Electricity price volatility – are Latvia’s citizens seizing their opportunities?

It has been a year since Nord Pool wholesale prices in Latvia set mind-blowing records, with the average monthly price exceeding even 0.565 EUR/kWh including VAT. Although the second half of summer and early autumn 2022 were the most expensive price periods since Nord Pool opened the Latvian price area in 2013, prices actually already started their upward trend in June 2021. These changes affected almost every electricity user in Latvia, as well as people’s future electricity purchasing decisions.

“One of the benefits of the electricity exchange is price transparency. Analysing the historical prices in the period from 2013 to 2020, it can be concluded that the typical monthly values fluctuated between 0.035 and 0.060 EUR/kWh including VAT, but since the summer of 2021 they have been below 0.12 EUR/kWh with very few exceptions,” said Jānis Bethers, Head of Energy Segment at Virši, analysing the situation.

 Nord Pool monthly Spot prices in Latvia, EUR/kWh including VAT

(Source: Nord Pool statistics)

Cautious and as predictable as possible – an increasingly conservative users'  strategy 

There are three fundamentally different ways for households to buy electricity on the electricity market. The most popular are fixed-price contracts, where the price per kilowatt-hour is clearly defined for a fixed period, but it is important to pay attention to the terms of the contract, as some traders may revise and change the price regularly. Dynamic products with a variable price per kWh are linked to electricity exchange prices and holders of such contracts can keep track of price changes and adjust their consumption accordingly. But in the case of universal service, the electricity price is fixed for 12 months and traders are not allowed to renegotiate the price.

“It is very interesting to see how Latvian consumers have changed their electricity purchasing strategy in this volatile environment and what kinds of offers they prefer from traders. The Public Utilities Commission regularly monitors the market and collects information from traders, which gives us insight into the changing habits of consumers,” says the Virši expert.

Analysing the product choice, it can be seen that by summer 2021, the share of household electricity contracts linked to exchange prices gradually increased, reaching almost a fifth or 18% of total contracts. As households experienced sharp jumps in exchange prices, they started to prefer more clearly defined fixed prices, so the number of customers for the dynamic product declined during 2022, reaching only 12% at its lowest point. At the same time, as the general public turned its attention to electricity prices, the number of universal service customers also declined sharply. Universal service is the most expensive way to buy electricity in the long term, but as recently as the end of 2018, more than half of household customers chose this form of cooperation with their electricity trader, while in the summer of this year, the number of such contracts has dropped to 17%. 

Distribution of household users by type of product chosen

(Source: Data from the Public Utilities Commission)

Average electricity price should decrease faster

If the evolution of the proportion of household contracts is rational and explainable, the evolution of average electricity prices raises a number of questions. The graph shows that until the summer of 2021, prices have been stable and have typically fluctuated around 0.07 EUR/kWh. As wholesale prices rose, most households with fixed-price contracts still saw an increase in their monthly invoices, as traders who had foreseen this option took advantage of the possibility in their contracts to unilaterally renegotiate fixed prices mid-contract.

Average electricity purchase price of household customers, EUR/kWh including VAT

(Source: Data from the Public Utilities Commission)

“The increase in average prices in household contracts is easy to explain, but the fact that they have been significantly higher than wholesale prices since the beginning of the year and still have not seen a significant downturn is surprising. Since the beginning of 2023, the average electricity prices, including VAT, have consistently remained at around 0.12 EUR/kWh and in no month during this period have they come close to the levels observed during the most expensive months of 2021 and 2022. This is surprising for two reasons: first, traders who reserve the right to revise prices under existing contracts are very reluctant to do so and do not voluntarily reduce prices, contrary to the experience of customers when market prices soared. Secondly, in hindsight, a large proportion of households fixed prices at the highest point of the market and are currently not exercising their right to renegotiate existing contracts,” explains Jānis Bethers.

This can be seen in the example of a household consuming 250 kWh per month and 3000 kWh per year. A year ago, the typical price level for a contract was above 0.25 EUR/MWh, while today it is around 0.15 EUR/MWh, which means that such a household could save around EUR 300 over the course of a year by renegotiating its price offer. The highest contract cancellation fee observed for Latvian households is EUR 200 for a 2-year contract, which decreases proportionally every quarter. So at the moment, taking into account the fact that 1 year has passed since the period of the high-price contracts, the highest expected contract termination fee is only EUR 100. Based on this calculation, a Latvian household with an average consumption and a fixed price contract a year ago can save around EUR 200 per year by being proactive and financially smart, while larger private households with a monthly consumption of 500 kWh can save up to EUR 500 per year.

The cost of electricity has become one of the most talked-about topics of the last year, with inhabitants closely monitoring and reacting sharply to changes, for example in the case of tariff changes by the distribution system operator. At the same time, households tend to be impatient and do not take advantage of their opportunities to cut costs, which in the current economic situation could ease the financial burden for many. It is therefore undoubtedly worth keeping up to date and evaluating the opportunities offered by the open market.

About Virši:

Virši is a rapidly growing energy commodities trader and convenience store network with 28 years of experience. Currently there are 74 locations in the Virši network, of which 72 are service stations, and these employ over 760 employees across all of Latvia. Since 11 November 2021, the shares of AS Virši-A have been admitted to trading on the Nasdaq Riga Alternative Market First North.