Energy market overview, January 2015


Mathias Vaarmann

Market Analyst

In this market overview, we take a look at the fluctuation of exchange prices during the first month of the year and analyse the price of oil, currently at its lowest level in the past six years. In addition, we discuss how the drop in the price of oil is also bringing down gas prices and how big energy corporations are cutting investments and costs because of the decline in oil prices. The continued decline in the price of oil is also affecting the exchange rate of the euro, which is at its lowest level against the dollar in the past 11 years.

The analysis of the energy markets in the Baltic States examines Eesti Energia’s supply of gas from the liquefied natural gas terminal in Lithuania and the new methodology approved by Litgrid, the Lithuanian system manager, for the calculation of the price cap on public services in the energy sector.

In the corporate client section of the market overview, we discuss Estonia’s largest independent terminal operator, Vopak E.O.S, which handles petroleum products transported by sea. We take a closer look at what kinds of energy purchasing solutions have been chosen by the terminal operator whose levels of energy consumption are high.

Read more about the topics below

  • Exchange prices in Estonia and Finland at lowest levels in past nine months »

    Last January saw the average price in the Estonian market area of Nord Pool Spot drop to its lowest level in nine months, EUR 33.84 per megawatt-hour. The last time electricity was cheaper in Estonia was in April 2014, when the exchange price averaged EUR 31.64. Compared to last December (37.42 €/MWh), the average price of electricity declined 9.6 per cent, with prices 17.4 per cent lower compared to last January (40.98 €/MWh).

    Although the newly completed EstLink-2 undersea cable was already being used by the market in January of last year, it was not yet fully accessible to the market at that time. Until the completion of the emergency reserve power plant at Kiisa (July 2014), the capacity of the cables between Estonia and Finland totalled 860 megawatts instead of the full capacity of 1000 megawatts. Whereas in January 2014 the maximum capacity of the undersea cables was utilised for 103 hours, this was the case during just seven hours in January of this year. In January there were a total of 59 hours when the electricity market used the additional 140-megawatt capacity.

    A dramatic price drop in January of this year was brought about by the favourable weather conditions in the Nord Pool Spot (NPS) electricity market system: high average air temperatures and high wind speeds. An indirect impact was also made by oil prices, 60 per cent lower since last summer, which depressed the market prices of coal, thereby bringing down the exchange prices of electricity in Germany. Lower prices in Germany, in turn, increased the export of cheaper electricity from the Federal Republic into the NPS electricity system, thereby lowering prices on the combined electricity market of Scandinavia and the Baltic States.

    The decline in prices was offset by the somewhat lower air temperature in the NPS countries at the end of the month and by a decrease in the output of the 1400-megawatt Oskarshamn-3 nuclear power plant in Sweden.

    Area Average
    Change compared
    to previous month
    Minimum Maximum
    Nord Pool Estonia 33,84 -9,57% 5,09 75
    Nord Pool Finland 33,80 -8,97% 5,09 75
    Nord Pool Latvia 39,78 -18,60% 5,09 75
    Nord Pool Lithuania 39,78 -18,60% 5,09 75

    Weather is one of the most important factors determining prices on the Nordic electricity market. A decisive role in determining prices is played by both the air temperature, driving demand for electricity, and the output from wind turbines, resulting from wind speeds and also affecting demand. In terms of supply, an important factor is the replenishment levels in hydro reservoirs, which depend on precipitation quantities. Since electrical heating is very common in the NPS countries, a temperature drop of a mere 1.6 degrees may push up demand for electricity by as much as two gigawatts during the heating season. By comparison, peak-hour consumption in Estonia last January predominantly hovered around 1.25 GW.

    Last January, the exchange price in Latvia and Lithuania averaged EUR 39.78 per megawatt-hour, the lowest price for either neighbouring country since December 2013. Compared to December 2014 (48.87 €/MWh), the exchange price for Latvians and Lithuanians dropped 18.6 per cent. Apart from the above factors, lower prices were also due to the higher capacity of the transmission cable between Estonia and Latvia and the increased output from the power plants in Latvia.

    In Finland, the average exchange price settled at EUR 33.80 per megawatt-hour, its lowest level since April of last year, just like in Estonia. Last January, prices in Estonia and Finland were consistent during 98.1 per cent of the hours, diverging during 14 hours.

  • Attractive levels of exchange prices provide good opportunity to fix electricity price »

    The EstLink-2 undersea cable connecting Estonia and Finland provides the Estonian market with better access to the electricity production assets of the rest of the Nord Pool Spot countries. Since the principle of the electricity exchange is that electricity should move from the cheaper area to the more expensive one, Estonia, too, has benefited from cheaper energy as a result of the production of hydropower and nuclear energy. It is worth remembering, however, that any markets connected to Finland will remain dependent on Sweden and Norway and on the interregional transmission lines. Since last January was warmer than average, the price of energy turned out to be attractive due to the slump in exchange prices. That being said, it is worth keeping in mind that major fluctuations in the exchange price of electricity may occur from month to month, which in turn may result in unpleasant surprises on electricity bills. Broadly speaking, since energy prices are lower now, prices on long-term future transactions are lower as well.

    For the most part, the next period for concluding a new electricity contract will begin in 2016 or even later. Accordingly, in the estimation of Artur Teesalu, Head of the Large Business Customer Department at Eesti Energia, it is a good idea to consider fixing prices already when prices on future transactions are low, rather than waiting until the end of the year. “With a view to electricity purchases for next year, it is worth considering that the price of electricity in January 2015 will not play a significant role in determining the price, since it is impossible today to predict the state of the hydro reservoirs or the potential for the production of cheaper electricity in 2016,” Teesalu explains. “However, what we can say based on previous experience is that the second half of winter and spring are a good time to fix electricity prices for upcoming periods. For companies wishing to take exchange price risks when buying electricity, the best and most common solution is the option, offered by Eesti Energia, of controlling their costs and fixing the price in part.”

    In order for each company to identify the solution that is best for it, Eesti Energia’s key account managers will help to assemble an electricity purchasing strategy for the client for the upcoming periods, allowing for market inputs and the client’s business needs.

  • Failed vote in European Parliament shakes carbon market »

    One of the objectives of the European Union is to raise prices on emission allocations traded on the Union’s single carbon market over the next few years. Once the economic crisis had passed, a very large surplus of allowances was created on the carbon market, suppressing the prices of CO2 quotas by several orders of magnitude. Whereas in 2008 a tonne of carbon dioxide emissions cost EUR 20 to 30, its price has now dropped to about EUR 7.

    Raising prices on carbon dioxide allowances is needed to fight climate change. Furthermore, the European Union in its energy policy has committed to distancing itself from energy supplied from Russia, primarily by increasing renewable energy sources. The current low price of carbon provides no incentive for Member States to give up the burning of fossil fuels; accordingly, the European Commission proposed a reform of the carbon market last year.

    Under the reform, a so-called market stability reserve would be created from 2021 to eliminate superfluous allowances from the market, thereby raising the price of carbon. Several Member States, including Germany and the UK, by contrast, wish to move up the market reform to 2017, already.

    However, shaping the reform proposal into legislation is going to be a rather long process yet. First, it requires support from the Industry and Environment Committees of the European Parliament, the Parliament itself and, finally, the 28 Member States of the Union.

    The second half of last January saw a vote in the Industrial Committee, the first in a series of votes. Under the initial vote, the beginning of the market reform from 2017 was rejected; after which, its beginning from 2021 was supported with a margin of one vote. In the estimation of the Committee, the majority behind the outcome of the vote was too slight to be compelling. As a result, the outcome of the vote was rejected in its entirety.

    The situation on the day of the vote caused confusion on markets, with the price of allowances fluctuating up and down by approximately 10 per cent during the day. With the rejection by the Industry Committee of the outcome of the vote, there remained the significant possibility that a market reform might begin as early as 2017.

    Although a tonne of emission allowances cost just EUR 7.15 at the end of January, the price of allowances is expected to rise dramatically over the next few months and then steadily over the next few years.

  • Oil prices at lowest levels in past six years »

    The decline in the price of oil, which began last summer, continued in January, bringing the price of Brent crude oil to its lowest level in almost six years on 13 January: USD 46.59 per barrel. Oil prices remained below the USD 50 mark for most of the rest of January. However, the last day of the month and the first trading days in February saw markets rally dramatically: at the time of the writing of this overview, Brent was nearing the USD 60 mark already. On the last trading day in January, Brent closed at a price of USD 52.99 per barrel.

    At the end of the month, a shift occurred in the price of crude oil, which has lost 60 per cent of its value because of global overproduction and a global decrease in demand for oil. Although the various indicators point to the continued overproduction of oil and the subsequent decline in its price, late last January markets turned their attention to the data published by the large US oil-drilling corporation Baker Hughes, according to which the number of oil wells in the United States decreased by 7 per cent in a week. This is the biggest drop in a week since 1987, when data of this type began to be collected. After the publication of the news, oil prices recovered by 8 per cent, since the news suggested to the markets that OPEC’s plan to push smaller producers off the market was producing results.

    Rising prices were fuelled by statements from large energy corporations that they would decrease investments in new oil sources. These companies include, among others, the British group BP, Chevron in the United States, Royal Dutch Shell – the largest oil company in the Netherlands and Europe – and France’s Total.

    According to Abdalla Salem El-Badri, Secretary General of OPEC, oil prices may rise to USD 200 per barrel over the next few years, since decreased investments in new oil sources may cause a crude oil shortage on world markets.

    An important factor determining the prices of gas and liquid fuels is the euro-dollar exchange rate on currency markets. Last January, changes affecting currency markets had a broader impact, which was passed on to both commodities and stock markets.

    After deflation hit the euro zone last December, the European Central Bank (ECB) made the decision in the second half of last January to implement quantitative easing measures, that is, print more money and inject it into the economy.

    According to the ECB, the cash injections will begin in March of this year, with the process to last through September 2016. During this period, up to EUR 60 billion will be printed and injected into the economy every month – more than EUR 1 trillion in total.

    The press release from the ECB and the surprise decision by Switzerland’s central bank (scrap the cap on the appreciation of the Swiss franc against the euro) took the euro to its lowest level in the past 11 years in a couple days. Whereas on the first day of last January the dollar-euro exchange rate was USD 1.2102 per euro, it had dropped to USD 1.1608 by 21 January. In two days, the decisions by the two central banks took the euro to a level of USD 1.1207 against the euro. By the last day of the month, some recovery in the common currency lifted the euro-to-dollar ratio to 1.1286.

    On balance, currency markets are expecting the dollar to continue strengthening this year. The main reason for this is the continuing recovery of the United States economy and the continued weakness of the economy in the euro zone.

  • News from the Baltic States »

    Eesti Energia to start supplying gas from Lithuania

    Eesti Energia will start supplying its gas clients with gas from the Klaipėda LNG terminal. On 27 January, Eesti Energia signed an agreement with UAB LitGas, under which 5.8 million cubic metres of gas will be supplied to the company.

    “Pilot supplies performed in December of last year confirmed that trading in gas via alternative importers is possible and works,” explained Heikko Mäe, Director of Energy Trading at Eesti Energia. “Given the current regulations and tense political situation, additional suppliers are undoubtedly important in ensuring the supply security of gas for both ourselves and the gas supplier, but also definitely for our gas clients,” he added.

    For Estonian gas clients, the conclusion of the agreement provides an alternative to Russian gas. In addition to Estonia, the liquefied natural gas terminal in Lithuania also serves to significantly strengthen supply security and competitiveness in Latvia and Lithuania, since reliance on the previous single source is being reduced.

    Eesti Energia has been selling gas to its major corporate clients, in addition to electricity, for three years. The advantage of supply by Eesti Energia is supply security, ensured by purchase agreements with several gas suppliers and also by the option of a choice between fixed and variable gas prices.

    The Lithuanian system manager has a new methodology for calculating a price cap on public services in the energy sector

    From 2016, a new model for determining the price will take effect in Lithuania, determining price caps on public services in the energy sector with respect to the prices of transmission, distribution and public offers alike. Last January, the decision was made that 2016 to 2020 would see the end of the price cap on services for clients of both Lesto, the Lithuanian state electricity distribution company, and Litgrid, the transmission network operator. In all likelihood, the methodology behind the establishment of a price cap will also impact any future investments in the grid in Lithuania.

    Lietuvos Energijos Gamyba becomes market participant on Nasdaq OMX Commodities

    Last January, Lietuvos Energijos Gamyba AB, the Lithuanian company engaged in electricity production and wholesaling, took another step toward its objective of continuing active integration on the Nordic and Baltic electricity markets. This the first company in Lithuania to have joined Nasdaq OMX Commodities, an exchange trading in electricity derivatives. Nasdaq welcomed the new market participant and stressed that this type of strategic step would help to increase competitive offers and render the European energy market more efficient.

  • Eesti Energia’s large business client Vopak E.O.S. is the biggest terminal operator in Baltic States »

    The four terminals servicing international freight flows via Muuga Harbour, in Harju County, and the infrastructure there, are owned by Vopak E.O.S., the largest independent terminal operator in the Baltic States, providing clients with logistical solutions for liquid fuels..

    A company with a global reach, Vopak E.O.S. handles liquid fuels transported by sea to European, American, Southeast Asian and other markets. Vopak E.O.S. itself does not trade in fuel, but instead provides a comprehensive terminal service including rail transport within Estonia, managed by the company’s subsidiary AS E.R.S.

    AS Vopak E.O.S. is owned by the Royal Vopak group of companies, the world leader in the processing and storage of liquid and gaseous chemicals and petroleum products. In the estimation of Arnout Lugtmeijer, Chairman of the Management Board of Vopak E.O.S., demand for liquid fuels in the world remains stable; however, regional competition has increased in recent years because of new terminals in Russia, for example. “Our preference on the market is a perfect service chain, the continuous development of services and the raising of efficiency. We are able to persuade clients of the technological and logistical advantages of our terminals, by diversifying, for example, the range of goods handled,” Lugtmeijer notes.

    To provide a full-scale logistical service, the company has four terminals at Maardu and Muuga, as well as a railway company. “In order to be successful on the market, we are paying a lot of attention to the quality of the service being offered, with an important role being played by innovation, efficiency and the implementation of state-of-the-art technologies,” Lugtmeijer explained. “Electricity is an important input into our technological process, the optimal consumption of which is quite important in terms of cost-effectiveness.”

    Lugtmeijer stresses that the technological process of Vopak E.O.S. as a large infrastructure company are quite comprehensive and energy-intensive. That being said, contracts for services provided by the company are being concluded for a year or even a longer period in advance. “Since clients are mostly interested in fixing the price of the service for a longer period, we ourselves, too, try to fix the price of energy carriers as much as possible,” stresses the Chairman of the Management Board. He adds that the company pays a great deal of attention to controlling costs and the efficiency of the technological process.

    During collaboration that has lasted for over 20 years, Vopak E.O.S. has been Eesti Energia’s partner in buying electricity and also in operating the high-volume liquid fuel terminal and railway depot on Eesti Energia’s property at Maardu. “Over this period of time, Eesti Energia has evolved into a cutting-edge energy and service company by focusing ever greater attention on constructive collaboration with its clients,” notes Arnout Lugtmeijer, Chairman of the Management Board at Vopak E.O.S.

    “To make the most appropriate decision when purchasing electricity, we have been in contact with our account manager, who keeps us up to date concerning the developments on the electricity market and recommends the best solutions for us based on the market conditions and the specifics of our company,” Lugtmeijer explains. “Additionally, we work together with several of Eesti Energia’s structural units on the development and management of production sites. Over the years, this collaboration has worked well and proven beneficial for both companies in every respect.”

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.