Exchange chief: power stations must master art of trading

Photo: Peeter Langovits

Electricity Exchange regional head Hando Sutter says EstLink 2, completed in 2014, ought to ensure equal prices in Estonia and Finland.

Estonian-Finnish price gap caused by too low capacity of cable.

Hando Sutter, the day after Midsummer, for six hours Estonian electricity price exceeded €200 megawatt hours. Should exchange ensure price stability?

Price stability is ensured by regulated electricity market. We are coming from a regulated price environment, but even then prices rose yearly. Exchange presents real balance of demand and supply, spot markets will not guarantee stability of prices.

As also seen in Nordic countries, spot market is volatile, with large price hikes and periods of very low prices, within the €0 to €400 range. Hourly market stability is unrealistic, monthly averages are another matter.

In June, the average price was €53. This is somewhat higher that in earlier months, but not Estonia’s record – as, in 2010, prices were higher for several months. Price hikes lasting a few hours will have no impact on consumers; rather, consumers are affected by the monthly average exchange price.

So, in a word, you are telling us that €200 for megawatt hour is not a high price to get agitated over or to be viewed as problematic?

The exchange’s market supervision analyses price peaks, inspects market participants’ behaviour in publishing information, as well as the conformity of other activities with exchange rules. Competition authorities of Estonia, Latvia and Lithuania are assessing what happened. The public discussion triggered is useful as well, as we have limited experience with open electricity market.

If the market is volatile anyhow, why then is exchange supervision paying attention to peak prices?

Exchange supervision is checking whether or not somebody was affecting the price.

When will the analysis results be known?

Exchange surveillance is an organisation separated from us; even in our office, they sit behind closed doors. If they find anything, they report to Estonian and Norwegian competition authorities, and to the competition authorities of the countries where violations occurred.

The competition authority of the country concerned will decide whether or not there will be an investigation. The more serious violations will be referred to police.

But how can electricity exchanges be manipulated, how is it done? What should producers do to push prices higher?

I would not want to speculate. There are possibilities [for that], but I do not want to talk about that. The exchange expects all to behave correctly.

There is yet another thing to be understood. It would be market manipulation if a power station, for instance, would say it is in maintenance, but is actually producing electricity. Thus a station would possess information not available to others. This would be a definite example of manipulating by information.

Another issue is behaviour of dominating companies. This not being limited to Estonia; in Sweden, for instance, Vattenfall possesses considerable market leverage.

The exchange being voluntary, we cannot force anybody to trade on the market. Behaviour of dominating enterprises is not regulated by exchange, this is regulated by competition laws of every country. Adherence of the law is inspected by local competition authorities, not the exchange manager.

Estonian officials say that all Baltic power stations should file hourly offers unto the exchange. How then is this, in reality – should they do that or not?

Pursuant to electricity exchange rules, all producers are not required to file offers. Nord Pool Spot is a voluntary market. We cannot force [them] to make offers; however, producers are obligated to announce maintenance and disruptions and any other incidents having an impact on market price.

In Estonia one gets the impression that Eesti Energia is all there is, but Estonia has foreign connections of over 1,000 MW, wherefore price is shaped by foreign connections. Estonia is a comparatively minor player on the Nordic and Baltic open electricity market. Estonia’s market share is 8 terawatt-hours a year, in the Nordic countries it is about 800 terawatt-hours.

Currently, Estonia’s connection is not complete as there are many hours when EstLink 1 is on overload; but when EstLink 2 launches, next year, the connection will be complete. If Eesti Energia decides not to send something unto the market, they will simply miss the money; the price signal, however, will be coming from the Nordic and Baltic common market.

Ando Leppiman, the economy ministry’s vice chancellor for energy, said that should the exchange start to harm our consumers, something needs to be done about it. What do you say: has the exchange harmed the home owners and enterprises?

Estonia joined the BEMIP plan (Baltic Energy Markets Integration Plan – edit) in 2007. The plan was aimed at getting the Baltic States out of energy isolation. European Union has provided money for the opening up of energy market; for instance: EstLink 1 got €100m. The plan was based on the principle that energy markets must be opened up and integrated.

Launching the Nordic electricity exchange model was part of the plan. In my opinion it is too emotional to decide that the entire plan should be binned – on the basis of June 25^th prices.

The vice chancellor was not saying the exchange should be binned; rather, he was saying that the exchange should work some other way – to avoid price hikes like that. He was reprimanding you for not doing enough to ensure price stability.

Price hikes are viewed as the result of some crazy conspiracy, but often we have to do with mere stupidity of market players. Very often, the one causing such market incidents suffers the most. For instance, looking back to 2010 and the €2,000 megawatt hour price: there were some market participants buying electricity for €2,000, from the market, while they themselves had power stations capable of producing it under €200 megawatt hour.

Afterwards, as we were providing trainings for the market players that suffered the losses, it became evident that they had just not believed that the price could rise that high in summer. And, for that reason, they made no offers unto the market, the day before. Back then, it became evident the price hike was not something done on purpose.

The exchange is providing regular trainings for market participants, but to regulators and transmission networks as well – to improve the electricity market. The common Baltic electricity market only launched on June 3^rd, this year, as Latvia joined up.

The market has been in operation for a month; we do not even possess proper statistics to analyse. The exchange will definitely analyse the situation, in cooperation with ministries and competition authorities of all states, and we will make plans for changes – if necessary.

I believe there were objective reasons for the June 25^th price hike.

Is it true that the high price was mainly the result of inactivity by Latvian and Lithuanian producers?

I cannot claim that. In Eesti Energia, power stations had some blocks in maintenance, as in Midsummer the demand was the lowest.

Lietuvos Energija had its newest gas station in maintenance, as demand was small due to holiday season. Maintenance works of major producers fell to the same time slot; I do not believe they did this on purpose.

It is difficult for me to say if they could have done the maintenance work at some other time. Big power stations cannot do that with prior announcement of a couple of days; this is planned long in advance. In spring, an agreement was made between Baltic transmission networks favouring transmissions within Baltic States rather that electricity coming from Russia.

As a result of that, whatever happens in one country affects all three, as electricity lines cannot be controlled like the Estonian-Finnish cable, for instance.

The current arrangement is that should there arise a critical situation between Estonia and Latvia, it is adjusted at the Lithuanian-Russian border.

To put it plainly: should there arise a danger that there will not be enough room for electricity to travel between Estonia and Latvia, then capacity is tuned down between White Russia and Lithuania. This, in turn, will reduce access of Russian electricity (As did happened on June 25^th – edit).

All such decisions affect price. Nord Pool Spot provides a trading platform, which has very many inputs. Should the inputs cause price volatility, this must be analysed and changes made with inputs if necessary. For instance, it must be considered is transmission capacities could be allocated differently.

Would Estonia and Latvia send all electricity produced by state energy companies unto the exchange, for all to be transparent?

But these are not things decided by the exchange.

Are you saying that the three Baltic governments and three transmission networks have much work left to do?

Definitely. Bit the same goes for the exchange. After the holidays, we will analyse causes of price volatility in all states, with ministries and competition authorities. Among other things, we will be discussion the arrangement of wind farm support scheme – lest turbines be left outside the exchange because of this.

Was that final reproof aimed at Latvians?

Yes, but there are other topics as well; the more offers we have, the better the market will function.

When EstLink 2 launches in 2014, will the high summer prices then be a thing of the past?

EstLink 2 ought to ensure equal prices in Estonia and Finland. Even so, price volatility also happens in Finland. In June, for instance, when the Olkiluoto nuclear station was in maintenance, Finland had higher prices as well.

The Olkiluoto maintenance was known a year and a half in advance. Now, the issue will be Baltic power stations’ ability to read information.

When Olkiluoto’s 900 MW fall away, we ought to have our production engaged, not in maintenance.  Should one be a day late with your offer, a price hike would result. All players must [learn how to] manage this entire open market system.