Estonian Electricity and Gas Market Reports

22.12.2021

Dear readers,

We are once again pleased to present our report on electricity and gas markets. Unfortunately, similarly to the previous report, we again cannot avoid emphasising specific nature of the year. It tends to happen that events affecting the economy come and go, but we are hardly able to envision them. No one was able to foresee the financial crisis of 2008 and although our economy showed up quite strong recovery, its consequences were evident even five years after. The same applies to the case of the COVID19 pandemic. No one was able to predict that the economic life of countries will be essentially locked down in the spring 2020 and then, using various stimuli the countries will be recovering their economies and, in 2021 we are in an unprecedented powerful cycle of economic recovery.

Such a steep and rapid recovery has put the prices of various raw materials to thrive – raging from metals to both oil, natural gas and electricity in the energy sector. Historically, we have not seen before such high longer run prices of electricity and gas. A lot has been written about the causes, but, as it usually happens in the economy – it is easier to analyse retrospectively, rather than to foresee certain events.

It is simpler to analyse and understand the causes of increase in prices for natural gas, as we can draw a parallel with the financial crisis of 2008, when the sharp decline was followed by a commodity boom that ended up in 2015. The economy recovery is inevitably accompanied with the increase of energy consumption and this is one of the causes for the to-days high price of natural gas. According to various analyses natural gas is the main fuel for the green transition from the fossil energy resources to renewables and following that perspective an increase in consumption in global scale can be projected.

When it comes to electricity prices, the topic is much more complicated and the causes of the high prices shall be treated in its complexity. Unavoidably, we face coincidence of various simultaneous factors. These factors are: increase in electricity consumption related to the recovery from pandemic – growing economy inevitably requires more energy, above said sharp increase of gas prices, too little investments in renewable energy sources, little precipitation in the Nordic countries, high price for CO2 quota etc. Certain role is obviously played by the transformation to carbon free economy, in which electricity plays ever increasing role - be it transport or heating and cooling systems of buildings. There are definitely people who say that the green transition is to be blamed on this. Such a dramatic turn in the economy is not an easy matter, however, no one doubts in the target for 2050. The European Commission has many times pointed out that the green transition shall take place in the market economy conditions and nobody has changed the underlying fundamentals of free competition set out in the founding EU treaties. In this year report we have paid attention to our support scheme for the renewable electricity producers and found that it is time to make the final decision in favour of the free market economy. Herewith, the same coin has two sides – of course, the high energy bills are a burden to consumers and there is ever increasing necessity for supporting hand from the state to consumers. From the other side, the high electricity price is a motivating factor towards investments in renewable electricity and in combination with low interest rates it is the best time for market-based, not subsidised investments.

In conclusion, one shall not forget the security of supply issues. Electricity production security issues were thoroughly analysed in our previous report. In relation to gas it is good to realise that today we have various sources of supply. Although the common Baltic-Finnish gas system is mostly supplied by Russia, there are still various entry points and in addition, the Klaipeda liquefied gas terminal plays an important role as an alternative source of supply. 

With wishes for pleasant reading, 

Märt Ots
Director General of the Estonian Competition Authority