According to the analysis1 of Estonian, Latvian and Lithuanian energy regulators, the steep increase in the electricity price on the Nord Pool power exchange on 17 August 2022 was a result of a combination of different factors along with the peculiarities arising from the small size of the Baltic market. The analysis identified no violation of market rules.
The maximum market price of 4,000 €/MWh was caused by the fact that on 17 August 2022 from 18:00 to 19:00, the Baltic market was lacking sufficient production capacity. In accordance with the rules of the Nord Pool power exchange, the peak capacity reserve of the Lithuanian transmission network operator Litgrid in the amount of 50 MW was activated for the whole day. With this measure, it was possible to prevent the electricity price from rising to 4,000 €/MWh in two other hours that day. However, this did not prevent the price from going up to 4,000 €/MWh from 18:00 to 19:00. The shortage in production capacity totalled 2.14 MWh (0.57 MWh in Estonia, 0.6 MWh in Latvia and 0.97 MWh in Lithuania).
There were several reasons for the increase in electricity prices. The price was affected by transmission capacity restrictions, simultaneous maintenance and failures of Baltic and Finnish production units, low wind power generation, low filling levels of Norwegian hydropower reservoirs and the rigidity of the Nord Pool system due to which the offers of some market participants were repeatedly rejected. Compared to other EU electricity markets, the Baltic market is small in size, which means that even the smallest changes in the market (eg minor restrictions imposed on transmission capacity) can significantly influence the prices.
In co-operation with Latvian and Lithuanian regulators, the Competition Authority came to the conclusion that both the processes and the products offered must be made more flexible. The Competition Authority also considered it essential to adopt an approach in which the bid lists are reopened when there is a risk of high market prices, as it would allow for market participants to change their production bids.
In addition, the Competition Authority proposed the following to improve the functioning of the Baltic electricity market:
1. Baltic system operators must coordinate planned transmission capacity maintenance and repair work with each other – situations where the maintenance and repair of important transmission capacities takes place at the same time should be avoided.
2. It is essential for large Baltic producers (Enefit Power, Latvenergo and Ignitis) to coordinate planned transmission capacity maintenance and repair work in such a way as to prevent a situation where the maintenance of important generation units takesplace at the same time. To this end, the opportunities for the introduction of such a coordination mechanism should be analysed in cooperation with Baltic regulators.
3. On the day-ahead market, consumption should be managed more effectively to keep electricity prices under control. Electricity sellers should offer consumption management solutions to consumers. In order to better manage consumption, legislation must be supplemented.
4. Power exchange operators should compare the price calculation results made for the day-ahead market and select a result that would most benefit the final consumers.
5. The analysis showed that there was no shortage in production capacity at the moment the price cap was reached and that the reopening of the bid lists would most likely have helped to prevent the price cap from being reached. For this reason, power exchange operators should prepare a price cap activity plan and adopt an approach in which the bid lists are reopened when there is a risk of high market prices, as it would allow for market participants to change their production bids.
6. In order to increase the flexibility of offers and probability of market access and decrease the likelihood of paradoxical rejection, it is recommended that market participants submit single hourly orders instead of block orders and submit shorter and smaller-scale exclusive group orders or flexible orders. In addition, the production capacity volume specified in the block order should preferably be the technical minimum capacity needed for the operation of the generation unit, or the market participant should be able to set a MAR coefficient for block orders that would allow for the production capacity specified in the block order to be reduced to the level of technical minimum capacity necessary for the operation of the generation block.
The Competition Authority finds that the proposals presented would add flexibility and price elasticity to the Baltic electricity market.
1 https://www.konkurentsiamet.ee/sites/default/files/konkurentsiameti_analuus_elektrihinna_osas_13.1 0.22.pdf