The Baltic and Polish power sectors face a major transition, and developments affect the Nordic market. Our new forecasts for the Baltic and Polish power price describe the transition using three scenarios for technology development and climate and energy policy
The Baltic power system faces a major shift in years to come. The power system is to be decarbonised and the Baltic region is set to decouple from the Russian synchronous grid and connect to the Continental system. So far, Poland does not have a clear decarbonisation strategy, but is under strong pressure as a result of the reforms in the EU’s emissions trading system, which has resulted in high CO2 prices, having a significant impact on the price of electricity in the country. These changes will have a significant impact on the Baltic and Polish power price.
Due to interconnections, the developments in the power market in the Baltic States and Poland are important for the power price developments in Finland in particular and the Nordic market in general. Developments in the Baltic and Polish power price hence impacts the Nordic power prices, in particular prices in Finland and Sweden.
Estonia currently has a large share of power generation from oil shale and faces political pressure to reduce oil-based power generation. We expect that higher CO2 prices will lead to a gradual phase-out of the oil shale capacity. In the short term, the oil-fired generation is replaced by imported nuclear power from Finland, when the Olkiluoto 3 reactor comes online. In the longer term we expect to see a larger share of wind power.
The Latvian market is correlated with the Estonian market. That means that some of the oil-fired power generation in Estonia will be replaced with increased gas-fired generation in Latvia. The wind power build-out in Latvia is currently slow as the feed-in system is put on hold to 2020, due to concerns about corruption. We do however expect increased wind power investments in the long term.
Lithuania is the Baltic country with the highest renewable energy share including both hydro and wind power. The country is currently dependent on power imports to cover domestic demand. There is currently a conflict between Belarus and Latvia around the Belarusian nuclear power plant Nastravets. The Lithuanian parliament has declared the Belarusian nuclear power plant a treat to Lithuanian national security, environment and health, and is threatening to stop power imports from Belarus. Such a ban will weaken security of the supply in the short to medium term, but in the longer term increased renewable investment and a new interconnector to Poland will ease the situation.
The power price Poland is higher than in the other countries since they have a coal-based power sector in which power prices surge when the CO2 price is high. There is substantial uncertainty concerning future energy policy in Poland, both with respect to renewable energy investments and phase out of coal fired power which we address in our three scenarios.