Energy Market Overview 14.03.2023: Universal service price is held high by CO2

Due to the end of the heating season, windy weather and the high level of gas reserves, the electricity exchange price remains at a lower level than the Estonian universal service price. The production price for universal service is determined by the Competition Authority, while the component with the greatest impact is the high CO2 quota price.

Price zoneAverage exchange priceChange (previous week)
Estonia119.6 EUR/MWh+2,7%
Latvia119.6 EUR/MWh+2,6%
Lithuania119.6 EUR/MWh+1,1%
Finland117.7 EUR/MWh+67,3%

The average price of electricity last week in Estonia was 119.6 €/MWh (+3.2 €/MWh compared to the previous week). The cheapest hour was at midnight on Wednesday, 8 March, paying €57.42 per megawatt hour. The highest price for electricity had to be paid at 9 a.m in the morning of Monday, 6 March, with 217.09 €/MWh.

The average gas price for the week was 44.9 €/MWh (-1.7 €/MWh compared to the previous week). The price fell due to the end of the heating season in Europe. On Friday, however, it reached a two-week high of 52.9 €/MWh as several nuclear reactors in France need extended maintenance again, increasing the need to produce energy at gas plants.

The gas storage levels in the European Union were around 58.6% by the end of the week, which is still significantly higher than the goal of 45-55% set by the Union for 1 February. A higher level of gas reserves will help ensure security of supply for next winter and reduce the risk of high prices towards the end of the year. A slight increase in gas prices is possible this week, as a strike begins in the French industrial sector, expected to limit the use of liquefaction plants for at least until 14 March.

The European electricity market reform will not cause major changes

The European Commission has long discussed reforming the European electricity market in order to avoid the extremely high electricity prices seen last autumn. The proposals have now reached a point where the principle that has been in effect on the electricity market until now – the most expensive bidder needed to cover the demand determines the market price – remains valid. Against large short-term price fluctuations, consumers are advised to use more long-term fixed-price contracts. The latter also help to plan the cash flows of renewable energy providers and thus speed up investments in renewable energy. This, in turn, is important for reducing Europe’s gas dependence and at the same time contributes to the fulfillment of climate goals.

The universal service price is related to Eesti Energia’s oil shale electricity production price, and currently the average market price is lower than that. An important reason for this is the significantly lower gas price and the good level of gas reserves in Europe. As the main heating season is coming to an end, demand is decreasing and very windy weather is pushing prices quite low at times. The price of CO2, which is a large price component in the production of electricity from oil shale, remains at the level of €96 per ton. Since the production of one megawatt-hour of oil shale electricity releases nearly one ton of CO2, the price of universal service related to oil shale electricity cannot be brought down significantly. It is perhaps more important to know that oil shale electricity is available if needed, but electricity can be bought cheaper from the common European electricity market for daily consumption.

After the energy war initiated by Russia, Europe was able to reduce its dependence on Kremlin’s pipeline gas to a minimum in just months, but a significant part of the compensating liquefied natural gas (LNG) still arrives in Europe from Russian ports.

Kadri Simson, Commissioner for Energy at the European Commission, called on member states last Thursday to stop importing LNG from Russia. The European Union imported 20 billion cubic metres of LNG from Russia last year, and another 4.5 billion cubic metres in the first two months of this year. Simson called on the countries to give up Russian gas completely as soon as possible in order to increase the region’s energy security.

The European Union has not imposed sanctions on the import of this type of fuel, but some countries, led by Germany, have voluntarily started to reduce supplies from Russia. The largest importers of Russian LNG in the Union are France, Belgium and Spain. Gas supplies from other countries have been nearly 10% higher than in the REPowerEU plan of the European Commission published last March.

The Commission is also asking member states to extend the 15 percent voluntary consumption reduction target until 2024. According to Simson, the measure has worked successfully and is the best guarantee to reach the desired level of storage by November. European countries reduced their gas consumption even more than planned this winter, reaching almost 20 percent savings. According to REPowerEU, wind and solar energy would replace 21 billion cubic metres of natural gas by 2027 and help reduce dependence on Russia.

Europe is stocking up on gas for next winter. According to Refinitiv, a company that analyzes international financial markets, Europe will set an LNG import record in 2023 with190 billion cubic metres of liquefied gas received via Europe and Turkey. This is 10% more than last year. The growth will be made possible primarily due to the increased reception capacity, the development of which has been most emphasized by Germany who until now has depended to a significant extent on Russian pipeline gas. According to Refinitiv, imports could increase further, but this is hampered by a slow growth in supply. According to analysts, the biggest increase will come from the United States where the country’s second largest LNG export terminal in Freeport is expected to restart. The main destination is Northwestern Europe with nearly 120 billion cubic metres of gas to be reached by 2026.

In the perspective of 2030, the growth of LNG consumption will be led by Asia with 75% of new volumes. The remaining quarter will be taken by Europe. The annual production volume of LNG is expected to increase by 55 billion cubic metres by 2027 and by another 96 billion cubic metres by 2030.

According to the forecast of the consulting company Cornwall Insight, Europe’s gas storage facilities may be filled by as early as September, but the region’s intense competition for LNG on the world market will not allow prices to fall to pre-war levels. Since the unusually warm weather, diversification of gas suppliers and reduction of consumption have helped Europe this winter, then a mild, windy and rainy summer may allow reserves to be filled by the summer. By the end of the current heating season, the storage levels should remain at an average of 55%, allowing the stocks to be filled faster. At the same time, the amount of snow this winter has been less than usual, which may mean lower filling of hydro reservoirs and higher gas consumption in the summer months.

March surprises with cold weather

While European countries have bought LNG independently so far, it was decided in the energy crisis to use joint procurement for the first time to ensure more favourable prices and security of supply. The first procurement may be reached in April and the contracts this summer. It is expected that at least 13 billion cubic metres of liquefied natural gas will be acquired this year. The role of LNG in ensuring European energy security will remain high in the coming years. According to forecasts, the ability to receive liquefied natural gas will increase by nearly a third next year, as the number of terminals increases from the current 27 to 35.

The reduction of energy consumption has become possible primarily thanks to industrial enterprises, having had a particularly great impact in Germany. The beginning of this year brought positive news from Germany, as the number of industrial orders increased by 1% in January compared to December. Meanwhile a Bloomberg survey had predicted a 0.7 percent decrease.

While we could rejoice over breaking of the winter’s backbone in mid-January and the soon-to-arrive end of the energy crisis in February, the cold wave that arrived last week reminded us that March is still a winter month. This was also reflected in energy consumption. The one-hour consumption record of this heating season was set in Finland last Thursday morning when 12,191 megawatts of electricity were needed. Great Britain got to deal with the winter cold as well, since coal-fired reserve power plants had to be started on Tuesday for the first time this winter because the market did not have enough production to cover consumption.

In addition to the cold and calm weather, the British were affected by the strikes of French energy workers across the strait, due to which up to 13 gigawatts of generation was offline. Furthermore, problems were discovered at the Penly 1 nuclear reactor, forcing more maintenance work to be done at other nuclear plants in the country. This in turn increases the need to produce energy from fossil fuels and to buy CO2 quotas, probably somewhat raising the price of the latter. The weekly average price of CO2 was 96.9 €/t (+0.4 €/t compared to the previous week).

Britain’s transmission system operator announced last week that it would increase the number of households eligible to take part in a program that allows them to earn money by managing their energy consumption next winter. To increase the flexibility of the energy system, the possibility of allowing electric cars to sell energy from their batteries to the grid is also being considered.

Electricity production should continue in test mode at Finland’s Olkiluoto 3 nuclear reactor on Wednesday.

Eesti Energia’s plants in Narva were on the market last week with 500 MW. The long-planned and month-long annual maintenance of Eesti Power Plant’s Unit 5 started on Wednesday. All other steerable production facilities are available for the market.

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.

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