The biggest problems so far have been the rise in electricity prices, as many traders have contracts for the supply of electricity at fixed tariffs, which are very difficult or impossible to change.
Photo: Evija Trifanova / LETA
10:25, September 27, 2021
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Olafs Zvejnieks, “Latvijas Avīze”, JSC “Latvijas Mediji”
Rising electricity and other energy prices have now created a dark cloud across the economy. Unfortunately, forecasts show that at least until the end of winter the situation is not expected to ease – we will have to live with high energy prices.
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The biggest energy storm of the decade is ahead of our eyes. Last year, energy prices were the lowest in a decade, but this year, on the contrary, the highest. Why it happened – there is a whole bunch of reasons: less electricity from wind energy and water, empty gas storage, liquefied gas tankers going to Asia, blackmail Russia, higher carbon prices.
Why are prices rising
The first reason for this is that this year, nature has literally scoffed at renewable energy enthusiasts and demonstrated the shortcomings of this type of electricity generation. Until now, it has always been considered that a situation is not possible where the wind does not blow anywhere – if it does not blow in one place, then it blows in another, and if there are good interconnections, then the electricity generated by the wind can be transferred from one region to another. And here you have it – the year 2021 has come, when the wind is blowing weakly all over Europe.
In the UK, which has the best working conditions for wind turbines in Europe, wind has produced at least 5% less electricity. Elsewhere, it is even worse – in Scandinavia and the Baltics, the decline is 12%, but in Germany – at least 20%. This has dramatically increased the demand for electricity from hydrocarbons, primarily gas.
Here, too, the second factor is that, after a relatively cold winter, Western European gas storage has been filled by only 72% on average, which is the lowest level in a decade. For comparison – at the same time last year, at the end of September, the storage facilities were already 94% full. If the upcoming winter is cold and the storage cannot be filled by the beginning of it, then some analysts have already said that there will be regions in Europe where you have to choose between producing electricity or heat, because both do not have enough gas. This is the reason for the mild gas hysteria in Western Europe.
The third reason is that liquefied gas vessels, which have generally been able to make up for the shortage, are heading this year mainly to Asian markets, where demand for gas has increased as a result of economic growth and can be sold at reasonable prices.
Next, Russia is openly blackmailing Western Europe, reserving unusually small volumes of gas through Ukraine and giving transparent hints that Russia could solve Europe’s gas problems if Germany and Denmark rushed with the certification of the newly completed Nordstream 2 gas pipeline, which would normally could take about half a year.
The prices of carbon emission allowances have also risen this year, so electricity produced from hydrocarbons will cost more this year as well. Valdis Dombrovskis, Executive Vice-President of the European Commission, said in a recent television interview that carbon prices need to rise so that the European economy is reoriented and no longer so dependent on Russia, which controls 41% of the European gas market. Unfortunately, the misfortune with this logic is that electricity consumption cannot be postponed until the economy has reoriented – it is needed now – and carbon prices are now contributing to the sky-high price of electricity and gas.
Add to this the still hot summer results in relatively low water resources in Northern Europe, which also prevents hydropower plants from producing as much as expected, as well as relatively high oil prices – and the result is unusually expensive energy resources across Europe.
A serious and unprecedented situation
Both households and businesses with higher electricity prices have to reckon at least until the spring.
Foto: Proxima Studio/SHUTTERSTOCK
Uldis Mucinieks, a member of the Board of Elektrum, says that the situation is very serious and unprecedented. “The prices of all energy resources have now risen to historically very high levels. There were simply high price levels in the summer, but now we can talk about atypically high levels.
If we compare the prices of the first nine months of this year on the electricity exchange with the same period last year, then the prices have more than doubled, and the increase affects the whole of Europe – in Sweden, for example, the price of electricity has even almost tripled. In addition, a very sharp price increase took place in September – last September electricity on the Nordpool exchange still cost 41 euros per megawatt hour, and this year in September – 120 euros. ”
The barrel says that gas prices have increased sixfold in the same period. In the wake of the growing trouble, coal-fired power stations across Europe have begun to “preserve”, which has led to a sharp increase in demand for coal and a tripling of its price since last September.
The results of the price increase did not have to wait long, and the biggest problems so far have been the rise in electricity prices, as many traders have contracts for the supply of electricity at fixed tariffs, which are very difficult or impossible to change.
Thus, Sky News reported last week that six electricity traders went bankrupt in the UK in September alone, all small, with two more hanging in their hair. In Latvia, only the electricity trading company Senergo, which is related to the family of Ernest Bernis, the co-owner of ABLV Bank, has ceased operations in Latvia.
Experts believe that all electricity traders who are not backed by any of the electricity producers – Latvenergo, Estonian Eesti Energia or green energy producer Enefit, Lithuanian Ignitis Group or Russian Inter RAO – are potentially endangered. However, even if they or other electricity traders may be forced to close down, their customers are not particularly at risk – as in the case of Senergo, they will simply have to become a customer of another trader.
One of Lithuania’s largest state-owned companies and the largest consumer of natural gas in the country, the chemical company Achema, announced last week that it had temporarily laid off a third of its employees. The head of the company Ramūns Miliausks says that natural gas prices in Europe have already reached the limit above which the company starts to operate at a loss.
If gas prices remain high, Achema will be forced to shut down other plants, affecting more than 1,000 companies directly and indirectly linked to the company, Miliausks explains. Also in Latvia, if “Liepājas Metalurgs” had not gone bankrupt in 2016, then most likely it would have been forced to stop operating now.
Don’t feel threatened
In a conversation with Latvijas Avīze, Krists Mertens, Chairman of the Board of the electricity trader Enefit, emphasized that the financial situation of each trader is currently determined by how responsibly it has managed so far and how professionally it has managed risks. Asked to explain what this means, he said, “it is not quite the case that anyone with a computer and a desk can become an electricity trader.
The market needs experience and liquidity, for example, we have played all the current risks before. There are also those who have hoped that they will be able to buy electricity at a better price during market fluctuations. These, the latter, are currently in a dangerous situation. Mertens emphasized that Enefit will fulfill its obligations to customers with fixed contracts, the rest will be supplied with electricity at market prices.
Uldis Mucinieks, a member of the Board of Elektrum, commenting on the situation with agreements on fixed tariffs, says that electricity supply agreements in the Latvian market are not only at fixed prices or only at the stock exchange price. There are other types of agreements, such as fixed price contracts, which do not at the same time fix the time at which electricity is supplied at such a price. This allows the electricity trader to adjust supply prices by informing customers in good time.
In addition, the agreements with business customers provide for the possibility for both parties to terminate the agreement or agree on new terms of cooperation. In the case of Elektrum, contracts for fully fixed prices account for about 30% of the total number of supply contracts, and their owners are currently the winners. The remaining 70% are either exchange rate contracts or the contracts already mentioned, which allow some price adjustments.
Mucinieks emphasized that although the situation is not pleasant at the moment, Elektrum’s financial position is stable, the owners of fixed tariff agreements will continue to receive electricity at the prices indicated in the agreements, while the prices for the rest will be adjusted according to market conditions.
It should be noted that with the increase in electricity prices, customers have started to pay more attention to both bills and control of electricity consumption. The interest in energy efficiency measures has increased, as well as the production of electricity themselves – this year the interest in the installation of solar panels has increased.
It is difficult to predict future developments in the electricity market, but electricity traders say that there are currently no events on the horizon that could sharply lower electricity prices, and in general, winter is not a period characterized by lower energy prices. Therefore, by spring, it is likely that we will have to live with high prices for electricity and also for all other energy resources.
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