"I switched my country home's electricity contract to a fixed-price plan starting in October. There seem to be too many unpredictable variables in this winter's pricing mix," Timo Tatar, the former deputy secretary general for energy at the Ministry of Economic Affairs and Communications and now head of the Estonian operations of Lithuanian energy group Ignitis, wrote on social media recently.

Explaining his reasoning to ERR, Tatar said the region and Europe as a whole are heading into winter with several factors that have more room to push electricity prices higher than lower.

"Especially if we end up with a colder-than-average winter that is also short on wind and precipitation," he said.

One unpredictable factor is the volatility of natural gas prices following the conflict involving Iran. Compared with last year, natural gas prices in Europe are around €20 per megawatt-hour higher. Since many traders expected — and some still expect — the conflict to be resolved and prices to fall, gas storage facilities are less full than usual ahead of the autumn and winter season, Tatar said.

Gas stockpiling has also been hampered by the heat in Western and Central Europe. Low water levels have reduced the output of nuclear power plants, forcing greater reliance on gas-fired power generation.

Alexela sees the same risks, Kalvi Nõu, the company's head of energy trading, told ERR. Europe's gas storage facilities are currently below typical levels and there are also concerns about the reliability of liquefied natural gas (LNG) supplies. All of this affects natural gas prices, and when gas prices are high, part of that increase is passed on to electricity prices.

Another concern is the low water level in the Nordic hydropower reservoirs, which also kept electricity prices higher in July than a year earlier.

"If hydropower generation remains more limited, there will be less low-cost electricity available on the market," Nõu said.

Tiit Hõbejõgi, a member of Enefit's management board, also agreed with Tatar that current conditions point to greater-than-usual uncertainty this winter, citing natural gas prices, Europe's gas reserves and the low hydropower reservoir levels caused by the hot weather.

If there is one positive development compared with previous years, Nõu said, it is the growing role of energy storage. Batteries are increasingly participating in the day-ahead electricity market — the market that matters most for ordinary consumers.

Uncertainty not a guarantee of higher prices

The unpredictability of electricity and natural gas prices is built into the system, however, since prices are influenced by many factors, including the weather, which is notoriously difficult to forecast.

"Exchange prices are inherently unpredictable. That's nothing new," Tatar said. "It's just that this year, we can expect periods of particularly high price peaks because of the warning signs in global markets. That's also reflected in futures prices, which are at roughly the same level as last winter or even slightly higher."

"Electricity prices are affected by a large number of factors simultaneously, many of which cannot be forecast far in advance," Hõbejõgi said.

At the same time, it would also be premature to assume that unpredictability necessarily means higher prices.

"It's important to point out that last winter we also saw very high exchange prices for electricity and natural gas, mainly because of exceptionally cold weather. Compared with last winter, it's difficult to expect even higher heating bills," Nõu said.

Tatar said consumers have become accustomed to price volatility in recent years, so he does not expect a repeat of the public shock seen during the 2022 energy crisis.

"That said, prices could still reach uncomfortably high levels during individual hours," he added.

As an example, Tatar pointed to winter hours when electricity demand is high and there is not enough renewable generation available. If natural gas remains €20 to €30 per megawatt-hour more expensive on the European market than it was a year ago, the production cost of electricity at gas-fired power plants would rise by €40 to €60 per megawatt-hour compared with last year.

Nordic electricity futures currently put Finland's electricity price for the fourth quarter of this year at about €90 per megawatt-hour, or 9 cents per kilowatt-hour.

"If Finland's average electricity price this winter does end up close to the €90 per megawatt-hour indicated by the futures market, Estonia's average winter price could be around €110 to €120 per megawatt-hour," Nõu estimated.

Tatar noted that a Finnish price of €90 per megawatt-hour would translate into fixed-price electricity offers in Estonia of roughly €140 per megawatt-hour.

"That's because the financial transmission rights (FTR) fee has to be added and there is still considerable uncertainty around that in the market. On top of that, the baseload electricity price has to be adjusted to match the customer's actual consumption profile, which also affects price expectations," he said.

While Tatar believes Finnish futures are not particularly important for forecasting prices in Estonia, Hõbejõgi said they are certainly a key indicator.

"They provide a basis for estimating prices in Estonia as well. At the same time, the margin of error is significant because Estonia's price area could ultimately end up either more expensive or cheaper depending on the availability of cross-border interconnections, regional generation and demand, local weather conditions and other factors," Hõbejõgi said.

Given the shortage of competitively priced electricity generation in the Baltic region, Estonia's electricity prices are still likely to remain higher than Finland's, he added.

Last winter, the average exchange electricity price in Estonia over the three winter months — December, January and February — was about €130 per megawatt-hour.

Gas stocks low but supply crisis not on the horizon

As noted, electricity and natural gas prices are closely linked, especially in winter, when gas-fired power plants have to operate more and their generation costs depend directly on the price of natural gas.

"The extent of that impact depends primarily on weather conditions. The colder the winter and the higher the electricity demand, the more important natural gas becomes in electricity generation," Nõu said.

Hõbejõgi said that although relatively little electricity is generated from natural gas in Estonia, gas plays such an important role in other countries that it still affects electricity prices in Estonia.

"If renewable energy generation is strong, demand remains around average and cross-border interconnections function well, electricity prices can remain moderate even when natural gas prices are high," he said.

Although Europe's gas storage facilities have not yet reached their usual levels ahead of winter, Nõu said he does not expect this winter to differ from previous ones in terms of security of supply.

Tatar also said he does not see a direct risk to natural gas supply security.

"However, if this winter turns out to be colder than average, we could certainly see sharp price spikes driven by gas-fired electricity generation," he said.

Hõbejõgi likewise said there is currently no reason to be concerned about supply security, though prices could still fluctuate significantly this winter.

"We certainly cannot rule out individual days or periods when prices change very rapidly. That's why the main thing to prepare for is price volatility, not supply security problems. There is also the possibility of isolated days with exceptionally high prices," he said.

Because of the conflict involving the U.S., Israel and Iran, Europe has been replenishing its gas storage more slowly than usual ahead of winter and estimates indicate that gas inventories in July were at their lowest level in 15 years. As of mid-July, European Union gas storage facilities were, on average, just over half full.

By the middle of this week, EU gas storage was 57 percent full. Levels vary by country: Germany's storage facilities were less than 50 percent full, while Italy's were more than 75 percent full.

Natural gas prices at the Dutch TTF gas exchange have fluctuated since the conflict involving Iran began. Just two weeks ago, prices surged, with natural gas climbing well above €60 per megawatt-hour. By Wednesday, the price had fallen back to €54 per megawatt-hour.

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