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Increasing solar energy generation in the Baltics and low demand during the summer season drives the electricity price down. However, at times when there is a lack of sun and wind, the region must rely on more expensive thermal power plants and electricity import from neighbouring countries.

Electricity prices in April were as volatile as a spring weather in Estonia but decreased monthly in total.

In April, the situation in the wholesale electricity market of the Baltic States was as changeable as the spring weather. However, despite the short return of winter, electricity price fell last month. Compared to March, on the Nord Pool electricity exchange in the Estonian price zone in April, electricity was cheaper by 11.53% and price was 60.39 eur/MWh. April was extremely volatile in terms of weather, and the demand for electricity changed accordingly. In total, 680 GWh of energy was consumed nationwide in April (721 GWh in March). Average hourly electricity consumption decreased by 2.6% percent.

Favourable weather at the beginning of the month led to record generation from renewable resources. Wind farms produced almost same level of electricity as solar, resulting in total 160 GWh green energy. In the second half of the month, subjugated weather increased demand of electricity and led to a decline in production from renewable sources. Situation started to look better when the winter receded.

Latvian and Lithuanian renewable energy production set records, but weather and infrastructure works resulted in need of thermal power as well.

In March, electricity prices in Lithuania and Latvia remained like those in Estonia, reaching 60.25 eur/MWh. Favourable weather at the beginning of the month resulted in record generation from renewable resources. In Lithuania on April 11th at 11:00 AM, this year's hourly domestic solar generation record was 730 MW, and wind generation at 9:00 PM on April 14th was also at a record high of 1090 MW. A total of 400 GWh of green energy was generated in the country from wind, sun and water in April. In Latvia, April was hydro generation month. Hydro production during the month was high and produce 642 GWH of green electricity. Wind production is rather small comparing to hydro and was at level 19.5 GWh.

Due to the cold weather in the second half of the month, it was necessary to recruit more thermal power plants. The situation was complicated by the fact that the production of cheaper electricity in the region is still limited by the repair of the important Finnish Olkiluoto-3 nuclear reactor. Sweden is also undergoing various planned energy infrastructure works, which reduce the flow of cheaper energy to the Baltic states. Repair work on the two reactors with a total capacity of 2.5 GW is scheduled to be completed in May.

European gas prices are stable for now, but can be affected by geopolitical tensions

The price of natural gas at the Dutch TTF trading point rose 2 percent in April, an average of 28.063 euros/MWh. This was influenced by investors' fears about the tense geopolitical situation in the Middle East. Futures suggest that the price of natural gas should exceed the threshold of 35 Eur/MWh at the end of the year, until then it will revolve around 30 Eur/MWh. However, if the situation between Iran and Israel escalates, we may see more drastic price changes.

The return of winter weather in April increased the demand for CO2 emission allowances, their average price fluctuated around EUR 64 per tonne. Futures show that their price is expected to fluctuate by around EUR 65 per tonne this year, although the mark of EUR 60 per tonne was forecast just last month.

Meteorological forecasts promise that in May the weather will return to its usual. If this is confirmed, the month should not bring surprises. As usual, as summer approaches, more efficient generation from the sun and wind is expected, all of which would allow electricity prices to be maintained at a low level. However, the unrest is being brought into the markets by the tense geopolitical situation between Iran and Israel. If the conflict continues or escalates into larger actions, this will inevitably have a negative impact on the wholesale prices of energy resources.

Summer is expected to bring low electricity prices based on renewable energy sources, but we have to cover the nights with more expensive imported electricity.

Overall, summer always brings lower electricity prices, and this year they may decrease more than expected in the Baltics. We are going into the summer with record high renewable energy output, stable consumption, and a steady supply of hydropower balance in the Nordics. Fossil fuel plants will most likely run on the minimum possible capacity due to their high fuel and CO2 quota costs. Gas plants in Latvia and Lithuania will be going through maintenance, as will the oil shale plants in Estonia.

The queen of summer will obviously be solar power, with an expected record 2000 MW of installed capacity in the Baltics. For reference, the expected consumption during noon in June is ca 2800 MW. Now add in 1700 MW of installed wind capacity, and we can expect that on most days, the price will be very low or even negative for the period between 10-18 (the sunny hours), like we have seen in April and May already.

This might bring us to a paradoxical price curve, where night prices could actually be a lot higher, because then we would have to resort to imports from either Finland, Sweden, or Poland, or activate any of our fossil fuel plants, which currently operate in a price range of 70-100 EUR/MWh. For reference, the futures market quotes July average price for our neighbours as follows: Finland 35 EUR/MWh, South Sweden 36 EUR/MWh, Poland 85 EUR/MWh. A rule of thumb is that Baltic price usually ends up between these indications.

EstLink 2 cable malfunction has affected electricity prices less than expected

The EstLink 2 cable will remain disconnected until end of August per current estimations. While initially the market expected this to have a huge increase in prices, spot prices since March have proven otherwise. This is a strong sign that the market conditions in the Baltics have reached a point where we are not always reliant on cheap Finnish power imports, and on some days, we even have had a surplus of cheap energy to export up north.

Finally, looking at aggregate electricity consumption data and taking out the effect of temperature changes, we see that consumption has remained fairly stable in the winter months compared to 2023. However, consumption during summer will remain an open question, as this data is skewed by the small rooftop solar consumers, who use up their own production. We may expect a small increase in consumption in terms of air conditioning, if we have another hot summer. Overall, we are still at lower consumption levels compared to the peak in 2022, which is in line with the overall economic situation.

Armen Kasparov, Head of Energy Trading & Portfolio Management Unit in Eesti Energia.