This means that a large proportion of the money moving through the market is heading to the southernmost Baltic state.
Following February’s disconnection from the Russian grid, prices on the Baltic frequency reserves market from the outset started fluctuating more than was expected. The market is used to maintain stability and avoid blackouts and other negative scenarios.
The peak came earlier this month when bids from a Latvian market participant, at ever-increasing prices, pushed the price per megawatt-hour of electricity to €10,000.
Additionally, market participants have criticized the lack of transparency of the market and in supervision.
The Riigikogu’s State Budget Control Select Committee convened on this topic, on Monday, with senior representatives of state-owned grid systems operator Elering, state-owned generator Eesti Energia and the Competition Authority (Konkurentsiamet) invited.
Ministry of Climate deputy secretary general, Jaanus Uiga, also present at the session, said the launch of the frequency reserves capacity market which started in February has taken longer than expected to reach the desired price level, adding there are reasons for this. Discussions have been held with Latvia and Lithuania on how to bring more flexible bids to the market, he said.
Jaanus Uiga. Source: Siim Lõvi /ERR
Both energy expert Marko Allikson and Eesti Energia’s director of energy trading and portfolio management Armen Kasparov had previously told ERR that it was already known ahead of the opening of the frequency market that flexible generation assets were lacking, which is one of the reasons why the electricity prices on the frequency market have been so volatile.
Eesti Energia CEO Andrus Durejko said at the Riigikogu meeting that market participants lack clarity on how much of the qualified capacity actually constitutes bidding into the frequency market, though it is evident that the capacity market is not supporting a balanced market.
The current market situation favors generating assets located in Lithuania, especially the Kruonis pumped-storage plant near Kaunas, he said.
“When I look at where the money is flowing, then it is going for the most part to Lithuania. /…/ The Lithuanians have strong assets, we do not have such good assets,” said Durejko. “They have carried through their energy policy well, [with] the right assets at the right time. Overall, however, things are not good in the Baltics, as prices are high, meaning that at certain hours there are no assets to make use of. A large part of the money goes to the owners of the Lithuanian assets,” Durejko said.
According to Durejko, this means the frequency market is more favorable to Lithuanian producers, that the Lithuanian economy gets for itself large sums, of around €5 million to €10 million per month.
Durejko added that Eesti Energia’s assets lack sufficient suitable capacity for this market, making it necessary to take a look in the mirror, as circumstances here have hindered making the corresponding investments.
The fact that qualified large producers, such as Latvian hydro plants, are not taking part in the frequency market gives small producers the opportunity to manipulate the market price, as happened recently, Durejko said.
Andrus Durejko. Source: Arp Müller/ERR
Uiga said that the smaller-than-expected volume of bids from Latvian hydro plants is also the main reason why system operators so badly missed their cost forecasts for the capacity market. For example, Elering’s share this year was supposed to be 60 million euros, but already by the end of July it was 56 million euros. “This was a surprise to all system operators,” Uiga described the Latvians’ unexpected passivity.
At the same time, the joint Baltic market is still a more favorable solution for Estonia than if Estonia had to provide reserves for 800 megawatts alone, said Uiga. “The launch of the market has taken longer than expected, but the movement is in the right direction. New bidders are coming to the market, and that is the opportunity to bring the price down, and Elering has done good work on this,” said Uiga.
Allikson noted at the session that since the market is common to the Baltic states, it is not enough for the market to function well if the Estonian system operator and market participants do good work. “In Estonia there is a whole bunch of market participants making bids simultaneously, but in Lithuania only the Kruonis plant is bidding and in Latvia even less,” he said.
According to Allikson, the price is also much affected by the volumes at which system operators make bids to the market: for example, according to him, it is unclear to market participants why Kruonis makes bids of 200 megawatts, or Kiisa emergency reserve power plant near Tallinn, in increments of 50 megawatts, when for the price a 10-megawatt bid is just as significant.
The rise in energy market prices means that the costs of balance to responsible parties have also gone up. According to Durejko, this year’s price rise on the frequency market has meant that the costs for balancing energy have risen by as much as two-and-a-half-fold.
No violations on the market have been confirmed
The supervisory authorities of the three states recently addressed all market participants warning them that any unfounded market bids are being closely monitored, and that if a market rule violation is detected, a fine will follow.
Bearing in mind the time-consuming nature of investigating possible violations, no violation on the frequency market has as yet been confirmed by the supervisory authorities of Estonia, Latvia and Lithuania, both Elering board member Erkki Sapp and Competition Authority Director General Evelin Pärn-Lee told the Riigikogu committee.
The Competition Authority has however received six applications regarding possible violations this year.
Evelin Pärn-Lee. Source: Priit Mürk/ERR
Pärn-Lee noted that since the Baltic frequency reserves market is still very young, both price fluctuations and inappropriate behavior by market participants have been observed so far. However the very fact that when bids get made, reports of possible violations are getting submitted, at the same time shows that the market is functioning, she continued.
Sapp stated at the session that the price ceiling on the Baltic frequency market is €15,000 per megawatt-hour.
Massive price fluctuations seen on the Baltic reserve electricity market earlier this month, ranging from a few cents to thousands of euros per megawatt-hour, were put down to one Latvian market player. Elering approached its Latvian counterpart on the matter.
A power grid must keep supply and demand in balance, as frequency shifts can damage equipment or even cause blackouts. This stability is especially important when smaller grids such as those in Estonia, Latvia and Lithuania, connect to larger systems such as Continental Europe’s, as happened in February this year.
A frequency reserve market brings in generators, flexible consumers such as EV charging and service providers, to offer backup capacity and to retain stability.
Grid operators like Elering run daily auctions to buy reserves in three types: FCR for instant automatic response, aFRR for slower automated correction, and mFRR for manual action during bigger problems. Providers earn money for keeping this capacity available and sometimes for the energy they can deliver.
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