New links to create 13% reduction in electricity costs

Businesses in Lithuania are set to benefit from substantially reduced electricity costs from next year. New interconnections with Sweden and Poland are expected to drive down power costs by 10-13%. The NordBalt connection to Sweden and the LitPol Link with Poland will more than double liquidity in Lithuania’s energy market, significantly boosting cost competitiveness for businesses.

Liquidity in NordPoolSpot (NPS), the Northern European energy market, is set to reach 1,200 Megawatts (MW) as a result of the new connections. The 700MW capacity connection between Lithuania and Sweden that will open next year will play a key role in cost reduction in the Baltic state. The new link will connect the Lithuanian energy market to NPS zone 4 in Sweden. In 2014, the price of electricity in NPS zone 4 was 40% lower than in Lithuania (€31.91 per MW hour (MWh) as compared to €50.13/MWh). In the first eight months of this year, the difference has been even greater, with electricity prices in NPS zone 4 at €22.89/MWh compared to €44.33/MWh in Lithuania.

A recent forecast, compiled using data from anonymous surveys completed by analysts and market players, anticipates a 10-13% fall in electricity prices in the Lithuanian NPS market following the completion of the NordBalt interconnection.

In order to gauge the mood of the market, Lithuanian business daily Verslo Žinios (VŽ) asked the biggest power sellers in the region the following three questions:

1. How will the market and its main indices change in Lithuania when the NordBalt power interconnection between Sweden and Lithuania starts operating? By how much will prices differ for big consumers and for households?

2. How will the NordBalt factor affect your company’s strategy? What will your preference be: to preserve/expand your current market share or to focus on maximising profit with the lowest costs possible?

3. Do you think market stakeholders will buy Swedish electricity and sell it in markets other than the Lithuanian market?

Here are some of the responses VŽ received.

Enefit: compared to 2014, prices will fall dramatically

Janis Betheras, General Manager of Enefit, a subsidiary of Eesti Energia, a private limited company based in Estonia.

1. This year, compared to 2014, power prices are particularly low – on average they are 18.6% lower than in the corresponding period last year. The new power supply lines which will connect Lithuania with Sweden and Poland should help to not only maintain the present low level in 2016, but even to push prices lower. Certainly, while energy prices have decreased markedly in 2015, we expect these changes to be more moderate in 2016, but compared to 2014 they could be said to be dramatic.

Obviously, global trends in the prices of energy resources will affect the price, as well as the production of electricity by hydro and power plants in Scandinavia. Nevertheless, we are optimistic because the futures energy prices on the Nasdaq OMX exchange also show decreasing trends. For instance, in the middle of September, the price offered for 2016 was €39.4 /MWh, which is 10% less than the futures price for electricity was in January for 2016. Another reason why electricity prices should remain low for the foreseeable future is the fact that the European Parliament has postponed proposed reforms of emission allowances, which will now only come into practice in 2019.

With regard to the effect of the new power connections on the free energy market, I think the diversification of power supplies will only increase consumer’s confidence, encouraging more of them to buy electricity at ‘spot’ prices. When the price of electricity grew in 2013 and 2014, this might have frightened some consumers. However, this year companies which have purchased power at market prices have paid considerably less than expected.

2. Enefit has introduced the largest number of new products for purchasing electricity into the Lithuanian market, and now has the widest-ranging portfolio. We help companies choose the buying power mode which suits them best and which allows them to use the opportunities available in the wholesale market, be it a fixed price, a market price, or a combination of both.

We have seen that in recent years our clients (who are purchasers of power) have a better understanding of the market and are choosing more diverse power purchase strategies. Our conclusion is that we are going in the right direction.

In 2016, Enefit will attempt to expand its market share in Lithuania. We have never just advocated lower prices: we are trying to create added value for our clients, for example by offering them advice on their energy purchases and products which best meet their needs. This is probably why we count so many large and medium-size companies among our clients, as they need professional advice and a wider range of electricity products to choose from.

3. Trading in the electricity supplied via the NordBalt cable will be organised by NordPool Spot (NPS) and no other energy seller will have physical access to the cable itself. Most likely, energy will be supplied from Sweden to Lithuania from the very first hour the cable comes into operation; therefore, those who buy electricity from NPS Lithuanian price zones will be able to use the flow of Swedish power.

Lietuvos Energija: consumers will see prices fall

Dalius Misiūnas, Chair of the Board and General Manager of Lietuvos Energija, a Lithuanian state controlled energy company.

1. In general, competition among producers will increase, and producers in the Baltic states will start competing with Swedish producers more actively. As a result, the price of electricity in the wholesale market should fall slightly. Most likely, the average annual price for power in Lithuania will be, at most, €40/MWh, although this will depend more on climatic conditions in Scandinavia. Besides, once Lithuania refuses power production quotas, Lithuanian power plants will probably generate considerably less electricity than they have produced this year.

In summary, prices should fall for consumers, but how much will depend on the degree of competition between market participants.

2. We will actively participate in the market and will endeavour to use the newly available operational capacity and competition in the most effective manner, taking advantage of the opportunities provided by the market.

3. Given the difference in prices in the Lithuanian and Russian markets (in Russia electricity is cheaper), power prices in Russia are unlikely ever to exceed energy prices in Lithuania to the extent that it would pay off for Russia to do that (to buy Swedish electricity).

InterRAO: prices will be similar to those in Finland and Sweden

Vidas Čebatariūnas, member of the Board and Commerce Manager at InterRAO Lietuva, one of the largest independent suppliers of electricity in Lithuania.

1. When the power interconnection between Sweden and Lithuania starts operating, the number of consumers and producers in Lithuania will neither increase nor decrease. Therefore, in our opinion, the power market will in essence remain the same. Clearly, power prices and their means in the NPS Lithuanian price zone will become similar to those in the Swedish and Finnish markets. Whether prices remain higher or lower will depend on a number of factors: winter and summer temperatures, the amount of water from mountain snow and rivers, subsidies for energy producers granted on the basis of Nordic policies, and other factors.

2. As the power market will not change in principle, and most probably it is only prices that will change, the strategy and business tactics of our company will not change after the interconnection between Lithuania and Sweden is launched.

The company has been implementing a risk management policy for a few years to help us foresee the factors which might affect the company’s performance and to make decisions leading to profitable operation. This approach has been particularly pertinent in view of the bankruptcies caused by the complications and losses in the third quarter of 2014. Because of this, the company will give priority to actions which allow the company to implement its mission, namely, to supply energy at competitive prices in a reliable and stable manner on the wholesale and retail power markets, whilst gradually expanding the share of energy received from renewable energy sources.

3. Such cases are certainly possible. In today’s market, power is exported to Russia or to Belarus. However, it should be emphasised that in such cases power would be purchased at the prices as applied in the NordPoolSpot Lithuanian price zone (as is currently the case), and not at the prices of the Swedish price zone.

Elektrum Lietuva: new connections will benefit consumers

Elektrum Lietuva, a private energy supplier, declined to participate in the VŽ survey. However, the company’s website has published the following comments by Sales Manager Martynas Giga.

Once the interconnections with Sweden and Poland are launched, the scale of imports will most probably further increase, giving a tangible benefit to energy consumers. In terms of the positive effects of the interconnection, it is important to not only focus on changes in price. We would then risk missing the most important aspect of this development, namely, energy security.

Firstly, the new connections will help to diversify the sources of energy from which electricity is supplied to Lithuania. If for some reason power stops flowing in one cable, it will reach consumers in some other way. This means that the risk from unforeseeable events, which could cause a sharp rise in prices or other problems, will decrease.

Secondly, Lithuania will receive cheaper energy as the flow of capacity will come from lower price zones. At the moment, the average energy price in Lithuania amounts to about €45/MWh.  In Sweden this figure is often as much as five times lower. The positive effect of the two aforementioned factors will reach its climax next year, in 2016. Businesses, who use 71% of all energy consumed in Lithuania, will immediately notice this effect. Still, energy prices for household consumers may not fall by as much as expected.

After peaking in 2014, when the price per Megawatt hour exceeded €50, prices have fallen to €43–44/MWh this year. This fall was due to significantly cheaper prices for raw materials, which also increased competition among local producers. Scandinavian price zones have also been affected by considerable increases in renewable energy sources.

Given the available information and future financial transactions, which indicate future energy prices, forecasts suggest a fall to approximately €39/MWh next year. Night-time electricity prices should fall most, while the price of daytime power might not fall as much.

The prices in our region are mostly subject to local operational capacities. Both the current and the forecast difference in energy price between the Lithuanian and foreign price zones leads to the conclusion that a positive effect might be felt thanks to the additional connections. If the energy demand of Lithuanian consumers could be satisfied by an uninterrupted flow of imports, they would obviously then pay less.

Read the original article in Lithuanian at VZ.lt