The Baltic reserves market is plagued by structural problems, according to Estonia's largest electricity producer, Eesti Energia. Market participants — the providers of capacity and reserves — lack a clear picture of what is happening and how the market functions. They also question how much regulating capacity in the Baltics can actually be used on a day-to-day basis if needed.

Eesti Energia says the market is also distorted by system operators themselves taking part, such as allowing Elering's 250-megawatt Kiisa power plant to participate.

Other issues include mismatches between the capacity and regulating markets, as well as possible price manipulation.

Eesti Energia's concern is understandable for a major producer unable to use its generation capacity on the frequency reserves market as expected. The market was supposed to offer extra revenue opportunities. In April, Armen Kasparov, the company's director of energy trading and portfolio management, told ERR that the opening of the frequency reserves market had created new potential revenue streams for Eesti Energia's dispatchable capacity.

They are not the only critics. Energy market expert Marko Allikson, a partner at Baltic Energy Partners, recently told ERR that the entire Baltic reserves market remains in its infancy and lacks sufficient transparency.

Experts and system operator Elering itself insist there is no shortage of regulating capacity in the Baltics, as shown by the amount of capacity qualified by the system operators: the volume of different reserve products needed to maintain grid stability exceeds actual demand by 4.5 to 10 times.

But reality might be different, Eesti Energia suspects. The picture is misleading, said Andres Tropp, the company's head of regulatory affairs, because roughly half of the capacity qualified by the system operators has never been offered on the reserves market.

Elering board member Erkki Sapp told ERR that data on the reserves market and the capacity market for reserves is fully available on the relevant websites and system operators have also published the amounts of pre-qualified reserves.

"Market participants certainly don't lack information about how the market operates, compared with reserve markets in neighboring countries or even the day-ahead electricity market," Sapp said.

In May, Eesti Energia sent a letter to the Competition Authority asking it to investigate whether the regulating capacity figures announced by the three Baltic system operators are accurate. The company has yet to receive a reply.

More than a few problems tied to Latvia

The capacities that have never been offered on the reserves market are mostly in Latvia, primarily at hydroelectric plants.

Why Latvian operators do not sell their low-cost hydropower on the reserves market is unclear to Eesti Energia — the high prices there could yield far larger margins than the regular day-ahead electricity market.

The owners of the hydro plants have not explained their behavior. "One might conclude that Latvia's hydro plants are unable to make offers on the regulating market due to technical problems. If that is true, it is unclear how these capacities were qualified by the Latvian system operator as suitable for offering reserve products," said Tropp.

And if these capacities cannot make offers on the market yet are still qualified to do so, Eesti Energia argues, this could be considered market manipulation or an attempt at it.

Sapp confirmed the issue mainly involves Latvian hydro plants, which — citing various reasons such as water levels on the Daugava River, environmental requirements and technical constraints — make relatively small offers compared with their qualified capacity.

"This has raised questions among both market participants and Elering. We have discussed the matter with Latvia's system operator as well as the Latvian market participant in question. The volume of reserves offered by Latvian hydro plants and information about their offer capabilities on Nord Pool's urgent market messages platform has somewhat improved," Sapp said.

He added that since each market participant's bids are considered trade secrets, system operators are not allowed to disclose them. "But at the request of market participants, we are working with Latvia's and Lithuania's system operators on a solution that would allow us to publish offer curves," he said.

Shortage when everything and more looks to be available

The balancing services market is divided into the frequency reserves capacity market, where system operators procure the reserve capacity needed for regulation, and the regulating market, where they buy the energy required to maintain balance.

Market participants who win bids on the capacity market are required to make offers on the regulating market as well. But there is a major problem: the average daily need for balancing capacity in the Baltics is only about 100 megawatts, while the largest players on the capacity market have generation assets that cannot operate in such small increments. Tropp cited as an example Lithuania's Kruonis pumped storage plant, whose minimum activation volume is 200 megawatts.

"They're only needed in rare cases, such as when a cross-border transmission capacity goes offline," Tropp said.

Another large player, the Elering-owned Kiisa power plant, participates on the market with special permission, but only intervenes when there are not enough market-based offers.

"So we are in a situation where capacity procured on the capacity market is mostly not participating in the regulating market and the frequency reserves capacity market is not supporting the regulating market, even though logically it should," Tropp said.

Eesti Energia faces a similar challenge: its large oil shale plants cannot access the frequency reserves capacity market and when prices are low on the day-ahead or intraday market, they cannot offer on the frequency market either — starting a plant for just a few hours is not feasible and operating longer would mean losses.

"In this situation, the regulating market's needs are covered by the equipment of smaller market participants, and if that's not enough, the Kiisa plant steps in," Tropp said.

This underlines a major problem on the frequency market, also flagged by Allikson and known even before the market opened: there is a lack of flexible generation assets. Kasparov likewise noted in April that there is a shortage of new generation and storage capacity capable of reacting quickly.

Recently, one Latvian market participant began exploiting these gaps for its own benefit by making a series of increasingly high-priced offers. At one point last week, the price per megawatt-hour soared to nearly €10,000.

Tropp said that since the end of July, small Latvian providers with marginal capacity — under 10 megawatts — have been making progressively higher bids: "First €3,000 per megawatt-hour, then €4,999 and last week €9,999 and -€9,999 per megawatt-hour."

While market opacity means other participants cannot tell what is driving these bids, Tropp said it is hard to believe such behavior could be justified under market rules. As noted earlier, Elering cites the need to protect trade secrets.

"The fact that this kind of price 'fishing' continues points directly to weak market oversight in Latvia," Tropp said.

Suspicious bids to be investigated and violations punished

This is not a price game for the average electricity consumer to watch with curiosity from the sidelines — the outcome inevitably shows up on electricity bills, as market participants cannot pass all the costs of keeping the power system balanced onto themselves.

"Since the balancing services market is shared by the Baltic states, these extreme prices unfortunately also hurt Estonian market participants and consumers. Estonian authorities should not take such cases lightly and should pressure Latvia to prevent and resolve them quickly," Tropp said.

Elering took formal action last week, sending letters to Latvia's system operator AST and its Competition Council.

Sapp said AST contacted the market participant responsible for the high bids and this week the frequency market has not seen such extreme prices.

"The Latvian market participant behind the high prices has significantly changed its bidding behavior after being contacted," Sapp noted.

On Tuesday, Baltic regulators sent an official letter to 141 market participants stressing the importance of responsible bidding. In the letter, seen by ERR, participants were warned that the supervisory authorities of the three countries — in Estonia's case, the Competition Authority — will closely monitor the frequency market. Suspicious bids will be investigated both by these agencies and by the Baltic system operators and violations can result in sanctions.

The Estonian Competition Authority told ERR that it is not investigating the possible market manipulation occurring in Latvia — that is the responsibility of the Latvian authority.

Eesti Energia doubts necessity of Kiisa plant's market participation

Eesti Energia says the extremely high prices on the Baltic regulating market are not just the result of one Latvian market participant's price fishing, but stem from structural issues in how the market is set up. That, in turn, has significantly increased electricity producers' and sellers' costs for forecasting and balancing their portfolios — costs that will inevitably be passed on to consumers to ensure the companies' long-term viability.

Market participants have also criticized the participation of Elering's 250-megawatt Kiisa power plant in the market. While its role as a safeguard on the newly opened market is understood, questions have arisen over the past few months as to whether Kiisa truly only participates when needed to ensure system security.

Eesti Energia argues it is already problematic that Kiisa, granted a special permit to participate, is pushing a large amount of dispatchable capacity out of the market. On top of that, Tropp said, the plant participates with very high offers under the "last bidder" rule, earning significant revenue.

"Elering benefits from the high prices on the regulating market because, under the balance rules approved by the Competition Authority, Kiisa's service is priced based on the highest market offer. True, Elering uses the revenue to help fund the purchase of other reserves, but these are clearly artificial, not cost-based price levels, which drive up costs for market participants and end consumers," Tropp said.

This means Kiisa is active on the regulating market with very high, non-cost-based prices, Tropp added, and even if the plant is participating as the last bidder, there is no justification for doing so at such prices.

Eesti Energia has asked the Competition Authority to determine how much system operators should be allowed to participate in the market with their own assets and how much new generation and storage capacity should be brought online so that, for example, Elering could withdraw Kiisa from the market. The company has not yet received a reply.

Sapp argued that excluding Kiisa's capacity would mean purchasing a greater volume of reserves from market participants, adding tens of millions of euros annually to Estonian consumers' bills.

"From the producers' perspective, such a request is understandable, but from the standpoint of electricity consumers and the final price of electricity, it's not feasible. Including Kiisa in capacity assessments for reserves means lower costs for consumers," Sapp said.

On Kiisa's non-cost-based bids, Sapp said that because it is the last reserve to be activated, it is priced according to the most expensive market-based offer — which is why cost-based bidding is not possible.

"It's also important to remember that the manual frequency restoration reserve (mFRR) market is currently quite thin and without Kiisa's capacity, the required reserve volume may not always be available, which would make ensuring security of supply much more difficult," Sapp noted.

In April, Elering received permission from the Competition Authority to use Kiisa's full 250-megawatt capacity on the frequency reserves market. Elering estimates that on some days this could save €1–€1.2 million in procurement costs for frequency reserves.

So far this year, the average amount of reserves activated in the Baltics has been 25 megawatts upward and 70 megawatts downward per day. The maximum activated in either direction has been about 650 megawatts.

Elering has paid €56 million for frequency reserves over six months

Last year, the Baltic system operators projected that Estonia's, meaning Elering's, share of frequency reserve costs would be about €60 million. But within the first few months of this year, it became clear the total would be higher. In July, Minister of Economic Affairs and Infrastructure Andres Sutt (Reform) said the 2025 cost of frequency reserves would reach €100 million.

From February to July, the total came to €56 million.

This year, the cost of frequency reserves is being covered by Elering through congestion fees. Next year, when the projected cost is €60 million, 60 percent will be paid by electricity consumers and 40 percent by producers. Any amount above €60 million will be covered by Elering, Sutt said.

Frequency reserves are power plants and storage units that stand ready to react quickly to changes in the electricity grid, such as plant failures that cause a surplus or shortage, potentially threatening the 50-hertz frequency. Reserve providers must be able to immediately start up additional generation when there is a shortage or reduce the output of a running unit when there is an oversupply.

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