«How is the electricity price formed? Why is it so high on the exchange? When will it go down? Will the state support businesses and households? Which connection to pick – fixed or with the exchange?» – BNN asked these an other questions to experts in the field of energy to determine the situation on the market.
This summer the price of electricity in Latvia experienced a sharp surge. Compared to July 2021, the price of electricity at Nord Pool has more than tripled, but when compared to August the price has more than quintupled. 17 August 2022 shocked a large number of Baltic residents because the price of electricity in peak hours reached a new record – 4 EUR/kWh.
With higher electricity prices and upcoming 14th Saeima elections, the topic of Latvia potentially leaving Nord Pool appears in the public space more and more often. The topic of Latvia potentially using electricity produced in the country for its own needs only is also popular. Unfortunately, there isn’t much information how realistic these measures are and what they could mean for the country.
Seeing as how information reported by the media about electricity-related topics is more informative than educational, BNN decided to consult with experts from the energy field – Enefit board chairman Krists Mertens and Latvenergo JSC Energy Wholesale Trade Functions Office manager Ingus Štūlbergs to clarify the situation on the electricity market.
This summer’s electricity price
When asked how the price of electricity if formed on the market, both experts said the main factors are supply and demand. As for the sharp price surge, Mertens said on the side of supply, nothing changed this summer manufacturing technologies-wise. However, the cost price of production technologies has changed significantly nonetheless.
«The main influence on the price of electricity came from natural gas, the price of which has increased multiple times. In our region, Latvia especially, a large proportion of electricity production comes from thermal power plants (TEC), which mostly use natural gas. The price of gas has increased considerably due to the geopolitical situation and the Russian-Ukrainian war. This has had an effect on the price of electricity.»
Latvenergo JSC is the leading electricity producer in Latvia. The company produces electricity using hydroelectric power plants (HES) and TEC. According to information from the company, in 2021 Latvenergo produced 4.5 TWh of electricity, with 2.6 TWh produced by HES and 1.9 TWh by TEC. When asked about electricity production by HES, Mertens admitted that annually-speaking the number is large, but he also stressed that there are major differences between months, weeks, days and hours.
«April-May is the prime time for HES. This is also when electricity is usually intensely exported to neighbouring countries. The energy production volume in Daugava Cascade turned out lower over the course of the last year,» Mertens admits.
«In July and August Daugava Cascade produced very little. In July were produced a little more than one-third of locally produced electricity in Latvia. This means we imported the remaining two-thirds. Unfortunately, the situation in our neighbouring countries and Scandinavia keeps changing together with geopolitical developments.»
Štūlbergs also mentioned other important factors. For example, the Russian-Ukrainian war and the weather that was not favourable for production of electricity from renewable energy resources.
«This year Baltic States and the rest of Europe experienced unusual drought and intense heat waves. On top of that there is the Russian-Ukrainian war, which also caused a major impact on prices of energy resources, especially natural gas and coal,» said Štūlbergs.
Latvenergo expert explained that the due to high air temperature there was an increase in demand for electricity this summer. As a result of this it was necessary to produce more electricity. Unfortunately, it was not possible to produce a sufficient volume of electricity from renewable energy resources due to poor weather conditions.
«For example, this summer most people wanted to cool off – air conditioners were on at most households. This increased demand for electricity. Consumption increased by 5-10% on average. This increase required more electricity, but because of intense drought power production fell at wind turbine parks. This required the use of TEC, which use fossil fuels – mainly natural gas in Baltic States and coal in Germany and Poland.»
Electricity prices and their fluctuations at Nord Pool exchange
When asked how the price of electricity formed at Nord Pool exchange, both experts outlined the importance of supply and demand.
«In the context of the exchange it is important to outline that demand is secured by different technologies and forms of electricity production. Electricity can be produced using fossil fuels and renewable energy resources. All producers that are prepared to sell electricity submit their offers on the exchange. All offers are grouped from cheapest to most expensive,» says Enefit board chairman Krists Mertens.
«Respectively there is also some consumption volume for tomorrow all households and companies plan to consume. This consumption indicates how many power plants have to be switched on to satisfy this demand.»
«Unfortunately, in Latvia this proportion of electricity generation creates a situation in which it is not possible to satisfy the electricity demand of end users with cheaper electricity generation technologies. For example, variable costs from electricity generation from wind, sun and water are zero – no one needs to pay,» said Mertens.
According to Enefit manager, these technologies in Latvia do not have a sufficiently high generation volume at the moment. This is why Latvia needs to switch on other power plants. For example, power output in Baltic States are based on fossil fuels.
«This means that in order for TEC to generate electricity, it is necessary to burn natural gas, but its price is already exceedingly high,» said Mertens.
When asked how at some hours prices at Nord Pool exchange tend to vary sharply, Latvenergo expert Ingus Štūlbergs explained it with changes in supply and demand, adding that sometimes changes can be very minor.
«We have to keep in mind that electricity supply offers also depend on electricity produced by wind turbine parks. It is possible that in hours when electricity is expensive, wind speeds are insufficient and power output at wind turbine parks is low, but the next hour, when electricity price is lower, the wind suddenly picks up,» explains Štūlbergs.
Should Latvia leave Nord Pool?
In regards to the topic of Latvia’s possible departure from Nord Pool exchange, both experts were sceptical, stressing that it would create more problems than solutions.
«Basically leaving Nord Pool is comparable with Brexit,» said Štūlbergs.
«With Brexit there is a very complicated regulatory framework. Considering we are part of the EU, we are subjected to different regulations, which make it mandatory for us to be part of the free market. We also have to keep in mind the fact that we cannot fully supply ourselves with electricity. This is why we have to import,» stresses Latvenergo expert, adding that what is outside the free market needs to be procured in accordance with the merchant’s conditions. There is guarantee the price could be better than what is available on the free market.
Mertens also outlines the fact that Latvia must import electricity to satisfy internal demand. Latvia also lacks manufacturing output that can produce cheaper electricity.
«If we quit Nord Pool, where are we supposed to get electricity? Right now there are challenges with energy security. Basically we are in the middle of a deficit. If we leave the electricity exchange, we will be able to produce some energy domestically and import some volume. This is where we have to ask the question – will we be able to produce enough?»
Mertens also explained that Nord Pool market is what helps secure the power volumes for affordable prices.
«At the same time, the electricity exchange is a place or a way to signal market players if it is necessary to adapt electricity consumption or invest in new generating technologies. If we don’t have these mechanisms, how will we know and analyse if we need to change anything?» asked Enefit manager, adding that the state should consider reducing electricity consumption and energy efficiency rather than leaving Nord Pool.
Mertens added that demand on the market is excessively high. This is why there is no reason to expect electricity prices to go down. The state should therefore consider new power plants to replace electricity generation from natural gas with newer technologies.
Use of electricity generated in Latvia
When asked why Latvian consumer cannot use electricity produced in the country in X-hours, when electricity prices are the highest, Latvenergo expert stressed that electricity production output in Latvia is not high enough to satisfy consumption needs in the country. This is why it is necessary to import electricity.
Mertens, too, agrees that the main reason why Latvia does not generate 100% of electricity it consumes is that the output of cheap electricity in the country is currently insufficient.
«In recent months we have produced very little electricity in Latvia – approximately one-third of what we normally consume in a month. We have other generation output that can satisfy Latvia’s consumption, but these options are very expensive,» said Mertens.
«It is important to stress that with the cessation of imports of gas from Russia, our only remaining alternative is liquefied natural gas (LNG). Currently in the there is only one such terminal in the Baltic region and Finland – Klaipeda terminal. Respectively – we lack critical infrastructure. This is why we are at the security of supply issues. If there is a risk of gas stores being insufficient, even theoretically, and we are forced to cease heating energy production this winter, no one will risk producing electricity using natural gas, which would only increase the risk of being left with no gas and no heat at -20 C this winter. This is why the issue of security of supply is so important now,» said Enefit manager.
«This is no longer an issue about electricity – unlike natural gas, we can produce electricity, though at higher prices or using very ineffective technologies. We cannot produce natural gas. There are no gas deposits in Inčukalns. It is stored there and there sent to users. We import this fuel. Right now there are risks that if winter lasts longer, our gas stores may not be enough. This is why austerity measures are in full swing.»
A look at the future – what should Latvia do?
In the context of the future, what Latvia should do to avoid a similar energy crisis, Štūlbergs stresses the need to increase generation output using renewable energy resources in Latvia and all of Europe. When asked if there is some form of electricity generation Latvia could focus on, Latvenergo expert said it would be a good idea to combine output.
«We need to combine renewable energy resources – wind and solar energy,» stressed Štūlbergs. «Statistically electricity generation using wind energy is higher in autumn, winter and start of spring. In summer months, when wind turbines do not operate as intensely, it is better to use solar energy.»
Enefit manager admits Latvia should focus on solar and wind energy: «I would say we should focus on solar and wind energy. Solar energy on households and enterprise level, as well as more large-scale projects on a national level, whereas for a general national level it would be better to focus on wind energy.»
It should be noted that both experts admitted that solar and wind energy is not reliable in the sense of availability. This means there is no way Latvia will be able to replace fossil fuel in the foreseeable future.
«Latvia has very good positions because we have Daugava Cascade, which is basically balancing capacity for non-permanent generation types. What this means is that in times when there is no wind, Latvia can use Daugava Cascade as a market balancing instrument. In summer we have a situation when Daugava Cascade cannot provide sufficient power output. This is when we have Inčukalns gas facility to compensate. By procuring gas and storing in the facility, we can use TEC as well to produce additional electricity,» said Mertens.
Štūlbergs stressed that «regardless of the number of power plants that use renewable energy resources, it will be difficult for power plants that use gas to generate electricity to make it through the next decade, since weather tends to change».
Fixed or exchange tariff?
Considering the high electricity costs and the need for residents to save money during a crisis, BNN asked the experts which electricity connection they would recommend to households – fixed or exchange tariff.
Enefit board chairman and Latvenergo export both admit that each situation should be considered individual.
«If households or companies find price stability and transparency important in a long-term perspective, fixed price is the best choice. If this aspect is not too important, and residents are prepared to take on higher risks at times and potential benefits, clients can go for exchange price,» said Mertens.
«We can see that with price fluctuations there are also moments when the price at the exchange is also lower than average.»
Latvenergo expert Ingus Štūlbergs stressed that the choice of connection depends on whether the client is able to adapt to situations.
«This adaptation can come in the form of washing clothes at night, for example. If a client is unable to adapt to late hours of the exchange, it would be best to pick a fixed tariff. If there is an option to adapt in daytime, then clients should pick the exchange product,» explained Štūlbergs.
Similarly to Mertens, Štūlbergs mentioned that the fixed price is not always more economical than the exchange price: «If we look at statistical data, the price of the exchange can stay high throughout an entire week. At times it can be lower. Everything depends on the ability to adapt.»
State support for enterprises and households
In the last several months the sharp surge of electricity prices has had an impact on households and companies alike in Latvia. BNN contacted the Ministry of Economics on multiple occasions to inquire about the opinion of the state in regards to additional support for enterprises and households, as well as future plans for energy security. However, the ministry has yet to provide answers.
It is worth mentioning that on 20 September, the ministry announced that the government in Latvia has plans for state support for energy-intensive manufacturing companies. In the context of households, the government plans to review three possible options for compensation of heating and electricity costs.
Support for energy-intensive companies will be available in the form of grants. Support per company will be equal to 30% of natural gas or electricity costs. Total support per company is not to exceed EUR 2 million.
As Enefit board chairman said during the conversation, prices of energy resources are not expected to go down. This means that as the heating season drawn near, households and companies have to consider ways to reduce energy consumption.
Although the Saeima has asked the government in Latvia to develop additional support measures for resident to compensate the rapid energy price surge during the heating season, only time will tell if this support is enough. Without a doubt, the upcoming autumn and winter months will be challenging for all of us.