Will the conflict in the Middle East cause a new energy crisis in the Baltics?

Military action by the US and Israel against the Iranian regime in recent days has raised the issue of electricity price stability. Although the conflict is taking place far from Latvia, such events are quickly reflected in electricity markets. Therefore, the most important question at the moment is whether the drop in electricity prices at the beginning of March will turn into a new price record caused by rising natural gas prices.

The first market reactions are already visible, as European natural gas prices rose by about a third in early March, currently exceeding €53 per megawatt hour. This represents an increase of almost 100% since January.

The escalation of the conflict in the Middle East is causing legitimate concerns about supplies, as this region accounts for around 17% of global gas and 30% of global oil production. The Strait of Hormuz, through which 20% of global oil consumption and 19% of liquefied natural gas trade is transported, is particularly critical. If shipping traffic is disrupted at this point, the supply of energy resources on the market will decrease. In an attempt to mitigate future risks, market participants may start to reserve energy resources, which in turn will drive up prices.

The situation in Europe is also complicated by the fact that gas reserves are at a relatively low level after a cold winter. This means that gas may have to be paid for at a higher price during the next storage season, which may also affect the electricity market.

When is the price of electricity determined by natural gas power plants?

Electricity produced from natural gas continues to play a significant role in the Baltic electricity market. This means that an increase in gas prices also increases the production costs of these power plants.

However, the price of electricity on the exchange does not remain the same every day. If demand can be met with cheaper resources, such as renewable energy, the impact of gas price increases may be less significant. However, when there is no green energy on the market, gas-fired power plants must be operated, and they then directly determine the overall price of electricity.

It is also important to note that the costs of these plants are not only made up of natural gas, but also the price of emission allowances. Therefore, it is difficult to predict the exact percentage increase in electricity prices at this stage. Much will depend on how often gas-fired power plants will be needed in the market and how long high gas prices will remain.

Gas price fluctuations are felt more in the Baltics

The current situation brings to mind the energy crisis caused by the war in Ukraine. In 2022, electricity prices in Latvia rose almost 2.5 times – while the average exchange price in 2021 was EUR 88.57/MWh, in 2022 it reached EUR 225.93/MWh. The situation was more serious at that time because we were completely dependent on Russian gas supplies. Conditions have changed significantly since then – we now have alternative gas supplies and renewable energy capacity has grown significantly. Therefore, the conflict in the Middle East should not have such serious and far-reaching consequences.

However, compared to Scandinavia, which has nuclear power plants and large renewable energy capacities – mainly wind and hydroelectric power plants – the Baltic states do not have many alternatives.

In recent years, the Baltic states have significantly strengthened their energy independence. For example, in Latvia, solar and wind energy production in 2025 will have increased fourfold compared to 2022, from 218 GWh to 879 GWh. However, the amount of green energy is still insufficient to fully offset the rise in natural gas prices.

The long-term answer – more local energy

The growing share of renewable energy helps reduce dependence on fossil fuel price fluctuations in global markets. The more electricity we can produce ourselves, the less global events affect our energy bills.

Events in the Middle East remind us once again how closely electricity markets are linked to geopolitics. Although the Baltic states have significantly strengthened their energy security in recent years, energy prices are still influenced by global processes. Therefore, in the long term, the speed at which we can develop local electricity production will be crucial.