Trust your neighbor, pay less? The future of electricity production in Estonia

One of Eesti Energia's ageing oil shale power plants. (Peeter Langovits/Postimees/Scanpix)
6/18/2016 9:45 AM
Category: Business

Historically, Estonia has exported electricity. The country’s policy to guarantee production capacity at 110% of its peak consumption as well as the remnants of its formerly state-run production system have made this possible. But the market and its conditions are changing.

Eesti Energia’s oil shale power plants in Narva are Estonia’s biggest, but they are ageing. Part of the plants will go out of service over the next ten years. A comparable replacement for them in terms of Estonia’s independent production capabilities is not currently in sight.

Like other countries (including Finland), Estonia has a policy in place that demands domestic production to be able to manage 110% of its peak electricity consumption. This overproduction by political design is a contributor to the country’s capacity to export energy.

National markets don't exist anymore

Over the past five years more than €800m has been invested in network integration, and in improving both the connections to neighboring markets as well as the Estonian grid’s reliability. The plain fact is that Estonia has become part of a larger regional market that goes beyond national borders.

With Estonia being a small part of a much larger regional market, this means that supply as well as demand have to be dealt with regionally. And in this context, Estonia’s domestic production capacity is very small - at 8 TWh out of 450 TWh produced in the area, it contributes about 1.7%.

This is what was behind a comment network operator Elering’s CEO, Taavi Veskimägi, made on Jun. 7. Veskimägi said that Estonia’s electricity supply could be guaranteed even if its own production capacity should be reduced to zero - because the much larger regional market could compensate for potential deficits in Estonia. Lithuania, for example, is currently importing some 80% of the electricity it consumes.

Subsidies or private investment?

At this point, supply becomes a trust issue. Estonia’s decision to maintain 110% production capacity is political, and motivated by the thought that suppliers outside its borders may not be reliable. If Estonia’s own production capacity diminishes, it has to trust its neighbors’ ability to keep their power plants running.

By the time most units of the Narva oil shale power plants go offline, the country will have reached a crossroads. The decision whether to pursue a free-market policy only or to subsidize production will have to be at the heart of any future energy policy. Because of the time it takes to adapt, these decisions have to be made in the coming two to three years.

Elering thinks Estonia has a chance to remain an electricity exporting country if it adapts its market to the new challenges. This would include phasing out the various subsidies currently in place, and creating other incentives for private investors to take up power production.

The alternative is the state-subsidized construction of new power plants. If the 110% capacity policy is kept up, this is a likely scenario. Political factors need to be taken into account - while the network operator, in its analysis, concentrates on running the country’s network and market, the government will eventually have to include a whole range of other considerations, from national defense right down to labor.

Creating and maintaining the open market

Compared to other countries, the liberalization of the Estonian electricity market has been successful - very early on, several companies competed with the established state-owned giant, Eesti Energia, whose market share didn’t remain too domineering, and that made an open market possible.

The Estonian market is open, but some changes are still needed to level the playing field. Sustainable energy sources are heavily subsidized, and there's the fact that Russian producers aren’t competing fairly - from state-subsidized production (e.g. through artificially low gas prices) to lax environmental regulations and lower safety standards, they have a whole number of advantages.

The construction of subsidized new power plants to increase Estonia's production capacity would represent another such factor.

Economic arguments against conservative politics

The question, in the long term, is how dedicated Estonia is to its liberal market policies. If an open electricity market is the ultimate goal, such a market cannot be built on subsidies and government intervention.

Elering believes that changing the market could create the conditions needed to both ensure Estonia’s electricity supply and give production based on private investment a boost.

Measures necessary include eliminating unfair competition, such as that by the Russian energy producers, and emphasizing demand-side management by equipping consumers with the necessary tools to measure their consumption, and pool their resources to improve their position in the market.

What is clear is that there isn’t just an economic dimension to the future development of Estonian energy policy and supply, but that there is a strong political component. Whether or not the 110% capacity policy is continued or given up is a politically motivated question more than one of getting to the lowest-possible electricity price.

Editor: Dario Cavegn

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