Inion Chief Technology Officer Robert Janickas: Electricity price jumps in Lithuania are not a coincidence, but a signal

Last week, Lithuania experienced one of the biggest spikes in electricity prices this year. On Tuesday, the price of electricity on the Nord Pool exchange rose to 1 €/kWh (1000 EUR/MWh) in the morning and evening. Such fluctuations are not random — they are a signal that the energy system is changing, and cases of imbalance will only increase.

At the same time, there will be more periods when electricity prices will jump to record highs. The jumps in electricity prices are due to changes in the electricity market, as renewable energy sources are becoming increasingly important.

Why prices are jumping

When consumption exceeds production, reserve capacity is activated — for example, the Kruonis hydroaccumulating power plant. But such power plants are inert, their launch takes time and costs dearly, so the price immediately jumps on the stock exchange.

Such situations also occur when one of the larger solar or wind power plants is temporarily stopped due to repairs or technical work. Other power plants then have to produce more than usual, which increases their costs and raises the price of electricity.

How is the price of electricity determined on the exchange

The price of electricity on the Nord Pool exchange is set for a day ahead. Each electricity producer and supplier gives their own forecasts: producers indicate how much electricity they will produce and at what price, and suppliers indicate how much electricity their customers will consume.

This data is fed into a common system in which supply meets demand. Once these quantities are balanced, the price of each hour for the next day is determined.

If actual production or consumption does not correspond to what was planned, an imbalance occurs, and a balancing market is triggered. In such cases, the grid has to quickly compensate for the shortfall with more expensive capacity, which leads to sharp jumps in electricity prices.

Electricity price spikes will become more frequent

Such price jumps will only increase. This is inevitable, as electricity production and its consumption are becoming less and less predictable.

Previously, there were several large electricity producers — Elektrėnai, Kaunas or Vilniaus Energia — which coordinated production and repairs with each other. Everything was planned and stable.

Now the situation has changed: we have a lot of independent electricity producers — solar and wind plants that operate independently. For example, one decides to stop the power plant for repairs, the other produces less due to weather conditions, and the missing amount then has to be covered by other, often more expensive sources.

Consumption has also become less predictable. The increase in the number of heat pumps, ventilation systems and electric vehicle charging is changing the dynamics of consumption.

When electricity production and consumption become unpredictable, there is an increasing mismatch between how much electricity is produced and how much it is consumed. At the same time, there are more and more periods when the price of electricity shoots up.

What would help stabilize prices

The only way to reduce the risk of electricity price spikes is through grid balancing and electricity storage. Such systems can store excess energy when it is produced in excess and give it back to the grid when it is lacking.

Accumulators are being implemented in Lithuania, but very slowly. This lacks not only financial support from the state and clear regulation, but also a clearer revenue model that makes banks reluctant to lend to such projects.

Risky projects are currently mainly financed by European Union and state support programmes, but they are clearly insufficient. This is best seen from the Environmental Project Management Agency's (APVA) support for hoarders — as soon as the call is issued, the funds are used up within a few days.

For example, at present, even those who provide a balancing service to the network still pay a transmission fee — although their activities reduce the load on the network and contribute to stability. This is illogical.

If this tax were abolished, investments in accumulators would become much more attractive, and there would be significantly more such projects in Lithuania. The faster the balancing capacity is expanded, the more stable the electricity prices will be.

The transformation of the electricity market is inevitable, so the question is no longer whether, or how fastwe will adapt. The sooner an efficient balancing infrastructure is established in Lithuania, the more stable electricity prices will be and the fewer surprises will be experienced by both businesses and residents.

Robert Janick
Inion Software Technology Manager