With rising electricity costs and record prices on the Nord Pool exchange in recent weeks questions are increasingly being asked about how Estonian consumers can avoid further price hikes, with one suggestion being that Estonia leave the exchange altogether.

However, Sandor Liive, former chair of the management board at national energy provide Eesti Energia, told ERR, that he believes leaving the exchange is unnecessary.

"The way it works in practice is, that in order to provide a more favorable electricity price, the government, as the owner of Eesti Energia, can decide to make an amendment to the law, which sets  the price at which Eesti Energia offers electricity and to whom it does so, with Eesti Energia continuing to optimize its production capacity against the market through the exchange," he said. "This is in fact what Eesti Energia has been doing all along with all fixed price contracts."

The new fixed price imposed by the government would simply be another package on Eesti Energia's menu, and would not require any changes in the company's day-to-day management of its production and sales portfolio, nor in its IT systems. Other electricity traders would continue to buy electricity for their customers through the exchange, however the difference between the government's fixed price and that of the exchange, would be covered by Eesti Energia.

Liive explained that electricity companies like Eesti Energia, Fortum and others, which own power plants and also have their own customers, sell electricity to many people at fixed prices. Small consumers or private individuals with fixed price contracts are billed once a month on the basis of those agreements. The electricity company itself, still offers all the electricity it produces to the exchange, while at the same time, buying electricity back for its customers, including those with fixed price contracts.

Fixed contracts reduce the financial risks not only for consumers, but also for electricity companies. The Nord Pool exchange, however, works a day in advance. By 12 noon each day, Nord Pool receives bids from electricity producers according their production capacities, as well as orders from consumers. Through a market coupling process, buyers are then matched with sellers, with prices set at the level where the two bids meet.

"For an energy company, with a fixed price portfolio, it doesn't matter if the market goes up or down, so if the market goes up, you get more money for your output, but you also have to pay more money to your customers to buy electricity," Liive explained. "A fixed-price electricity package is the same kind of financial instrument for an electricity company."

Liive compared the situation to one in which a commodity is sold to a customer at a pre-agreed fixed price, while at the same time producing more of that product and selling it to others. In such a scenario, the amount producers receive can increase or decrease in relation to the market price. With a fixed price contract on the other hand, producers can be secure in the knowledge that the agreed upon price for their output will always be the amount received.

The reason this can be done through Eesti Energia, is precisely because the company has its own production facilities. Alexela or Eesti Gaas, which do not have their own generation capacity, cannot be told that they have to sell electricity at a fixed price when they themselves may still have to buy electricity at a higher price - the companies would not stand for it.

"It is also reasonable and profitable for Eesti Energia to optimize its generation portfolio against the market, while at the same time buying electricity from the power exchange for its customers," Liive said.

Thus, if politicians want to give Estonian people fixed, reasonably priced electricity, the cost of which has been reviewed by the Competition Authority, it does not have to bring Estonia off the (Nord Pool) exchange. Instead, either an amendment to the law or a decision at Eesti Energia's general meeting must be made, which would release Eesti Energia's management and supervisory board from liability.

"Daily trading through the exchange, buying and selling, can and must continue. There is no need to dismantle the exchange system," he stressed.

Leaving the exchange would also create the problem of where other producers would put their output and from whom we would buy electricity if we were short on capacity.

"A well-functioning market is the fundamental basis of the electricity system, and the certainty of prices provided by the state can be achieved in other ways," Liive said, adding that at the same time the exchange system also requires improvements.

According to Liive, the exchange is in need of increased transparency, and, given that Nord Pool's maximum prices are primarily set to prevent traders from making errors, the high level of the current price cap is questionable. Liive believes a price cap of €1,000 per megawatt-hour is sufficient.

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