Ben Seeder in Riga -
The surprise shutdown on August 20 of a major Russian power line, which sent spot electricity prices in some Baltic regions spiking, has highlighted the problems of those countries' dependence on their eastern neighbour for so much of their electricity supplies.
The shutdown of the 330-kilovolt (kv) power line in the St Petersburg region came without warning from the Russian grid operator, and had a major negative effect on the Baltic power network, Taavi Veskimagi, chairman of Estonia's grid company Elering, said in a press statement released on Friday, August 24.
The reduction in transmission capacity in Latvia and Estonia resulting from the cable closure caused prices on Nord Pool Spot's new Lithuanian bidding area to rise sharply in trading that day, from a low of €70 per megawatt hour (MWh) to over €200/MWh. Estonia's spot market was less affected, since it is mostly self-reliant in electricity production. But since the closure of its Ingalina nuclear plant in 2009, Lithuania has been 60-70% reliant on electricity imports, mostly from Russia.
A spokeswoman for Lithuanian Prime Minister Andrius Kubilius said on August 24 that power generation in the country was boosted as a response to the import shortfall from Russia. "This occurrence once again illustrates Lithuania's heavy dependence on electricity imports from the neighbouring countries, especially from Russia," she said. "Only the development of competitive local generation... and implementation of the projects of the power grid connection between Sweden and Poland can cause the situation to change and ensure the full energy independence of Lithuania."
In a statement, Elering's Veskimagi said the shutdown of the line was not listed in the maintenance schedule that is coordinated by the BRELL countries (Belarus, Russia, Estonia, Latvia and Lithuania), and thus came completely without warning from the Russians. "The incident further endorses the need to desynchronize the Baltic electricity system from the Russian system and unite with the synchronous area of Continental Europe," Veskimagi said in the statement, adding that a similar incident occurred in June.
Elena Tekanova, a spokeswoman for OAO Federal Grid Company United Energy System, the Russian transmission system operator, did not respond to emails seeking comment.
Stina Johansen, spokeswoman for Nord Pool Spot, said the market conduct rules force participants to inform the market of any disruptions that could affect prices, but Nord Pool Spot could not apply these rules to Russia's Federal Grid Company because it is not a member.
Dalius Misiunas, CEO of Lietuvos Energija, said the price spike in Lithuania was mainly the result of the reduced import capacity, despite his company taking steps to boost domestic power output. "The diminished import capacity [from the Russian outage], combined with less [hydro] production capability on our part... I think that is the reason for the higher price on [August 20]," he said.
The average price on August 20 in the Nord Pool Spot Lithuanian bidding area was €123.38/MWh with a high at €200.59/MWh.
Misiunas noted that output from his company's 100-MW capacity Kaunas Hydro Plant had been reduced because of low water levels caused by a Belarus hydro plant filling a reservoir. The planned maintenance of one oil and gas turbine at another plant made little difference, he said. For other Nord Pool Spot participants, the price spike on August 20 has highlighted the challenges facing the new Lithuanian bidding area.
Liudas Liutkecitius, Lithuanian country head for Eesti Energia, said despite Lithuania's entry into the market on June 18, it still remained largely disconnected from the Nordic and Baltic power grids. "Joining Nord Pool didn't change the fact that Lithuania is an 'energy island' - we are not fully integrated with the grid in the Nordics and the rest of the Baltics," he said. "With the closure of the Ignalina nuclear plant, Lithuania now has 60-70% reliance on imported electricity, mostly from Russia, making the market susceptible to interruptions from the East."
The result is electricity spot prices significantly higher than in the Nordic bidding areas, and roughly 20% higher than in the Estonian area to the north.
Lietuvos Energija's Misiunas said the Lithuanian power market faces three major problems at present: grid connection bottlenecks to the north, a lack of connections to Poland and Sweden, and the low amount of generating capacity in the country. "Once these problems are overcome, then we should see much more activity on the spot market, it will be more liquid and less volatile, and that should attract more consumers to participate," he said, adding that the projects to connect Lithuania to the Polish and Swedish grids were ongoing, while the current 700-MW capacity connection between Estonia and Latvia is scheduled to be expanded by 2020.
The completion date of NordBalt, the project to connect Lithuania and Sweden by a 700-MW capacity submarine cable, is expected in 2015; the LitPol project, connecting Lithuania with Poland by a 500-MW capacity link, is expected to be completed by 2015.
Misiunas also said Lietuvos Energija was expanding its generation capacity. Apart from the proposed 1,350-MW nuclear reactor at Visaginas, new capacity additions include the construction of the new 455-MW Combined Cycle Gas Turbine plant, which will go into operation in September or October this year. "We are also assessing the possibilities for our hydro pump storage. We are thinking of extending it by installing a new technology that increases the flexibility... The new upgrade will be able to pump integrals of 110-220 MW," he said.
The result would mean more local peak capacity, which would cut down on sharp price swings on the spot market, he said.
At present, volumes in the Lithuanian bidding area average 19 GWh/day. According to Hans Randen, director of European integration at Nord Pool Spot, trade on the market accounts for around 80% of all electricity consumed in Lithuania.
But most of this volume is in the form of "price-independent bids" - where power companies bid on their own auctions at set levels. These transactions are not used for the competitive price discovery function of the market, and account for the vast majority of the volume on the Lithuanian market, according to Eesti Energia's Liutkecitius.
Liutkecitius estimates that only 10% of the volume on the Lithuanian bidding area of Nord Pool Spot constitutes "real, competitive trading activity," which he felt was another problem for the market. "I think the Nord Pool Spot market here is not well understood by the large electricity consumers. We have a culture of using fixed-price contracts in Lithuania. A large industrial consumer, like the Orlen refinery, for instance, would never go into the spot market, it is too volatile and small - it would be an immense risk for them," Liutkecitius said. "What happened on [August 20 with the sharp price spike caused by the Russian power line outage], something similar to that also happened in June. That is not attractive for buyers."
This sentiment was reinforced by the prevailing prices for over-the-counter contracts. He said bilateral contract prices paid by a medium-to-large industrial consumer currently ranged from €47 to €48/MWh. For a company such as PKN Orlen - the biggest power consumer in the country, which buys electricity on a bilateral contract with Inter RAO AB - it could be much less, he said. These OTC prices compare favorably with the current spot of around €66/MWh, he said, giving large consumers little incentive to focus on the spot market.
But once full integration around the Baltics and with Poland and Sweden happens, he said this situation could change. "The physical connection to the Nordic market will help immensely with increasing the size of the spot market, it will be more stable, and that should attract the local consumers in... If you look at the Nordic countries, the industrial electricity consumers are actively participating in the spot market, and the information there shows the ones that are using the spot market to actively manage their portfolio have won out against companies that are using only OTC contracts," he said.
Orlen Lietuva spokesman Audrius Stasiulatis said he was unable to comment on the Lithuanian bidding area of Nord Pool Spot.
Robertas Staniulis, head of strategy and market development at Lithuanian grid operator Litgrid, pointed out that the bidding area was only two months old, and confidence in it would grow with time. He also said that current prices on the spot market reflected seasonal factors, such as the effect of maintenance on power lines. "Average prices are in line with last year's prices, and are slightly above the Estonian and Nordic prices -- what you would expect given the lack of integration in the grid currently," he said.
The Estonian bidding area of Nord Pool Spot opened in April 2010, and Latvia could join the market later this year. Litgrid and Elering - the grid operators in Estonia and Lithuania - became shareholders of Nord Pool Spot on August 1.
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