Overview: Strong connections with Finland brought Estonia lower electricity prices

TALLINN - According to Karl Joosep Randveer, an energy trading analyst at Eesti Energia, electricity imports from Finland were of critical importance in stabilizing prices in November.

"November brought colder weather to Estonia, increasing heating needs and thus demand in the electricity market. Average temperatures dropped, nights grew longer, and daylight hours decreased. The electricity price was mainly influenced by the region's wind energy production, Latvian-Lithuanian gas and hydro energy, Estonian oil shale electricity, and imports from the Nordic countries. Compared to Latvia and Lithuania, Estonia's electricity price remained the most affordable in the Baltics, primarily due to better access to Nordic energy. Additionally, the Estonia-Latvia transmission capacity was limited by more than half due to maintenance work. As a result, the average price in Estonia was 9.59 cents per kilowatt-hour, which is 7 percent higher than in October and nearly 16 percent higher than in November of last year," Randveer noted in a press release.

The analyst stated that wind energy production, which usually brings prices down, fell by about 12.5 percent in the Baltics over the month and was nearly a quarter lower than a year ago. Due to poorer wind conditions, the increased consumption was covered less by cheap renewable energy and more by production from fossil fuel plants. In these cases, prices were mostly set by Estonian oil shale and Latvian-Lithuanian gas plants, whose production costs are significantly higher than renewable energy. This also raised electricity prices throughout the Baltics, with the price exceeding 15 cents per kilowatt-hour for about one-fifth of the hours in November.

"While in summer, low wind energy is balanced by strong solar energy, which keeps fossil fuel plants off the market, the solar energy production season is essentially over in November. This June, solar energy covered up to 25 percent of Baltic consumption; in November, its share was only about 2.2 percent, meaning solar power could not alleviate prices," Randveer explained.

"Local wind energy production covered 13 percent of Estonia's consumption, which is significantly lower than last year. In winter, when the alternative to wind energy is expensive fossil fuel, a sharp drop in wind means higher prices in the Estonian market. In addition to the Estonia-Latvia transmission maintenance, the system's flexibility was also reduced by maintenance at a major Lithuanian gas power plant, forcing more expensive power plants to enter the market to cover peak hours. However, the increase in Latvian hydropower production had a positive effect on prices: in November, it was about twice as high as in October and 30 percent above the five-year average," the analyst added.

Electricity imports accounted for slightly more than half of Estonia's consumption in November. Estlink 1 and 2 operated at full capacity for two-thirds of the month, meaning cheaper Finnish electricity flowed into the Baltic market for a large portion of the time. Notably, Finland's average price in November was half that of Estonia's - 4.79 cents per kilowatt-hour - which, according to the analyst, was primarily due to a more diverse energy portfolio of cheap wind and nuclear energy, as well as hydropower imports from Sweden and Norway.

"In November, strong intraday price fluctuations also continued in the Estonian price area, although volatility was lower than in October. The price variability created good opportunities to earn revenue with storage solutions: a 1 MW/2 megawatt-hour battery could have earned nearly 9,500 euros by charging during low-price hours and selling during peak prices. If the same battery had participated in all market segments, the potential revenue could have reached up to 30,000 euros. This clearly shows how important other energy markets are from the perspective of production profitability," said Randveer.

On cold days in December, when heating demand is high and there is little wind, prices are likely to remain in the 10-15 cents per kilowatt-hour range and could often rise above 20 cents, he forecasts. If typical winter wind conditions return, cheap wind energy from Lithuania, Estonia, and the Nordic countries could reduce the need for expensive fossil fuel plants and bring prices down.

The role of Latvian hydropower will also be important, according to Randveer. If Latvian hydropower production continues to rise, peak-hour prices may partially fall, as flexible hydro plants can increase production during more expensive hours and reduce the need for fossil-fuel electricity.

"A significant factor throughout the winter will also be the price of gas: a sharp increase quickly transfers to electricity prices and, ultimately, to consumer bills. Currently, gas prices remain very low, around 30 euros per megawatt-hour, which helps keep the production costs of gas plants in the Baltics low. This positive effect is partially limited by the rising price of CO₂ allowances, which increases the cost of carbon-intensive electricity generation, such as from gas and especially from oil shale plants," Randveer noted.