essence, the OPEC decision meant that the oil cartel declared a price war on all other market participants.

    The reason for the OPEC decision was the plan of the main members of the organisation (Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates) to use lower oil prices to push U.S. small and medium-sized producers, who are largely dependent on high sales prices, out of the market. It will take a lot of time to effectively realise the plan since most of the producers already sold their future production at the time of higher oil prices, with the help of risk mitigation transactions.

    Global overproduction of oil was also supported by Russian production in 2014, remaining at the highest level since the end of the Soviet Union: the average daily production was 10.58 million barrels a day. Oil production of Iraq in 2014 was also at its highest level since 1980.

    Since several of the factors that contributed to the fall of oil prices last year will most likely continue for an extended period of time, the changes on the market are forecast to continue having an impact in 2015. This means that oil prices are not expected to rise this year.

    The rapidly strengthening dollar also played a role in changing oil markets

    Unlike the economies of China and Europe, last year was thoroughly positive for the U.S. economy. In connection with that, the value of the U.S. dollar increased on world markets. Since liquid fuels are priced in dollars on the world markets, its strengthening made fuel products more expensive to those whose main currency is not the dollar.

    For the euro, the highest peak of the year against dollar was in May, when almost USD 1.40 could be purchased for EUR 1. By the end of December, this ratio had dropped to 1.21 which means a 13.6 per cent fall of the common currency against dollar. At its deepest point in December, the euro was at its lowest level against dollar in the last two and a half years. By the time of writing this report (January 2015), the euro-dollar ratio has dropped to 1.185, which is the lowest level in the last nine years. Euro lost 12% of its value against the dollar in 2014.

    The strengthening dollar also meant that the gas sold by the Russian giant Gazprom to Europe became more expensive for European (including Estonian) consumers, since Gazprom’s accounting is done in dollars.

    The reason behind the euro-dollar change is the monetary policies of the central banks of these two currency areas heading in opposite directions. While the U.S. Federal Reserve is rapidly moving towards raising the central bank’s interest rates in the conditions of accelerating economic activity, the European Central Bank is struggling with a stagnating economy and deflation threat. In order to fight these two problems, central banks are lowering the interest rates or even establishing negative interest rates, that is, printing money. These factors made the dollar considerably more attractive to investors than the European common currency, leading the euro to a quick fall against the dollar.

  • News from the Baltic States »

    Estonian energy market: energy security and new strategies

    In 2014, Estonia’s largest oil shale company, Eesti Energia, celebrated its 75th anniversary. In the autumn the company organised its annual Energy Forum, dedicated this time to energy security. During discussions, answers were sought to the questions of whether energy independence really is important for Estonia and whether renewable or fossil fuels should be preferred as energy sources. In addition, discussions were held over how much work energy independence provides and how to increase the state revenues earned from it. The Forum presented a strategy by Eesti Energia, based on producing electricity from oil shale oil. The strategy was backed by the achievements at the end of the year, when successful tests were carried out for achieving the maximum output of the new generation oil plant Enefit280.

    Enefit280 oil plant

    An important development on the Estonian and the entire Baltic electricity market was undoubtedly the agreement between Estonian and Latvian system managers on the possibilities and principles of mitigating the price risks enabling cross-border trading on electricity markets. Limited transmission capacity auctions were held under the agreement, and at the end of the year, the new rules on the sale of transmission capacities were agreed upon.

    Latvian energy market: first year on the Nordic electricity market

    For the Latvian energy market, 2014 marked the first anniversary of the opening of the supply area of the Northern electricity exchange owner Nord Pool Spot in Latvia. Now, the common exchange system includes Norway, Denmark, Sweden, Finland, and all three Baltic States.

    Last year also meant preparations by the Latvian energy sellers for the opening of the market of household customers in 2015. The initial results show that three considerable competitors emerged next to the current monopoly; however, only 4000 households, that is just 0.5% of Latvian’s 850 000 households, decided to change their electricity operators when the market opened. It shows that although the market is finally open for household consumers, the first signs indicate no big changes or lively competition on the market.

    Lithuanian energy market: Opening of Klaipeda liquefied natural gas terminal

    The top event on the Lithuanian energy market in 2014 was undoubtedly the opening of the Klaipeda LNG terminal and the arrival of the first quantity of liquefied natural gas. According to President of Lithuania Dalia Grybauskaite, the Klaipeda terminal ensures energy security to the entire Baltic region, and the opening of the terminal means that Russia can no longer assert political pressure on Lithuania by keeping the gas prices artificially high. According to the European Commission’s assessment, Lithuania paid 36% more than Germany for Russian gas already in the first four months of 2014. Rokas Masiulis, the Head of Klaipedos Nafta, the company that was responsible for the liquefied natural gas terminal project, was appointed as the Energy Minister of Lithuania last September.

    Rokas Masiulis. Photo: vilnews.com

  • Estonia’s largest cinema operator Forum Cinemas: 250 movies and 1.25 million visits per year »

    Forum Cinemas AS is Estonia’s largest cinema chain, which began operating in 1993. The three cinemas of Forum Cinemas AS in Tallinn, Tartu, and Narva show movies on a total of 16 screens with 2594 seats. The company is the leader in the cinema market, with a market share of almost 50%.

    In total, Forum Cinemas brings viewers almost 250 movies a year and in addition to the great creations by Hollywood studios and smaller film makers, they are also the only one in Estonia to show classical theatre admirers the New York Metropolitan opera productions, the London National Theatre word productions, and ballet by the Moscow Grand Theatre, both in live stream and rebroadcast.

    Forum Cinemas theatres have approximately 1.25 million visits every year. “The intensification of competition over the last few years on the cinema markets of Tallinn and Tartu has not changed this number significantly – rather, the opening of a new cinema increases the number of visitors. That is why we are also planning to expand in Tallinn and elsewhere in the near future,” said Kristjan Kongo, Director of Baltic Operations at Forum Cinemas.

    Forum Cinemas AS belongs to Nordic Cinema Group, the largest Nordic cinema group, and is also the Estonian subsidiary of Finnish cinema operator Finnkino. Forum Cinemas operates Estonia’s largest multiplex cinema Coca-Cola Plaza in Tallinn, Kino Ekraan in Tartu and Kino Astri in Narva. The Forum Cinemas chain also has a total of seven cinemas in Latvia and Lithuania.

    Seven cinemas and 16 screens make Forum Cinemas the leader on the Estonian cinema market

    “Our central activity is operating the cinemas – in addition to selling tickets, showing movies, taking care of the equipment and theatre furnishings, we are also keeping a constant eye on the trends on the world’s cinema market and the new technological developments. All in the name of keeping up with the advancing technologies of movie makers and giving our visitors the wonderful visual experience created by film studios,” said Kongo.

    Forum Cinemas also distributes movies under the brand VaataFilmi. “It means that our subsidiary imports the production of Hollywood studios Universal and Paramount that, in addition to our cinemas, also ends up in other cinemas of Estonia. In 2014, a total of 18 movies were brought to Estonia by VaataFilmi from these studios,” Kongo told.

    Efficiency has become the most important factor in operating cinemas and rental areas therein, and cooperation with Eesti Energia plays an important part in it. A cinema is a separate environment for experience, using electricity everywhere - from a small and energy-efficient LED light, to a 7000-watt cine projector lamp. “When in regular lighting, several energy-efficient technologies have been introduced in the last decade, the cinema is still waiting for the developments that would enable more economical functioning of the projectors,” Kongo admitted.

    Forum Cinemas movie theatres use a total of 230 000 kWh of electricity each month. In addition to the cine projector, the other large energy consumer is the ventilation system, which ensures the best air for the visitors to enjoy the movies, regardless of the season.

    According to the Director, electricity is one of the most important “raw materials” for a cinema, which is why Forum Cinemas keeps an eye on all the developments and news in the field of electricity. “Larger problems, like power failures, may completely paralyse a cinema. Although our employees are prepared to give operative information in case of a power failure and to guide the visitors safely out of the cinema, the latest power failure in the downtown of Tartu and its Tasku cinema showed that such an experience can be very frightening to visitors. That is why we are interested in the success of all projects that help to improve the reliability of electric systems in the future,” confirmed Kongo.

    Forum Cinemas is very satisfied with the services of Eesti Energia. “During negotiations, we found the suitable energy purchase solution for the cinema and we are satisfied with our selection. Our cooperation has expanded and diversified to more than just energy purchase,” Kongo said. The Forum Cinemas energy purchase solution contains a convenient solution of both electricity and gas from the same partner.

The market overview has been prepared according to the current market knowledge of the Eesti Energia analyst. 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.