Estonia's frequency market success brings lower prices compared to Latvia, Lithuania
This week, the average daily exchange price of electricity in Estonia has been several times lower than in neighboring Latvia. The situation has been driven by the success of Estonian market participants in offering capacity on the frequency reserve market.
Over the past five days, electricity prices on the regular market in Estonia have been clearly lower on average than in Latvia and Lithuania. While electricity has generally been somewhat cheaper in Estonia than in its southern neighbors over the years, the gap has not previously been severalfold over such an extended period.
For example, on Sunday the average daily price in Estonia was €1.46 per megawatt-hour, compared with €26.85 in Latvia and Lithuania; on Monday, the respective averages were €6.03 and €63.65. On Thursday, the average electricity price in Estonia was €17.6 per megawatt-hour, compared with €85.5 in Latvia and Lithuania.
According to Kalvi Nõu, head of energy trading portfolio management at retailer Alexela, the widening price gap is being driven by the Baltic frequency reserve market where Estonian companies have made successful bids. As a result, a larger-than-usual share of the transmission capacity on the Estonia-Latvia interconnectors has been reserved for frequency market services.
"It appears that Estonian market participants have become increasingly successful in providing capacity to also meet Latvia's and Lithuania's needs. This, in turn, means greater constraints on the regular Estonia-Latvia electricity transmission capacity," he said.
Marko Allikson of Baltic Energy Partners noted that Estonia's competitive fast-response storage and generation capacities help cover a large share of the Baltics' manual frequency reserve needs.
"This reduces the Estonia-Latvia interconnection capacity available for the day-ahead market," he said.
Winds blowing down the price
Electricity prices in Estonia have been low this week because of windy weather and inexpensive wind power imports from Finland, which have helped keep prices down even during the evening and nighttime hours, Allikson said. Since a bottleneck has currently formed on the Estonia-Latvia border, however, Latvia and Lithuania have not been able to benefit from this cheap electricity. For example, during the nighttime and early morning hours on Thursday, the price per megawatt-hour in Estonia and Finland was slightly above €2, while in Latvia and Lithuania it exceeded €100.
During daytime hours, when solar generation is at its peak, electricity prices in Latvia and Lithuania are comparable to — and at times even slightly lower than — those in Estonia. However, the difference is marginal for consumers, since prices are already very low, at just a few euros per megawatt-hour. Lower prices further south mean that solar power generated there is exported to Estonia and Finland during the day.
Nõu said the coming days will show whether the sharp price divergence between Estonia and Finland on one hand and Latvia and Lithuania on the other is a temporary anomaly amplified by exceptionally windy weather or whether the same trend will continue once wind conditions normalize.
The current situation is generally positive for Estonian electricity consumers and power retailers, though the impact on Estonian electricity producers is rather negative as it generally keeps oil shale-based electricity out of the market, Nõu added.
According to Allikson, price differences with Latvia have been larger than before ever since the EstLink interconnectors became operational. Only during the heating season and periods of high water levels on the Daugava River do the price gaps narrow or even turn against Estonia on a monthly average basis.
Current situation proof of FTRs' importance
According to Nõu, the current situation clearly highlights the importance of having a sufficient volume of financial instruments, or FTRs, on the market to allow electricity retailers to hedge against risks arising from unexpected price fluctuations.
"Retailers that have not been able to sufficiently diversify or hedge their price risks in the Latvian and Lithuanian markets may incur significant losses under such conditions," Nõu said.
Elering and Fingrid plan to reduce the volume of electricity price hedging instruments between Finland and Estonia from 650 megawatts to 350 megawatts starting in 2027. According to Elering, this is necessary to align the volume of FTRs with the actual needs of the Estonian market and to reduce financial risks for consumers.
Commenting on the plans by Elering and Fingrid, electricity retailers said the move could significantly increase the price of fixed-rate electricity packages and shift a larger share of risk onto retailers and consumers.
An FTR (forward transmission right) is a financial instrument used by electricity retailers to hedge risks when offering fixed-price contracts while purchasing electricity at market rates.
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Editor: Marcus Turovski
