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Published: 7/22/2021. Updated: 7/22/2021

NERC: the price difference between Lithuania and Latvia occurred due to the methodology used by Latvia and Estonia for calculation of cross-zonal capacity with Russia


The National Energy Regulatory Council (NERC), having assessed the increased electricity prices in the Lithuanian bidding zone of the Nord Pool power exchange compared to the Latvian bidding zone, has concluded that the difference in electricity prices between Lithuanian and Latvian bidding zones occurred due to the methodology used by Latvia and Estonia for calculation and allocation of cross-zonal capacity with Russia, as a result, during the period of January-May 2021 Lithuanian electricity suppliers paid more than 6 million Eur of congestion fees.

NERC adopted the market investigation's conclusions after examining the available market data and results of electricity market simulation performed by Nord Pool.

The investigation has showed that there is no priority given for trade between EU Member States and that the trade with third countries has hampered cross-border trade between EU Member States.

From 2020 when Latvian and Estonian transmission system operators had started to apply the methodology for the calculation and allocation of cross-zonal capacity with Russia and started trade through the Russian-Latvian trade zone, price differences between Lithuanian and Latvian bidding zones occurred.

The capacity calculated and allocated by the Latvian transmission system operator with third countries creates congestion on the Lithuanian-Latvian cross border, that unjustifiably reduces the price of electricity in the Latvian zone and distorts the market, as a result, creates preconditions for inefficient use of transmission infrastructure.

Due to fully utilized commercial Latvian-Lithuanian capacity (flow) in certain hours, commercial congestion occurred only on Latvian-Lithuanian flows resulting up to 60 percent or higher price (highest observed spread equal to 70,68 %) in Lithuania compared to Latvian bidding zone price.

The price differences between Lithuania and Latvia have been influenced as well by the fact that third countries producers are subject to different requirements for their activity concerning environmental and State Aid rules application (e. g. emissions trading scheme (ETS) is not applied in third countries), which results in lower electricity generation costs for such producers compared to producers operating in the EU.

Although Lithuanian-Latvian interconnections are not fully technically utilised (physical flow accounts for only 46% of commercial flow), market (commercial) congestion still occurs in the Latvian-Lithuanian section. The calculations performed by Nord Pool and evaluation made by NERC showed that the calculation and allocation of interconnection capacities according to technical capacities of Russian‒Latvian interconnections:

1) would not generate TSO congestion income;

2) would result in equal prices between these zones and market participants would have equal trading conditions;

3) Lithuanian electricity suppliers would not have incurred more than 6 million EUR congestion fees from 1 January of 2021 until 31 May of 2021;

4) trade with other EU countries would increase (SE, EE, FI);

5) half of reduced imports from third countries would be replaced by increased imports via EU interconnections (FI, SE, PL).

The detailed material of 22 July 2021 public hearing is available here.