There is no better way to say it – we are currently experiencing a crisis, an unprecedented rise in prices in the energy markets, which is affecting every energy service provider and citizen of Europe.

Over the past six months, stock prices have been unprecedentedly high, and they still continue to rise. In September, we experienced a repeated price rise, this time even faster than in previous months. In this article we will explain how it will affect people and what factors have caused the crisis in energy prices in Europe.

• During the last 6 months, electricity price in Latvia has increased by more than 250%
• In Europe, including the Baltics and the Nordic countries, prices are rising, as the average price of the Nord Pool system has risen 7.5 times. We explain the factors that have influenced the growth
• There is a dramatic situation in the European natural gas market
• For customers, electricity and natural gas prices will rise again

During the last 6 months electricity price in Latvia has increased by more than 250%

In August, Latvia had the second historically highest electricity price since Latvia started operating on the Nord Pool exchange. The average monthly electricity price has doubled, reaching 87.32 EUR/MWh (compared to 43.41 EUR/MWh in August last year).

Figure 1: Average prices on the Nord Pool Spot Latvian Exchange Area

Consequently, till 22 of September, the average wholesale electricity price in Latvia reached 125.70 EUR/MWh. Compared to the price of the same period in 2020, it is 3 times higher.

In Europe, including the Baltics and the Nordic countries, the prices are rising as the average price of the Nord Pool system has risen by 7.5 times. We will explain the factors that influenced the growth

Rising prices can be seen all over Europe. For comparison, in all three Baltic countries, the price increase exceeds 100%, with the fastest price increasein Lithuania.

Figure 2: Increase of the exchange prices in the region

In August, the average price of the Nord Pool system reached a record for the summer months, rising to EUR 65.39 per megawatt hour (MWh). In the Nordic countries, such price level was last experienced in the winter months of 2011, but never in the summer. Compared to August 2020, when the price of electricity was 8.79 EUR/MWh, this year, it has increased 7.5 times. And by 22 of September, the average price of the Nord Pool system has increased by another 35%, reaching 88.26 EUR/MWh. Compared to the price in September 2020, the increase is sixfold.

Usually, electricity prices are influenced by many different factors, such as weather conditions and forecasts, electricity demand and production volume, changes in raw material prices, future projections of possible changes, etc. These factors determine how the average monthly electricity prices on the Nord Pool exchange will develop, as well as forecast electricity prices for future periods that affect the entire region. This year, the rapid price increase has been influenced by various factors simultaneously. We briefly explain each of them below.

- The demand for electricity has increased

Across the Nord Pool region, in the first eight months of this year, total electricity consumption has increased by 6% compared to the corresponding period in 2020. While it may not seem like much, it is enough to shake up the electricity prices on the exchange. The increase can be explained both by the severe weather and very hot summer, when we tried to maintain the desired comfort temperature with the help of electrical appliances, and by the economic recovery from the Covid-19 pandemic, due to which demand for electricity increased in all sectors.

- Low development of renewable energy sources in Europe and Latvia

This year, temperature fluctuations are not the only environmental events, which have led to a rapid increase in prices for both electricity and natural gas. Wind generation in the Nord Pool region has decreased by 7% as well compared to the previous year, and in Germany even by 17%. As a result, the development of renewable energy resources was replaced by natural gas and coal, which reached record high prices this year due to the high demand (the price increase can be seen in the continuation of the article).

Whereas in Latvia, the inflow into rivers was below the average level in many years, resulting in lower electricity generation at our three hydropower plants.

- Low filling of water reservoirs in the Nordic countries

Dry weather has also affected the level of reservoir filling in the Nordic countries. Currently, the average water accumulation in soil, snow stocks and water reservoirs is below normal. The reservoirs are only filled by 66.5%, which is 15.6% below the permissible level. This is certainly one of the factors that influenced electricity price increase, as low hydrobalance and water reservoir level, as well as low wind power station generation amounts have created a need to use other, more expensive energy resources. As a result, the amount of power produced by fossil fuel stations increased.

- Geopolitical situation in Eastern Europe – electricity supply from Russia has decreased three times

Yes, the relations between Eastern European neighbours are one of the reasons for the electricity price increase as well. Last year, all three Baltic states, considering the political environment in Belarus, decided to suspend electricity trade with Belarus. To prevent the electricity generated by the Astravets nuclear power plant in Belarus from entering the Baltic market, a new trade solution was developed with Russia – electricity trade was transferred to the Latvian-Russian interconnector.

On the 15 of September, Lithuania took the next step in this regard by approving a unilateral plan to reduce the maximum cross-sectional capacity of the electricity transmission lines from Belarus to Lithuania. Until now, the electricity trading methodology in force in Latvia and Estonia envisaged the maximum use of the throughput capacity of the Belarus−Lithuania connection. However, the currently introduced changes mean that Latvia will only have access to electricity trade with Russia in the capacity that corresponds to the interconnection capacity of the countries, i.e., approximately 320 MW. The throughput capacity for commercial deliveries decreased three times.

- Record high prices of energy commodities

Energy markets are interconnected, so the factor that has contributed particularly to the electricity price increase this year is the rapidly rising prices of energy commodities and emission allowances. The lacking amount of generation from renewable resources is compensated by using power stations that use natural gas and coal. Due to this fact, the price of oil, natural gas and coal influence the growth of electricity prices not just in Europe, but in the whole Northern region:

• On 21 of September, the quote of a coal futures contract was more than 3 times higher than the price on 21 of September 2020 (USD 167.30/t in 2021 in comparison with USD 52.80/t in 2020), thus, creating an increased interest in the use of a more environmentally friendly fossil source (natural gas) in the generation of electricity, contributing to an increase in demand and price;
• The price of European emission allowances on 21 of September was almost 2.5 times higher than in 2020 (60.16 EUR/t in 2021 in comparison with 26.66 EUR/t in 2020). High market volatility can be observed in the allowance market;
• The quote of the oil futures contract has almost doubled – from 41.44 USD/bbl. on 21 of September 2020 to 74.36 USD/bbl. on 21 of September 2021;
• As well as the rapid increase in natural gas prices, which significantly affects electricity prices on the exchange. The reasons for the increase in the price of natural gas are explained in detail below.

There is a dramatic situation in the European natural gas market

The above-mentioned factors have severely damaged the natural gas market as well. This year's average price of natural gas is rising daily.

In August 2021, the average price of natural gas was almost 6 times higher than last year (from 7.85 EUR/MWh in August 2020 to 44.02 EUR/MWh this year), and in September, the price of natural gas continues to rise rapidly. On 21 of September, the price rose to 73.78 EUR/MWh, which is almost 6.5 times higher than the contract price on 21 of September 2020 − 11.50 EUR/MWh.

Figure 3: Natural gas TTF index monthly contract prices (average price of contracts in October 2021 for the trade period up to 22.09)

Natural gas supplies affect the price increase, resulting in a lower volume of generation in Latvia

In addition to the above-mentioned factors that have affected both electricity and natural gas prices, another significant factor in the increase in the price of natural gas is the volume of its supplies. This year, the supply of liquefied natural gas (LNG) in Europe has been low, with LNG deliveries to Europe in August being 21% lower than in August 2020. Imports have shifted from Europe to Asia, where, in competition with European demand, high demand has resulted in high price levels.

Dabasgāzes cenu ietekmēja arī zemākas piegādes no Norvēgijas un Krievijas plānotu un neplānotu apkopes darbu dēļ, kā arī no Krievijas enerģijas uzņēmuma "Gazprom" zema papildu gāzes rezervācijas jaudas tranzīta dēļ uz Eiropu.

The price of natural gas was also affected by lower supplies from Norway and Russia due to planned and unscheduled maintenance work, as well as from the Russian energy company Gazprom due to the low reservation of additional gas transit capacity to Europe.

As natural gas is used as the main fuel for the electricity and heat generation in our thermal power plants CHPP-1 and CHPP-2, the rapid increase in natural gas prices has increased production costs and, consequently, reduced the generation volume in Latvia. The total volume of electricity generation in Latvia in August 2021 was 60% lower than in this period in 2020

As a result, high demand and low supply make it difficult to fill up the storages for the next season.

Forecasts for this winter are unsatisfactory as demand may exceed supply

As winter approaches, the demand for natural gas in Europe continues to grow, as in the last 6 months, it has increased by 16%. And weather forecasts suggest that air temperatures in Europe will remain below multiannual levels in the coming months.

Usually in the summer months, natural gas storage is filled, which balances price changes, but not this year. Low gas supplies and low development of renewable energy sources have had a negative impact on the filling of storage facilities. As a result, the current level of storage in Europe has fallen by more than a fifth (in 2020, storage was 94% full, this year only 72%). In the context of high demand and low supply, Europe can expect a winter season with a shortage of natural gas storage.

For customers, the electricity and natural gas prices will rise again 

Due to all these factors, we have also had to review electricity and natural gas prices for our customers. Considering the current market situation and the above-mentioned factors, it should be concluded that the prices of electricity and natural gas used in the price changes made at the beginning of this summer no longer correspond to the current market situation and actual costs. Therefore, this autumn, we are forced to reconsider the terms of our contracts.

It is true that there is no single answer as to what size of price increase is expected. The increase in the price of each customer's electricity or natural gas depends on the type of product the customer has chosen when the previous contract was concluded and for how long the price is fixed. The price increase is calculated in comparison to the offered price in the previous period, which may be different for each customer.

In the current situation, we recommend reviewing the energy efficiency of your home. Often with small improvements in the use of electrical appliances, room insulation or our habits, we can reduce energy consumption by as much as 10%! We invite you to look at the recommendations prepared by the Elektrum energy efficiency specialists!