Energy Market Overview: German industry must renounce cheap Russian gas


Higher wind production and the maintenance of the connection between Estonia and Latvia significantly lowered the stock exchange price of electricity in Estonia and Finland last week, but the eyes of the energy markets were turned to Brussels, where the president of the European Commission introduced measures to alleviate the energy crisis.

Price area Average exchange price Change (previous week)
Estonia 141,7 eur/MWh -52,5%
Latvia 358,7 eur/MWh +3,1%
Lithuania 361,8 eur/MWh +3,0%
Finland 122,6 eur/MWh -58,9%

Last week, the price of electricity in Estonia and Finland fell significantly, that was facilitated by higher wind production in the region and a decrease in demand from Latvia due to maintenance work on the cable between Estonia and Latvia. From Monday to Friday, the transmission capacity was limited to 771 MW and the capacity will remain limited until the end of current working week. Prices in Latvia and Lithuania remained at the same level as the previous week.

Both the cheapest and the most expensive exchange price of the week in Estonia was on September 15. At night between 03:00 and 04:00, the price was only 14.44 euros per MWh, in the morning between 09:00 and 10:00, the same amount price was 500.10 euros. The average price was 156.8 euros/MWh, that was cheaper compared to the previous week.

The European Commission is planning a profit limit for energy companies

European Commission President Ursula von der Leyen introduced crisis mitigation measures at the beginning of last week, the most important of which is the profit margin limit for energy companies. This is meant to collect more than 140 billion euros to alleviate the price increase for consumers. Germany alone plans 10 billion euros for its relief fund from this measure. Member states have not yet unanimously approved this plan. The Commission also proposed to reduce electricity consumption by 10%, with a mandatory 5% during peak hours. How the goal is achieved is left up to the member states.

The measures planned by the European Commission to solve the energy crisis caused a lot of response in Europe. According to the Swedish energy giant Vattenfall, the profit cap may backfire on renewable energy investments, which are most needed for the long-term solution to the energy crisis.

Europe's ability to cope with existing gas reserves largely depends on how cold the winter turns out to be. According to the first forecasts, there is hope that the temperatures in the United Kingdom, Germany, Scandinavia and Eastern Europe will be slightly above average, and in Southern Europe more or less normal. The end of Gazprom's supplies via Nord Stream 1, the drought in Central Europe, and the interruptions of the French nuclear plants partly caused by this led the gas price to a record level in August, which has now gradually decreased thanks to the faster-than-planned filling of gas storages in European countries. However, a harsher than usual winter may worsen the energy crisis. The effect of cooler weather on energy prices will probably be seen soon enough, as colder weather is expected across Europe at the end of September.

France plans to increase its nuclear capacity

The real face of the crisis will be revealed when the stored gas will have to be used and the reserves will start to decrease rapidly. The problem is serious, because a temperature drop of 1 degree increases energy demand in France by 2,400 megawatts, what is equivalent to the output of two nuclear reactors. At the same time, the European Union is in negotiations with Norway to further increase their supplies and thereby reduce the price. The European Commission also proposed to create a new LNG price index that would be cheaper than the natural gas TTF index. However, experts do not consider it reasonable, because LNG is already being delivered to Europe at a 20% discount compared to TTF, and simply creating a new index would not increase gas reserves faster. There is a need to increase LNG receiving capacity in Europe.

The French national energy company EDF promises to increase the production volumes of its nuclear power plants by 2024, when they should reach the range of 315-345 TWh. Beset by technical problems, EDF forecasts production of up to 300 TWh this year, as the 10-year average is as high as 395 TWh. The capacity of France's nuclear power plants is important for Europe, because the country is traditionally Europe's largest exporter of electricity, and in addition to the home country, Italy and the United Kingdom mutually rely on them through connecting cables, which in turn provide reliability for France as well. So it's no surprise that France's main grid company has warned that it will likely have to make several requests to reduce electricity consumption during the winter. Finland and Sweden, for example, have previously issued similar warnings.

Germany is looking for different solutions to get out of Russia's energy trap. On Friday, the takeover of three refineries owned by Rosneft was announced. At the same time, Olaf Scholz's government is in talks to take over Uniper, VNG and Securing Energy for Europe (formerly Gazprom Germania) in order to prevent the country's energy market from collapsing. The situation is critical because Uniper, which has been importing cheap Russian gas for years, has valid long-term contracts with large customers at a price cheaper than the market price, and the company loses nearly 100 million euros a day by fulfilling them. For German industry, giving up cheap Russian gas means a big challenge, which may also be accompanied by a blow to the German economy.

Nord Pool keeps the maximum exchange price at 4,000 euros

Electricity exchange Nord Pool announced last Tuesday that, although the rules would allow setting a new price limit of €5,000/MWh after the maximum price of €4,000/MWh on August 17, this will not be done. The procedure of the energy market regulators about the reasons why the price rose so high in the first place is still ongoing. According to the understanding of the market participants, free capacity was available in the Baltic countries at that hour, but it was not allowed on the market, because at that moment, with the quantity and price fixed in the offer, it would have brought the market price below the offer limit price. To avoid such a situation, Nord Pool has promised to consider holding a secondary bidding round, where bidders could change their bids based on the results of the first round and react immediately to the described situation. Such a two-round bidding system is used elsewhere in Europe.

The plants in Narva were on the market last week with 540 MW on average. In the middle of the week, unit 6 of the Eesti power plant was under unplanned maintenance, and from Saturday to Wednesday of this week the Auvere power plant will undergo maintenance. The 3rd unit of the Eesti power plant is in the long-planned annual maintenance, it will return to the market in October.

In the European emissions trading system, the weekly average price of CO2 increased to 71.8 EUR/t (+2.5 EUR/t compared to the previous week). The European Commission rejected the idea of setting a price ceiling on CO2 as it would not help in today's market situation. The current CO2 price level does not limit supply in the market, and lowering this price would not solve the European gas shortage that is causing high electricity prices.

The average gas price for the week was €201.8/MWh, which is €23.6/MWh less than last week. Gas prices fell due to high storage levels. Most European countries have reached a level of 80% or more. Storage levels are 88.3% in Germany, 100% in the United Kingdom, 85.9% in Italy, 86% in the Czech Republic and 94.04% in France. The level of the Inculkans storage in Latvia that supplies us is 52%. Gas is constantly being brought there through the Klaipeda LNG pier in Lithuania, but since a large part of it is currently also going to the Polish gas network, the increase rate is relatively slow. The price of gas remains volatile, the main factors of which are the risks of political intervention in the market, the fear of a cold winter and the low hydro balance in the Nordic countries.

The price of electricity is formed on the power exchange for each hour depending on the production capacity and consumer demand for that particular hour, as well as on transmission limitations between countries.

Olavi Miller, Market Analysis Strategist at Eesti Energia

The market overview has been prepared by Eesti Energia according to the best current knowledge. The information provided is based on public data. 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 electricity market regulation, the market overview or the information contained therein is not final and may not correspond to future situations. Eesti Energia shall not be responsible for any costs or damages that may arise in connection with the use of the information provided.