August News from Energy Markets

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1 Eesti Energia Energy Market Overview August 2014 News from Energy Markets Electricity August Day-Ahead market prices lower than July in Estonia, Latvia and Lithuania, but higher than in earlier months Electricity August Day-Ahead market prices lower than July in Estonia, Latvia and Lithuania, but higher than earlier in months Estonian enterprises prefer fixed price electricity contracts Finnish August electricity market prices highest since January Finnish nuclear power plant Olkiluoto-3 delayed even further Natural gas prices continued fast growth throughout August Crude oil price held near a one year low Erkki Raasuke was elected as the new Head of Supervisory Council of Eesti Energia Litgas and Statoil signed a long-term deal to supply Klaipeda LNG terminal with gas Energy Market Factors Lower August air temperatures lifted electricity demand Low levels of precipitation in Northern Europe forecast for September may lift electricity prices EstLink-2 failure lasting for several days slightly lifted Estonian electricity market prices Effects of Ukrainian crisis on Continental Europe may transfer to Northern Europe Carbon dioxide prices kept at a high level due to paused government auctions in August Crude oil price was kept low by little demand in Europe and large levels of supply to the market Ukrainian political tensions and European stagnating economy lowered the euro against the dollar even further Author of the market overview: MATHIAS VAARMANN mathias.vaarmann@energia.ee MATHIAS VAARMANN Market Analyst Eesti Energia AS The main factors affecting the Estonian electricity market in July were electricity production plants and transmission line maintenances, which included the first large maintenance of undersea transmission cable EstLink-2. The capacity of the second cable connecting the Estonian and Finnish markets was at least in part limited throughout the maintenance period. Major yearly maintenance periods of electricity production assets and transmissions of Estonia and its neighbours concluded with August, as of which electricity supply to the neighbouring countries markets was restored. For Estonia this mainly meant that the cheaper electricity flow from Finland was fully restored. A technical fault was discovered in the second EstLink cable during the night of August 8, the identification and repair of which took 10 days for the cable s maintainer. During the repair works, the cable was completely shut off, which meant that the maximal possible transferable capacity from Finland to Estonia was limited down from 1000 megawatts to 342 megawatts. During six days out of ten the limited transfer capacity created a bottleneck between the two markets. This resulted in Estonian market prices rising to 81 euros per megawatt-hour during some hours. As the transmission line was reopened Estonian and Finnish electricity market prices reunified, staying identical until the last day of August, when the Estonian daily average price rose slightly higher than the Finnish price due to a fault in EstLink-1. Due to failures in transmission cables and slightly higher domestic electricity demand, Estonian August average electricity Day-Ahead market price averaged at 39,10 euros per megawatt-hour, which is 11,5% less than in July, when the average price was seen at 44,17 /MWh. In August Estonian prices stayed identical to Finnish prices during 92,7 percent of hours. In July, the two region s prices were equal during 75 percent of hours.

2 Estonian electricity market monthly average price reached a long-term low point of 31,57 euros per megawatt- hour in March of this year. Since then, electricity prices have restored, reaching 36,85 euros in May and 44,17 euros in July. Majority of Estonian large business customers have chosen to fix their electricity price for the duration of the contract at least partly, when signing electricity purchase contract. This allows entrepreneurs to protect themselves against any fluctuations in the energy market and therefore control their costs better. For example, 46% of Eesti Energia s large business customers have chosen to entirely fix their electricity price for the length of the contract. Further 46% of large business customers have fixed their price partially and a mere 8% have chosen an electricity contract with a fluctuating price. According to Head of Large Business Customer Service at Eesti Energia, Artur Teesalu, the optimal choice for large businesses is fix the business s contractual electricity price to at least partially for a longer period of time. Longer-term contracts allow Largu Business Customer Service managers Electricity price preferences of Eesti Energia s large business customers 46% 8% Fixed price Spot price Combined price 46% to offer their clients a better price. This is due to the characteristics of the electricity market, when buying electricity from the market, cheaper periods lie in the future. For clients who do not wish to completely fix their electricity price, Eesti Energia suggests fixing the price at least partially. When fixing partially, Large Business Customer Service helps the clients to find the most suitable contractual periods and amounts to fix. In addition, clients retain the option to fix their prices completely during the contract in case of changes in the market. Finnish market region August electricity market price averaged at 38,38 euros per megawatt-hour, which is 4,3% more than in July (36,81 /MWh). Additionally, Finnish August price was the highest price for the Baltics Northern neighbours since January, when electricity price was seen at 40,23 euros. Like Latvia and Lithuania, Finland lacks electricity production assets capable of covering its domestic demand. Finland, however, possesses powerful transmission lines which allow the country to import large quantities of cheap electricity from Sweden, and smaller amounts of electricity from Russia. Finland began building its newest and most powerful electricity production plant in The 1600-megawatt Olkiluoto-3 nuclear power plant was due to be completed in 2009, the commissioning of which was to contribute to Finnish energy independence. The project, however, has been tackled by several difficulties and as of today the nuclear power plant has not started to produce electricity yet. The contractor, Areva-Siemens, in the end of August, announced that the project in delayed even more and the plant will not be commissioned before the end of The delay of Olkiluoto-3 is also delaying the planning and start of building works of Olkiluoto-4. The capacity of the fourth unit is planned at megawatts. The commissioning of the additional units and the resulting larger supply of electricity to the Finnish market may lower Finnish electricity prices, which in turn, due to single market, may result in lower Estonian electricity prices. Latvian and Lithuanian single market August electricity Day-Ahead market average price was fixed at 55,31 euros per megawatt-hour, which marks a 3,5 percent fall compared to July. The lower price results from the end of maintenance periods of the two countries electricity production plants. The amount of electricity imported into Latvia and Lithuania also increased in the end of August, which allowed the electricity price of the two countries to slightly fall. In the second half of the month, the changes the market brought about a bigger stability in the market, lowering intra-month price fluctuations. Similarly to Estonian prices, Latvian and Lithuanian prices have also restored throughout this year from the winter and spring market low-point, which resulted from much higher-than-average air temperatures. In March, Latvia and Lithuania saw its year 2014 lowest electricity market price of 41,61 euros. In April, market price in the two regions was 44,07 euros, 54,90 euros in June and then 57,34 euros in July. Electricity markets of the two countries are still largely dependent on electricity imported from foreign countries. EESTI ENERGIA Energy Market Overview August

3 In addition to the existing inter-country transmission lines, two new cables will be added in the end of next year. These include the 500 megawatt LitPol Link, which will connect the Lithuanian market to the Polish market and the 700 megawatt undersea cable NordBalt, which will connect the Lithuanian market and the Swedish market. This will allow Latvia and Lithuania to import large quantities of cheaper electricity from Swedish nuclear and hydro power plants. This may have a price-decreasing effect for the two countries. Prices of electricity in August 2014 In addition, it is possible that the Northern European electricity market may be affected by political tensions between the Western world and Russia. Sanctions between the two blocks have lifted European gas prices, which may in turn lift Central European electricity prices. Since Northern Europe trades electricity with Germany, then it is possible that higher electricity prices in Germany may also lift Northern European electricity market prices. Area Average Change Minimum Maximum ( /MWh) M-o-M ( /MWh) ( /MWh) Nord Pool Estonia 39,1-11,48% 21,95 81 Nord Pool Finland 38,38 4,27% 21,95 79,84 Nord Pool Latvia 55,31-3,54% 21,95 220,08 Nord Pool Lithuania 55,31-3,54% 21,95 220,08 Day-Ahead Prices July-August EUR/MWh Estonia Finland Latvia and Lithuania Natural gas prices continued fast growth throughout August Estonian and European natural gas prices continued fast growth in August. The rise in gas price is mainly due to a much stronger United States dollar value on world s foreign exchange markets. Additionally, European gas markets have been affected by Ukrainian political tensions, which have raised questions over the future of Russian gas imported to Europe. European Union gets about a third of its consumed natural gas, coal and oil from Russia, for which the EU pays around 250 billion dollars a year. Due to Ukrainian tensions, European natural gas prices have risen by 35 percent since July. European Union has started discussions over measures to employ in case Russia should halt gas exports to Europe. These would for example include a gas export ban from Europe and a limitation of industrial gas use. In order to protect companies from natural gas price fluctuations, Eesti Energia offers large business customers a choice to fix the price of natural gas for the contract period length. Additionally, Eesti Energia will start to offer its clients the choice to purchase electricity and natural gas together. Carbon Dioxide Emission Rights Price July-August /t 6,5 6,3 6,1 5,9 5,7 5,5 5,3 5,1 4,9 4,7 4,5 CO Price EUR/metric tonne 2 Brent crude oil price, which also affected the price of natural gas, held at a very low level in August, and during the second half of the month fell to its lowest in nearly a year. In July, one crude oil barrel could be bought on an average at 108,2 dollars. By the second half of August, the price had fallen to 102 dollars per barrel. The price fluctuated very little from the middle of the month until the end of the EESTI ENERGIA Energy Market Overview August

4 month, rising above 103 dollars for only one day. Brent crude oil was kept low in August due to a low level of demand in Europe, which in part results from a stagnating European economy. The price was further brought down by large quantities of supply to the market, which was due to large levels of production in oil exporting countries, especially in Libya and Iraq. Political tensions in the two countries have kept a lid on oil production, but in July problems began to be solved. Despite the lasting tense situation in the two countries, oil fields and export infrastructure have been kept aside conflicts, which allowed the countries to export more. The biggest factor affecting natural gas prices sold in Estonia in August was the United States dollar value, which rose to a one year high. Stagnating European Crude Oil Price July-August $/bbl economic activity has kept the value of the euro low during the past few months. Tensions arising from Ukraine and European Union Russian opposing sanctions have also had their effect on the single currency. On the counter, United States economy has showed more growth, which in turn supports the dollar. As a result of the two opposing effects, the value of the euro in August fell below 1,33 dollars for the first time in nearly a year. The euro continued to fall throughout the month and during the last week of the month, one euro could be acquired for 1,32 dollars. On the last day of the month, European Central Bank fixed one euro at 1,3188 dollars. For comparison, in May one euro was worth nearly 1,4 dollars. If the dollar keeps rising, the price of gas may rise even further. Price of crude oil Baltic state news Erkki Raasuke was elected as the new Head of Supervisory Council of Eesti Energia Erkki Raasuke. Photo: Peeter Langovits / Postimees New Head Erkki Raasuke was elected after the Minister of Finance Jürgen Ligi tendered now ex-head Jüri Käo s application of resignation. In addition to Erkki Raasuke, the enterprise s Supervisory Council will continue to consist of members Meelis Virkebau, Kalle Palling, Toomas Luman, Danel Tuusis, Indreak Kaju and Märt Vooglaid. Eest Energia Board of Audit is now composed of Kaie Karniol, Kalle Palling, Meelis Virkebau and Märt Vooglaid. Litgas and Statoil signed a longterm deal to supply Klaipeda LNG terminal with gas Euro-Dollar Exchange Rate July-August EUR/USD 1,37 1,36 Dollars per one euro LNG terminal Independence. Photo: Delfi 1,35 1,34 1,32 1,31 Lithuanian state-owned enterprise Litgas and Norwegian Statoil signed a deal in August involving deliveries of liquefied natural gas LNG which will grant the minimal required gas quantity in the EESTI ENERGIA Energy Market Overview August

5 LNG terminal being built in Klaipeda. The agreement, beginning from next year, is worth 2,5-3 billion litas ( million euros). According to the agreement, Statoil will deliver 540 million cubic metres of gas to Lithuania every year for the next five years. Lithuanian yearly gas requirement is 2,7 billion cubic metres of gas. The deal is the first in its kind to offer Lithuania the ability for alternative gas deliveries, which allows gas prices to be lowered for Lithuanian end consumers. According to plans, the Klaipeda LNG terminal will begin work in the beginning of December. EXPLANATION OF TERMS Base energy is the sale/purchase of 1 MWh of electricity each hour within the given period. MWh i.e. megawatt hour equals 1,000 kwh. GWh i.e. gigawatt hour equals 1,000 MWh. An electricity exchange price area is a part of the electricity market with a uniform electricity price. Estonia price area is the Nord Pool price area in Estonia. Nord Pool is a power exchange that consists of price areas in Finland, Sweden, Norway, Denmark, Lithuania, Estonia and the Estonian-Latvian border. ICE i.e. the Intercontinental Exchange is the largest commodity exchange in Europe. OPEC is the Organization of Petroleum Exporting Countries. Peak hours describes the period of increased electricity consumption. The Nord Pool exchange regards the period between 08:00 and 20:00 Central European Time (one hour behind the Eastern European Time used in Estonia) as peak hours. Closing price is the price of the last contract of the day. A forward contract is a contract that binds the parties to sell/purchase specific assets at a specified time in the future at an agreed price. The forward price i.e. the forward contract price is the price at which the assets specified in a forward contract are sold/purchased. Brent crude oil is the reference product for several oil products from the North Sea. DISCLAIMER The market review has been prepared by an analyst of Eesti Energia to the best of their knowledge. It is not an official standpoint of Eesti Energia. The information given is based on public information and the sources specified in the overview. The market overview has been presented as informative material and it has in no case whatsoever been presented as a promise, proposal or official forecast of Eesti Energia. The standpoints contained in the market overview may change and the person presenting them reserves the right to amend said standpoints. Due to the fast changes in the electricity market regulation, the Market Overview or the information contained herein are not final and they need not correspond to situations emerging in the future. The market overview does not create, terminate or amend legal relationships (incl. contracts). Eesti Energia cannot be held liable for any expenses or damages that may emerge as a result of the use of the information contained in the Market Overview. EESTI ENERGIA Energy Market Overview August