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Probably for the first time this winter, the incoming cold wave is welcomed with calm hearts: security of supply is guaranteed, energy prices remain stable and the threat of power cuts has passed.

The average price of electricity last week in Estonia was 104.7 €/MWh (-6.2 €/MWh compared to the previous week). The cheapest hour was at midnight on Saturday, 25 February, paying €31.58 per megawatt hour. The highest price for electricity had to be paid on the evening of Tuesday, 21 February at 7 pm with 178.13 €/MWh.

The average gas price for the week was 50.2 €/MWh (-1.8 €/MWh compared to the previous week). The price of natural gas has fallen to an 18-month low despite weather forecasts predicting a colder period. Temperatures are more than three degrees lower than usual in Germany, and even up to 5 degrees lower in France. The weather forecast for the Nordic countries is also 5 degrees colder than usual for this week, but the cold wave will be shorter than expected and according to the forecasts, the end of the next week will be two degrees warmer than normal. The price is kept low by higher-than-usual storage levels, LNG supplies and lower fuel prices.

While there is still frost in the north of Europe, Central Europe breathes a sigh of relief in light of the beginning of March, heralding the approach of spring. The European Union reduced gas consumption by nearly a fifth this winter, which is significantly more than the voluntary commitment of 15%. Finland made the most effort by using more than 50% less natural gas. Germany, which received 55% of its gas supply from Russia before the war, reduced its gas consumption by 19%. Among the European countries, only Malta and Slovakia saw their gas consumption increase above their five-year average consumption. The main factor in achieving good results has certainly been the milder than usual winter, but also the actual change in behaviour, such as lowering indoor temperatures. As winter recedes, the refilling season will soon begin.

The situation is quite good in view of the next winter, because the goal is to end the heating season with storage levels of over 50%, being currently at 62%. In addition to energy security, it makes it possible to forecast more favourable prices. If Europe can maintain this level, it will make it much easier to divest Russia of fossil fuels in the long term, but it is still too early to assess whether the goal is realistic. Especially because the next winter may not be so mild.

A high CO2 price may bring gas plants back to the market instead of coal and oil shale plants

While the price of natural gas is falling, the CO2 emission allowance is more expensive than ever. Therefore, energy producers may once again prefer natural gas over coal, raising the prices. In addition, industrial companies that have been the main reducers of consumption may increase their consumption. This has been done at the cost of shrinking production. For the first time since last May, industrial production in the eurozone increased, and private sector gas orders have also started to grow.

The European Commission plans to discuss with the member states whether or not to extend the obligation to reduce consumption. In light of falling prices, there is a risk that consumption will turn upward. Russian pipeline gas has historically covered about 50% of Europe's needs, but now its share has fallen below 10%. Assuming that the current volumes remain constant, Europe will receive 20 billion cubic metres of natural gas from Russia this year. Before the war launched by Moscow against Ukraine, the figure was 155 billion cubic metres.

Even before attacking Ukraine, the Kremlin started an energy war against Europe. Their expectation to make Europe suffer in the cold and to come to Moscow to ask for additional gas supplies did not materialize. We probably saw a decisive turn, or at least a long-term exclusion of Russia from the European gas market. Thanks to the market sanctions, Russia itself has been hit hard, earning 46% less from the sale of gas and oil in January than a year earlier. Before the war, Europe paid Russia about 1 billion euros per day for fossil fuels, while now it has shrunk to a fraction of that. Also, starting this week, Gazprom will no longer be able to reserve space in European gas storage facilities and thereby prevent gas collection, as it did last year, when Gazprom did not fill its European storage facilities after the end of winter.

In order to ensure Europe's energy security, France must significantly increase its role, but its problems with the start-up of nuclear reactors do not seem to end. By the end of February, 70% of production capacity was able to be put into operation, but the start-up of several plants has been repeatedly postponed due to various problems. Meanwhile, Germany plans to shut down its last three reactors in April, and Belgium recently shut down two of its seven reactors. New capacity in a comparable volume has not been added, although the French hope that their output will be significantly increased next winter.

The weekly average price of CO2 was 98.1 €/t (+3.6 €/t compared to the previous week). On Tuesday, it was €100.3/t, exceeding the previous record of €99.22/t set on 19 August last year. The price was driven by calm and cold weather in Europe, forcing more electricity to be produced from fossil fuels. As well as the preparing of companies for the end of April for checking that they did not pollute more than they had quotas for last year. Since the electricity consumed in Estonia does not only come from oil shale, the final price is currently more affected by the weather, the price of gas, major maintenance work and what is happening in the Nordic countries.

The market for CO2 allowances is likely to calm down after April and the annual average price may not remain at the current level. However, since the supply of quotas is reduced year by year, the average price will remain in an upward trend as demand continues.

Eesti Energia’s plants in Narva were on the market last week with 455 MW. On Wednesday, the long-planned and month-long annual maintenance of Eesti Power Plant’s Unit 5 will start. All other steerable production facilities are available for the market.

The price of electricity is formed on the power exchange for each hour depending on the production capacity and consumer demand for that particular hour, as well as on transmission limitations between countries.

**Olavi Miller, Market Analysis Strategist at Eesti Energia**

The market overview has been prepared by Eesti Energia according to the best current knowledge. The information provided is based on public data. The market overview is presented as informative material and not as a promise, proposal or official forecast by Eesti Energia. Due to rapid changes in electricity market regulation, the market overview or the information contained therein is not final and may not correspond to future situations. Eesti Energia shall not be responsible for any costs or damages that may arise in connection with the use of the information provided.