Experts warn winter could bring electricity price spikes

Electricity prices could see sharp and unexpected spikes this winter because of higher natural gas prices, uncertainty over liquefied natural gas supplies and low Nordic hydropower reserves, energy experts told ERR.

Timo Tatar, a former deputy secretary general for energy at Estonia’s Ministry of Economic Affairs and the current head of the Estonian business of Lithuanian energy group Ignitis, said he had fixed the electricity price for his country home from October because the winter outlook contained too many unpredictable variables.

Tatar said the region and Europe as a whole were heading into winter with several electricity price factors having more room to rise than to fall. The risk would be particularly high if the winter were colder than average and brought little wind and precipitation, he said.

One unpredictable factor is the gas price, which has become volatile because of the conflict in Iran. The European price of gas is currently several dozen euros per megawatt-hour higher than a year ago. Tatar said many traders had expected the conflict to end and prices to fall, leaving gas storage facilities less full than usual ahead of autumn and winter.

Heat in western and central Europe has also made it harder to build gas reserves. Low water levels have reduced nuclear power generation, increasing the use of gas-fired power plants.

Alexela’s head of energy trading, Kalvi Nõu, told ERR that the company saw the same risks. European gas storage facilities are currently underfilled, while the reliability of liquefied natural gas, or LNG, supplies is also a concern.

These factors affect gas prices, and high gas prices are partly passed on to electricity prices, Nõu said.

Another concern is the low water level in Nordic hydropower reservoirs, which also helped keep electricity prices in July higher than a year earlier. If hydropower generation remains more limited, less cheap electricity will be available on the market, Nõu said.

Enefit board member Tiit Hõbejõgi likewise said the current situation pointed to somewhat greater than usual uncertainty this winter. He cited natural gas prices, European gas reserves and the low hydropower reserves caused by hot weather.

Nõu said one positive development compared with previous years was the growing share of energy storage. Batteries are increasingly participating in the day-ahead market, which is the most important electricity market for ordinary consumers.

Uncertainty does not necessarily mean higher prices

Electricity and gas prices are inherently difficult to predict because they are influenced by many factors, including the weather, which is notoriously hard to forecast.

“The exchange price is always unpredictable. This is nothing new,” Tatar said. “This year, however, high peaks can be expected at times because of the red flags in global markets. This is also reflected in futures prices, which are at a similar level to last winter or slightly higher.”

Hõbejõgi said electricity prices were affected by many factors, most of which could not be forecast far in advance.

At the same time, it would be premature to assume that uncertainty necessarily meant higher prices.

Nõu noted that the previous winter had also brought very high electricity and gas exchange prices, mainly because of exceptionally cold weather. Compared with last winter, he said, it was difficult to expect heating bills to rise even further.