Electricity Day-Ahead. prices fell to year-and-a-half low. February News from energy markets. Energy market factors

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1 Enefit Energy Market Overview February 2014 News from energy markets Electricity Day-Ahead Estonian market prices fell to year-and-a-half low Latvian and Lithuanian Day-Ahead prices stay on level same as January Electricity Day-Ahead prices fell to year-and-a-half low Electricity futures prices reached a long-term low-point Gas futures market prices up compared to January EstLink-2 officially taken over from builders Eesti Energia improved electricity sales to wholesale markets by 118% Latvian government postponed household electricity market opening to next year Latvian regulator has approved a new Mandatory Purchase Obligation (MPO) Energy market factors Warmer-than-average weather dominating February lowered electricity Future and Day-Ahead prices Hydro reservoir capacity stayed high, supporting electricity market price fall Generally high wind power generation also decreased Day-Ahead market prices Carbon emission rights prices increased heavily throughout February Crude oil market price stayed high compared to January Dollar exchange rate weakened considerably, supporting oil price Author of the market overview: MATHIAS VAARMANN mathias.vaarmann@energia.ee MATHIAS VAARMANN Market Analyst Eesti Energia AS Day-Ahead prices were lowered by higher-than-average air temperature and comparatively high wind power generation. Estonian and Finnish average Day-Ahead market prices in February were 34,79 euros and 34,16 euros per megawatt-hour, respectively. Undersea transmission line EstLink-2, officially opened in February, increased transmission capacity between Estonia and Finland to 1000 megawatts, unifying market areas in the two countries. The transmission cable will be limited to 860 megawatts in Finland to Estonia direction until September, when Kiisa emergency reserve power plant will be commissioned. Due to this, Estonian and Finnish market prices may differ from time to time. In January, Estonian and Finnish market prices averaged at 40,98 euros and 40,23 euros per megawatt-hour, Finland being the latter. Taking this into account, market prices in the two regions fell by 15 percent in February compared to January. December average prices were fixed at 36,84 euros in Estonia and 35,65 euros per megawatt-hour in Finland. Market prices were lower than February in June 2012, when Estonian price was recorded at 30,80 euros. Finnish market region prices were lower in July of the same year, when the monthly average price was calculated at 13,67 euros. Latvian and Lithuanian Day-Ahead average prices shaped to be 42,72 and 42,73 euros per megawatt-hour in February. Market prices of the two countries stay equal majority of the time, however, prices may differ if limitations occur in cross-border transmission lines. January Latvian and Lithuanian average prices were fixed at 42,94 and 42,95 euros per megawatt-hour, respectively. Therefore, market prices in the two countries fell by less than one percent in February compared to January.

2 Latvian and Lithuanian market prices did not react similarly to Estonian and Finnish market price fall. This is due to the fact that Latvia and Lithuania lack electricity production assets to cover their own consumption. The two countries are therefore obligated to import a large quantity their consumption from neighboring countries. According to transmission system operators agreement, however, cross-border transmission line capacities have been partly limited, which inhibits cheap electricity import into Latvia and Lithuania, which, in turn, has a price-increasing effect. February market prices were brought down in Estonia and Finland by a considerably higher-than-average air temperature and a comparatively high wind power generation, which continued throughout the month. Warmer weather has a price-lowering effect. Consumers, who use electricity for heating, demand much less energy, which in turn lowers the market price of electricity. High wind power generation also has a pricedecreasing effect. Wind power is largely unpredictable and any energy produced is sold onto the market straight away. Wind-generated cheap electricity, especially in large quantities, therefore, has a price lowering effect. Electricity futures prices reached a long-term low-point High air temperature and large quantity of precipitation in Scandinavia in February lowered futures prices Average power exchange price Area average Change Minimum Maximum ( /MWh) M-o-M ( /MWh) ( /MWh) Nord Pool Estonia 34, % 14,86 68,59 Nord Pool Finland 34, % 14,86 68,59 Nord Pool Latvia 42, % 17,22 80,25 Nord Pool Lithuania 42, % 17,22 80,25 Average power exchange price EUR/MWh Electricity forward prices EUR/MWh Estonia Finland Latvia and Lithuania 2015 Future Contract Prices The first half of January brought about a sudden increase in futures prices along with a major cold spell dominating Northern Europe. In the second half of the month, weather forecasts showed an arriving warmer weather. This resulted in a drop of electricity futures prices. Throughout February, Scandinavian electricity prices kept on falling, bringing an all-time low-point for several future instruments. Year 2015 Helsinki market area future contract average price in February amounted to 37,17 euros per megawatt-hour, meaning a 4,3 percent decrease compared to January. January average price for the instrument was 38,82 euros. February low-point for the observed instrument came on February 26, when the price closed at 35,75 euros per megawatt-hour. This was also an alltime low-point for the instrument. During the last trading days of the month, prices recovered slightly. On February 28, Helsinki area future contract closing price was recorded at 36,20 euros. December average price for the contract was 38,08 euros and the monthly low-point was 37,36 euros. EESTI ENERGIA Energy Market Overview February

3 During future contract trading, weather forecasts are taken into account as an important factor. Throughout February, forecasts showed continued spring-like warm and wet weather. Warm weather means lower energy demand in Northern Europe, which in turn lowers electricity prices. A lot of precipitation fills hydro reservoirs, which are used by hydro power plants to produce electricity. More precipitation means hydro power plant reservoirs fill faster, which in turn means more power supply onto the market, which then in turn amounts to lower electricity prices. Hydro power plants produce the majority of total electricity in Scandinavia. In the long-term, however with a smaller importance in Northern Europe, future contract prices are also affected by European Union Carbon Emission CO 2 emission price /t 8 7,5 7 6,5 6 5,5 5 4,5 4 Allowance prices. Emission Allowance price variation directly affects fossil fuel-burning power plants costs. In February, carbon prices continued to increase heavily. The average price of carbon emission rights in January was 5,07 euros, however, by the end of February, the price of emitting one ton of CO2 had increased to 7,15 euros. Throughout February, the price increased by 41 percent and since the beginning of the year, the price of the greenhouse gas has increased by 48 percent. The fast price increase of carbon is caused by European Union s plan to remove 900 million emission permits within the next two years, including removing 400 million permits this year. Carbon Dioxide Emission Rights Price Gas futures market prices up compared to January Gas prices were increased by higher price of crude oil; price was also supported by a weaker dollar Gas future contracts prices were marginally higher in February than in January. Gas future contracts prices were upped by higher price of gas components, gasoil and fuel oil. The higher price of gas components was caused by a higher price of crude oil on world markets. Gas price is also affected by the movement of US dollar on foreign exchange markets. Brent crude oil February average price was fixed at 108,84 dollars per barrel. During the initial days of the month, oil price stayed comparatively low around 106 dollars. Price was kept down by markets cautiousness of emerging economies growth. Among others, markets kept a close watch on the Chinese economy, which showed signs of slowing down in the beginning of the year. China is one of the biggest oil consumers in the world, and slowing of the Chinese economy means a much smaller demand for oil on world markets. Crude Oil Price $/bbl Price of crude oil (ICE) $/bbl In the second half of February, crude oil prices started to rise. Prices were increased by a major cold spell dominating United States of America throughout the month. The lasting cold increased the price of heating oil considerably, which also had an upward effect on crude oil. United States gas market reached an all-time high-point in February. Among others, crude oil price was also supported EESTI ENERGIA Energy Market Overview February

4 by Libyan and Venezuelan protests, which limited refined oil output. During the last days of the month, crude oil price rose to above 110 dollars. Gas price is also affected by United States dollar and euro rate on foreign exchange markets. A more expensive dollar generally, but not always, means cheaper oil. In February, the dollar went through noticeable weakening, which in turn supported the price of crude oil. During the last trading day of January, European Central Bank fixed the price of one euro at 1,3516 dollars. During the last day of February, however, the euro was fixed at 1,3813 dollars. As of then, the dollar had gone through a weakening of 2,2 percent, which means it became cheaper in terms of the euro. The fall of the dollar is mainly accounted to a slowdown of the US economy, in which many blame the major cold spell in USA. European economy, however, has been showing growth, which in turn supported the euro against the dollar. Euro-Dollar Exchange Rate EUR/USD 1,385 1,38 1,375 1,37 1,365 1,36 1,355 1,35 1,345 Baltic state news Eesti Energia improved electricity sales to wholesale markets by 118% In 2013 Eesti Energia sold a total sum of gigawatt-hours of electric energy, 13% more than it did in Approximately two-thirds of total electricity sold was to retail markets. After the electricity market opened in Estonia, retail sales fell by 12%, whereas wholesale sales grew by 118%. Electricity wholesale improved mainly due to higher average wholesale prices, which allowed us to produce and sell more electricity than in Government of Latvia has postponed the opening of electricity market for households until January 1, 2015 The decision of the Latvian government impacts those electricity sellers, who have already prepared for the competition stemming from opening of the market, by investing into sales systems and Dollars per one euro advertising. Similarly difficult situation for electricity sellers was in 2012, when the government decided to open the electricity market for business consumers with one month notice. Legislations adopted by the Latvian government have meant that doing business during the transition phase from closed market to open market has become more difficult for electricity retailers. Latvian regulator has approved a new Mandatory Purchase Obligation (MPO) Starting from April 1, the MPO will be 26,79 euros per megawatt-hour, 0,11 euros lower than it was before. By implementing the mechanism that compensates part of the MPO, Ministry of Economics has fulfilled their promise of not increasing the MPO for end consumers. It was mainly achieved by implementing a new tax for subsidized electricity producers. Without the mechanism, MPO would rise by 16 percent. EESTI ENERGIA Energy Market Overview February

5 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 February