Baltpool: Dependence on natural gas could have raised heating prices as many as 4 times

If the Lithuanian heating sector had not done away with its dependence on natural gas, heating prices would be at least 4 times higher this year. According to the National Energy Regulatory Council (NERC), the average heating price this October is shaping up to be 10.29 ct/kWh (excl. VAT), which is an increase of 24% compared with the end of the last heating season, when the price was at 8.28 ct/kWh. This demonstrates that all geopolitical events and the resulting changes in energy prices since the end of the last heating season had relatively little impact on heating prices. 

More than half of the end-consumer heating price comes from the purchased fuel, the price of which is determined monthly. The remainder comes from fixed costs including depreciation, amortisation, and repairs of the heating network, employee wages, and VAT.

‘The main factor affecting the heating prices is the energy crisis in Europe due to the war in Ukraine. Due to the export ban for biomass from Belarus, the price of biomass has doubled in Lithuania, reaching 46 EUR/MWh. Over the course of a year, the price of natural gas has at least tripled, reaching 250 EUR/MWh. On a positive note, Lithuania had been able to transition its heating industry to biomass on time, allowing the heating industry to use the type of fuel that is 4 to 5 times cheaper,’ says Vaidotas Jonutis, Head of Trade Department at Baltpool.

Different price changes in different cities

In September, one of the highest prices in the country was shaping up in the city of Vilnius, reaching 17.56 ct/kWh. However, due to its plans to use fuel oil for heating, the October price dropped to 9.70 ct/kWh. Compared with the October of last year, this is a 62% increase.

According to NERC, the price for heating in Kaunas in October, will rise by 140% compared with the same period of last year, reaching 9.50 ct/kWh. Klaipėda looks set to have a 90% increase, with the price at 10.06 ct/kWh, and Panevėžys should expect a 117% increase, with the price at 11.13 ct/kWh.

According to Jonutis, these differences are due to the proportion of gas in the fuel structure of respective cities: The more gas they use, the greater the price hike they can expect. The September prices do not quite reflect the extent of possible heating price fluctuations: With fuel price fluctuations and geopolitical uncertainty changing every day, heating prices can rise as well as fall. Looking at biomass price trends, however, one might presume that the price peak has already been reached.

With respect to the expected heating prices in the Baltics, the capitals of Latvia and Estonia will be paying more, given their larger proportion of gas used for producing heating energy than in the smaller cities.

According to Baltpool, Lithuanian cities are ready for the heating season, as per usual. They have already secured around one-third of the required biomass through long-term supply contracts. They have already purchased an even greater amount of biomass than in the previous heating season. ‘One trend we observe in this year’s market is biomass suppliers hesitating to get into long-term commitments due to considerable uncertainty regarding the prices of raw materials during the winter season and preferring to sell biomass through short-term contracts instead. For as tense a period as this, this is completely unsurprising,’ says Jonutis.

Biomass prices determined by firewood

In the previous year, the price of biomass in Lithuania was strongly determined by cheap raw materials form Belarus, according to Jonutis. Now, with the Belarusian raw materials out of the picture, the price of biomass is increasingly closely tied with the price of wood, which the biomass market competes for with the timber industry. With the end of the pandemic and the increased demand for raw materials in the furniture industry, the average price for wood rose 2.5 times since last year, from 30 EUR/solid m³ to 75 EUR/solid m³.

Implementing price management solutions

Seeking to ease the situation in the biomass market, this year, Baltpool launched a new biomass product, SM3D, made from dry logging residues, as well as introducing the option of indexed long-term contracts, a factoring service, and an amendment to the rules regarding significant reductions of trading securities.

‘It is obvious that the geopolitical situation is not going to change any time soon, which is why it is important to increase the domestic supply of biomass. This would require a stimulus package for companies producing biomass raw materials in our forests to enable them to produce more of it and thus increase their competitiveness in the market,’ says Jonutis.