Large buyers jolted by electricity market liberalization

  • 2010-04-08
  • From wire reports

TALLINN - Estonia opened up 35 percent of her electricity market for competition on April 1, leading the way for the largest electricity consumers, those using over 2 GWh of electricity per year, to buy their electricity from competing sellers, reports National Broadcasting. These 230 large consumers can choose whether to buy electricity from one of the four electricity sales managers on the market, or to buy electricity directly from the electricity bourse.

Prices headed up on the first day of opening. The Nordic states electricity bourse, Nord Pool Spot, for the Estonian region, ended April 1 at an average price of 38.78 euros per MWh, a jump of 30 percent from the previous day’s price.
Opening up the Estonian electricity market to large consumers benefits the Estonian economy, says Estonian Economy and Communications Minister Juhan Parts. Parts said that it is important to open up the electricity market because of energy security; the aim is also to physically connect the Estonian energy system with the European energy system.

Main transmission grid operator Elering’s board chairman, Taavi Veskimagi, said that companies need to just survive the initial price surge upon the market opening, since later competition on the electricity bourse will push the prices down.
Estonia’s energy-intensive exporters, including pulpmaker Estonian Cell and HeidelbergCement’s local unit will be hurt by the up to 40 percent surge in power prices on the market’s opening, reports Bloomberg. Joining the Nordic power market, covering Norway, Sweden, Finland and Denmark, means prices will rise 35-40 percent on average for members of the Association of Large Electricity Consumers, said Tiit Kolk, head of the group that includes Estonian Cell and HeidelbergCement’s Kunda Nordic Tsement.

“The unprecedented price rise will probably result in some companies getting into financial difficulties or even closing [their] business,” said Kolk, also chief executive officer of chipboard maker Repo Vabrikud, a unit of Swiss-based Sorbes Group. “It’s clear this price increase will slow down the economic recovery and may even turn the recovery into another decline.”

The lobby group, whose members account for about 15 percent of Estonian consumption and about 4 percent of its exports, in January failed to persuade lawmakers to postpone opening up 35 percent of the Estonian market. The Estonian economy, which shrank 17.7 percent over the last two years, may grow as much as 2 percent this year, according to the largest Baltic lenders, Swedbank and SEB, mainly due to a recovery in exports.

Exports of oil products including shale oil, and of wood products, led a jump in Estonia’s exports in January with an annual increase of 153 percent and 25 percent, respectively. Estonia’s biggest shale oil producer, Viru Keemia Grupp, expects profitability to fall, though export volumes probably won’t decline, said spokeswoman Julia Aleksandrova.
“The opening of the power market will pretty clearly hit the competitiveness of exporters in the short term,” said Tonu Palm, chief Tallinn-based economist at Nordea. Industrial consumers in Estonia, which relies heavily on its oil shale-fired power plants, have enjoyed the lowest prices for electricity in the 27-member European Union, at 6.43 euros per 100 kilowatt hours at the beginning of 2009, compared with Malta’s 15.70 euros and the EU average of 10.51 euros, according to Eurostat. 100 kilowatt hours are 0.1 megawatt hour.

Estonia is the last of the three Baltic states to partially liberalize its market, with a full opening scheduled for 2013. The move may attract investment in new plants by regional energy companies such as Germany’s E.ON, which owns Sweden’s Oskarshamn nuclear plant, Fortum Oyj of Finland and Vattenfall, the biggest Nordic utility. About 70 percent of existing plants have to be renovated or shut down due to high environmental costs by 2016 according to Economy Ministry.

The average price for the first day of trading was 38.78 euros per megawatt hour, based on bidding, reported state-owned utility Eesti Energia, on its Web site. This compares with about 30 euros the company charged from the big clients before the market opening, and with Nord Pool system’s price of 44.94 euros.
Most companies have locked in their prices in longer-term contracts with Eesti Energia or its main competitor, Riga-based Latvenergo, to avoid the risk of price fluctuations on the exchange, said Veskimagi.

Competitiveness will be hit because of additional taxes, exporters said. Total electricity costs for companies will exceed those in much wealthier Finland, as additional distribution fees, excise taxes and renewable energy fees will amount to 22 euros per megawatt hour from June, compared with 5 euros in Finland, said Estonian Cell’s manager, Riia Ratnik. “Such a cost increase in an environment where cement prices can’t be raised either at home or in exports, will certainly have an impact on competitiveness,” said Meelis Einstein, general manager of Kunda Nordic Tsement.

The government may need to revise its stance on avoiding electricity tax breaks for industrial companies, said Einari Kisel, vice chancellor at the Ministry of Economic Affairs and Communication. “Now where we’ll have a clear market price reference, this subject can be discussed again if needed.”