#2 The Latvian story - what's up with the utility bill?

😵‍💫 Geopolitics landscape is uncertain, to say the least. Some say that the heating bills will go to stratosphere, some even say there will be no food and heating for winter. Wait.. what?

Jun 02, 2022

👋 Brief intro

This is the second part of the Latvian story, if you missed the first one then click here. If you did not, then thank you & Matīss is back with a new challenge.

Rest assured, he is alive and well, but let’s paint a picture for our next topic.

This is January 3rd the year 2023, Matīss is still a bit sad that the holidays were on Saturday & Sunday (sorry but it’s true), but life goes on and he is grabbing a beer, putting up the Feel Good Friday playlist on Spotify & getting ready to pay the monthly bills.

Our topics in the Latvian story:

💸 Inflation remains high & interbank lending rates get ready for lift-off
😵‍💫 Geopolitics landscape is uncertain, to say the least
🩸 Markets are bleeding
🔮 Other things & speculations (this one will be updated periodically)

Read responsibly as this is being written only as speculation & I am no expert in all of these fields so there is no need to take me too seriously. However, I am more than interested in discussing any of the topics in more detail & hearing your thoughts - be they the same or different. I am just scratching the surface here.

😵‍💫 Geopolitics landscape is weird & energy prices are mean

Why now, why?

I do not want to sound like a party pooper, but the geopolitical landscape is the worst in multiple decades with the war in Ukraine, Covid-19 is still not gone, climate worries, and tensions between USA and China. It’s not just me saying that but the experts.

Source: World Economic Forum Global Risks Perception Survey 2021-2022

What is really important for Latvia?

Russia & Ukraine war impact on gas prices

Energy prices are almost guaranteed to go up. So it gets more expensive to drive the car, use the electricity & heat the room. Regarding the car, Matīss is not driving that much so that's not a game-changer & we already took that into account in the previous part, but the heating part & electricity is a separate story.

Already this heating season (early 2022), we witnessed significantly inflated gas prices (more than 50%) even pre-war. Then the war started & pushed the prices even 3x higher. It was felt only partly because gas was already bought last summer & Latvia gave some support with the bill which ends now in May 2022.
It seems that nobody knows what will happen in the next heating season, but there is a consensus that the prices are unlikely to fall. Then we have speculations starting from another 3x jump to having limited heating due to the gas scarcity if Latvia does not take Russian gas.
As far as I understand, then this chart is the one to watch for the gas prices, see below a screenshot for the last 5-years. It’s currently trading at around 87 EUR per something. Does not look too good.

Taking a step back - how do we actually get gas?

For me, it’s interesting to understand how & from where does our heating come. Idk maybe it’s just me & you know this stuff if so feel free to skip the following bullets.

Most of my understanding comes from a pair of fruitful discussions at a show “Kas notiek Latvijā?“, (1) this and (2) this. Their overall feel is that there are more known unknowns than know knowns. Let’s sum up my understanding after watching these debates:

From January 1st, 2023, Latvia will not buy gas from Russia which has always provided it to us. This theoretically means that Latvijas Gāze (& others) could still buy gas from Russia in 2022. However, practically as far as I understood from Kalvitis (CEO of Latvijas Gaze) then already now it’s not possible due to sanctions against Russia.
Gas for Latvia’s consumption (heating and electricity) is typically stored in Inčukalns gas storage. Their storage is not empty, but there is not enough of the good stuff for the next heating season and they obviously need to receive this gas from somewhere.
Ok, but what other options are there, if not Russian gas? In 2014, Lithuania built its gas terminal (Klaipeda LNG Terminal). As it turns out, this means that they can buy (import) gas from other countries than Russia. And no, it is not possible to import gas in just any port.
The issue here is that this terminal has become more popular than the Kardashians since nobody wants Russian gas no more. Klaipeda is being approached by Poland, Finland, Latvia, and Estonia; however, it’s not physically possible to provide the necessary amounts for all. This terminal can ensure gas for providing around 30 TWh of power, while Finland, Latvia, and Estonia combined, so without Poland, need 60 TWh of power. I hope that I got this right.
This means that another terminal is necessary. Estonians and Finns have taken the lead with Estonians already kind of starting to do something in Paldiski. Their estimate is to finish this by end of the year, more or less.
The timeline is this tight because otherwise there will be not enough gas or an extremely expensive one which I did not understand how we could get, but ok.
There should be more clarity during the next couple of months as the gas is being bought and transported during summer due to (1) typically better pricing, and (2) it being operationally easier.
Many industrial businesses in our region (even more so in Finland) are dependent on gas & with higher pricing, their business models could be seriously challenged.
All in all, the situation is pretty bad & we should hope for at least a warm winter & super efficient building process in Estonia.

You may ask, but not all heating comes from gas, right? Or.. isn’t the electricity and heating created in other ways as well? Yes, that is true, but gas is the most important. What I got from Normunds Talcis (Rīgas Siltums CEO), in this article, is that around 70% of energy is bought not created by them and the majority is gas. He also said that everybody knows that the heating prices will increase, but it’s not clear by how much. For electricity, we also have our HES, and some green energy, yet gas is still a leader. Here are some interesting data on electricity.

One somewhat positive thing that I heard - as per the industry experts, it’s super unlikely that there will be not enough gas as the market should sort itself out, yet the price might be a huge issue. Nevertheless, if there is no heating, then probably people would run to use electrical heaters but as we found out the issue is that electricity is also partially created by using gas. So it’s not an option.

Matīss & his utility bill

Anyway, let’s get to our favorite part - speculations & Matīss - even though there is no clarity what we can do is take a somewhat realistic 100% increase in heating prices as a speculative figure to test how does it look for Matīss who has a 56 m2 apartment in Riga.

Let's assume that heating is around 50% of average monthly utilities of EUR 116.2 (excl. electricity), so if it goes up 100%, then we have those EUR 116.2 for just heating not as a total. This is a guestimate by just taking a look at my own utility bill and the proportions there. Btw, we are not looking at the crazy winter months, where the utilities (excl. electricity) could go even up to EUR 300 (or more, nobody knows) per month.
Electricity is another hot topic. In Latvia, around 40% of electricity is created with gas, thus another 100% increase would actually be around 40%. For Matīss its EUR 40 * 40% = EUR 25.07 increase compared to 2021.

*Average monthly impact due to gas price increase*

🤌 Summary

Heating and electricity prices will go up during the next heating season due to gas becoming significantly more expensive & there are no short-term alternatives. Latvia & other countries that relied on Russian gas are working on a plan (no, it’s not done yet), but it’s not trivial and there are many unknowns.

Latvia (companies that buy gas, i.e. Latvijas Gāze) has not yet bought enough gas, and nor do we have reserves for the next heating season. The purchasing part will be done this summer with likely at least 100% more expensive gas & without having the necessary infrastructure in place for the deliveries. Therefore, there is a somewhat of a regional plan (Estonia, Finland & Latvia) to build an extra facility where the gas could be delivered to. Most likely it will happen in Paldiski, Estonia. It looks like this facility will be built without any governmental support. Talk about YOLO.

As you remember from the previous article, then Matīss had 24% / EUR 486 (I had a mistake in the previous post as I forgot to include the dog in the mandatories, oops!) left for somewhat optional costs & after our new utility adjustments (EUR 66.2 + EUR 25.07 = EUR 91.27) this would go down to 20% / EUR 409. With a further reduction (but less so in summer) down to even 15% (EUR 270) in the extreme winter months, if the utilities (excl. electricity) cost increases to the higher guestimates.

*How does the impact translate to total costs*

At this point, it’s pretty clear that the winter months could be say more silent and less festive than in 2021. Honestly, I have to say that even Matīss with his decent salary seems a bit fucked (sorry for the language).

Matīss after inflation, the interest rate increase, and the new reality in energy prices has lost EUR 476.60 in purchasing power compared to 2021. So he now needs to increase his income by this amount of money to sustain the same way of living.

🧩 Other noteworthy things happening

Potential food supply crisis

As per the experts - there will be serious food shortages as Russia & Ukraine were huge exporters. I have no opinion on whether it will have an effect on Latvia & I will let others speculate on the matter. Here are a couple of interesting articles though:

In short, lots of food (mostly grains) comes from Ukraine & Russia, now it is disrupted, this could lead to food scarcity (more expensive, less available food) in the developed world and significantly increase famine in the poorer countries. Europe is trying to figure something out, fingers crossed & let’s hope that it’s not too little too late.

Other challenges

Other supply chain issues have been among the top challenges ever since the pandemic & lockdowns started, then the spending spree followed & now the geopolitics. The supply chain is in chaos—and it’s getting worse. If you did some home renovation or even some larger construction works, then you might have noticed the price changes in raw materials - they crazy!

Regional uncertainty - unfortunately, we are quite unlikely to see heavy investments in our region, thus unlikely that lots of new jobs will be created & also unlikely that we will see a boost from external capital. It is not all bad as everything is in our hands & each crisis creates opportunities.

Another key geopolitics topic that might be less directly influential on Latvia, but important & interesting globally - China & US relationships that are difficult: (1) “President Joe Biden said the U.S. would be prepared to intervene militarily if China invaded the democratic, self-governed island.“ (2) There is still a trade war in-between the countries.

& I will leave you with a couple of interesting videos with opinions from the experts.

This is an interesting video to watch by Ray Dalio related to the topic. He is one of the most influential investors in the world. There is a book that’s even more insightful.

2. This one is on the war in Ukraine & two different angles on how to look at it. There is no truth, just different opinions on the same events happening & both of them (or three of them) are extremely talented and smart. I think this is a great representation of how divided our society gets on important issues.

I’m writing this to guide myself through the current events & I hope that I will manage to help others by doing that. Hope for the best but be ready for the worst.

As usual, I am more than interested in your thoughts.

Next up: my favorite topic (for clarity - not the bleeding part) “🩸 Markets are bleeding“, & impact on the turbulent life of Matīss.

Yours sincerely,

Roberts L.