Arvi Hamburg: Belief in market solution to electricity crisis is naive
While the principles agreed by the new coalition to mitigate the effects of the energy crisis will help to alleviate its symptoms, the electricity market needs deeper reform, says Arvi Hamburg, chairman of the Energy Council of the Estonian Academy of Sciences. The entire Baltic and Nordic region requires a comprehensive and consistent energy development strategy.
Although quoting Churchill has become a cliche, a good crisis should not be wasted. We would not have such energy-efficient vehicles and low-cost solar panels if decisions made in the aftermath of the 1970s energy crisis had not been made. In our current situation, with several years of pandemic behind us and Estonia having one of the highest inflation rates in Europe, who is responsible for learning Churchill's lesson?
I believe that it is our responsible behavior as consumers that is most important to society as a whole. From this vantage point, it would be impossible to blame the government or some other higher authority. We should have realized by now that with current GDP chasing and rising consumption rates, it is no longer possible to provide food and care to all the current and future people on the planet.
In the grand scheme of things, not only Estonia but the entire world faces three enormous difficulties.
The first challenge is business model transformation. They can no longer be based on the assumption that future output and consumption will continue to rise and become more affordable.
When remodeling both the economy and the entire ecosystem, we should be mindful of both today's and tomorrow's constraints. We can't obviously return to the cave and turn off the light. Instead, we should become even smarter in our pursuit of technological advances that will help us manage these labor-intensive and valuable natural resources. This is a challenge for all engineers, technicians, and scientists.
The third and somewhat less challenging step is shaping worldview. Instead of focusing on a single component at a time, we should consider the entire system. Take the energy sector for example: when energy is produced using the sun and wind and no CO2 is released into the atmosphere, everything appears to be really good. However, when the full range of problems, including geopolitical aspects, is brought to view, other problems emerge, such as where the materials for electric car batteries come from, how democratic these countries are and how much we can rely on them, and, more broadly, how to survive in harmony with nature.
Clearly, speaking is easier than committing: if we would randomly inquire about someone's willingness to give up something, like their car, we would get contradictory responses. A case in point, I teach engineering at a high school. When I ask secondary school pupils how Tallinn could become a greener capital, they insist on eliminating all motor traffic in the city. However, some of them at the same time complain that driving to school in the Old Town has become tedious due to speed bumps. The paradigm must shift—it should be obvious that one's attitude and way of doing things must fundamentally change.
If we are looking for those to blame for the current crisis, the leaders of each nation owe that responsibility to the people in their region. They shouldn't be thinking only about how to get more voters. Our policy orientation depends on present-day capabilities and long-term objectives, but we should also make sure that scientists and dreamers could be reached out to, and that they are sufficiently nurtured.
We occasionally repeat the adage that nothing can be planned because the market determines everything. I rather belong to the school of thought according to which it is impossible to make multibillion-euro investments without careful prior planning. Doing so would be completely absurd. Our electric power industry is a good example of this. It is fundamentally based on variable costs rather than investment principles.
Now we see what happens to the market in the event of a shortfall. So it is rather naive to believe that the market will take care of this problem for us.
I don't recall anyone complaining about Nord Pool electricity prices four or five years ago, and the rest of continental Europe has had to pay twice as much as we have in the long run. One could even argue that the market over-served its customers in this case. For many years it only made sense to invest in wind turbines and solar panels, with a reasonable payback period. What are the long-term benefits of exiting the market, and how could it be now restructured to encourage the setting up of managed generation capacity?
It is strange that we continue to believe and rely on the market if it does not function properly. Maybe I'm being unfair to Lithuanians, but gas accounted for 0.4 percent of their energy output on Monday, and the price of that gas influenced prices across the Baltic and Nordic market regions. This is unusual market behavior.
I am not suggesting that the market is an inherently terrible concept. I am saying that the current intra-day or day-ahead market is predicated on minimal variable expenses. It has never been a favorable environment for investment, nor will it ever be. There is no reason to rely on it.
Three steps are necessary, I think, to improve the market. In addition to the day-ahead and daily markets, it is necessary to optimize the market for guaranteed investments. Then, an investor could be confident that if they, for instance, invest a million or a billion euros in electricity generation, that electricity will be purchased in the future.
Second, there should be a market for system services, which currently does not exist. This means that we'd be able to purchase power from other sources in the case of major shortages. Of course, I'm not saying such a seller would definitely exist in a situation where half of Europe is in deficit. Nonetheless, this possibility should be worked on.
Third, as many consumers as possible should be connected to power generation. For example, the University of Technology could sign and maintain a 10-to-15-year contract with Enefit Green. Obviously, no one would take on a single household customer consuming 100 kWh.
To make this happen, only some minor changes to the Electricity Market Act are necessary, no new sections need to be added. It should become clearer, however, what a community electric cooperative is and what it can achieve. It should cover the community's power generation, delivery, and management. Today, we may produce electricity but cannot distribute it since we are not permitted to connect it to the power distribution grid.
These are the basic steps. Many world nations have already sold in advance the capacity they are producing. This is the only way, I believe, to ensure pricing stability and industry competitiveness—it is only possible to achieve with permanent contracts. I don't mean to suggest fixed contracts as they are offered now at the rate of 250 KWh, nor do I mean that green energy should be sold at a higher profit margin. Why are we talking about green energy then at all, if we mainly imply that it is harder to sell?
In summary, we require the broadest and most diverse energy portfolio possible. This should be every nation's top priority, and meticulous planning is required. Because Estonia and the Baltic countries have such low consumption rates, we should group together with the other Baltic Sea nations, or at the very least the Nordic countries, in establishing production structures for the coming decades. The more diverse the energy mix, the better. Even though Finland now imports one-third of its electricity, in respect of diversification it is a shining example.
I don't get the idea that we should wait for directives and proposals regarding winter management from Brussels. As throughout the Soviet era, even though directives used to come from Moscow, we knew how to keep our homes warm.
One of the most significant changes in the energy sector in Estonia over the last few decades was the liberalization of the electricity market. Most small producers and investors can easily enter the market through renewable energy solutions, which, however, inevitably causes grid instability. How can we ensure this diverse generation portfolio, while avoiding the costs of duplication and fossil fuel backup capacity?
There is no one ideal course of action. The decision has been made to eliminate the reliance on fossil fuels in power generation by 2030 or 2035. The entire process is set in motion, and it is impossible to imagine now bankers lending money to someone who wants to build a fossil-fuel-powered plant.
The political situation is also telling. Although the war has given a new impetus to the abandonment of fossil fuels, Russia is not the dominant player on the global stage. Russia's coal and oil production percentages are negligible. Gas is a hot topic, however, as Russia has been so successful in penetrating the European gas sector. It is an example of our poor planning.
There are two ways to keep the production and consumption of power in balance, i.e. either output or consumption should be regulated. The latter is clearly more problematic for the consumer and cannot always be relied upon 100 percent of the time. Therefore, we need controllable capacities. As a statesman, I would ensure that even when someone generates electricity from steam on a campfire, they wouldn't entirely extinguish it and also provide assurances to users, which means that the producers should either own storage themselves, make an investment in it, or delegate the responsibility to another party.
Currently, an investor building a 100 MW wind farm can notify the system operator that it is their responsibility to maintain the electricity grid's stability. The system operator can then quickly add another fast-start gas turbine to Kiisa [emergency backup power station located in Saku], but the cost would be shared by all of us.
This same investor may generate energy for about three cents per KWh and sell it for €300 on the market. The system service should then be examined on a larger scale to look into the possibility of larger-scale reserves or storage.
Planning and supply security should be our top priorities, just as they are in the UK. Our supply security should not be limited to the mere presence of electricity, as Elering [an independent electricity and gas transmission system operator] seems to believe. It is an anomaly when electricity costs €500 per megawatt in the middle of summer. Before the coming heating period the owners of coal-fired power plants are improving their systems, and this provides me with some solace.
We also talk a lot about Germany's example; however, their problem today is not the generation of power from natural gas. Germany is using both coal and nuclear reactors to generate power. Similar to Spain and Belgium, district heating is the bottleneck for them. Gas is dangerous not only because of its impact on energy prices, but also because of infrastructure concerns. Even if we start importing liquefied natural gas (LNG) from other nations, the infrastructure is built on the assumption that the gas comes from Russia. Moreover, LNG is always more expensive than piped gas.
In the Estonian context, the construction of the Paldiski LNG terminal is, of course, essential. The need for it was already discussed in 2009 and public consultations were held in Paldiski. At the time, it fell through. The second time it failed was during the Rõivas government. The Balticconnector [gas pipeline] was built instead in collaboration with Finland, as Finland also needed a place to store their gas under a favorable Gazprom deal. Now it turns out that Latvia is permanently short of gas, while Finland is consuming more than the Baltic countries all combined.
Not to be critical, but we should be able to foresee such things. Politicians do not need to know everything, but ministry staff have to be in touch with the people in the field, have up-to-date information and clear understanding. Whether it is done by the ministry, the government, or the legislature is a different topic, as long as we have accomplished it. The proportion of gas in Estonian district heating was once around 80 percent, but we have largely moved away from this. Solid fuel is also used for oil boilers and at the Iru Power Plant [co-generation power plant in Maardu, which works on both solid fuel and gas].
We should try and preserve a kind of common sense here. In the future, though, I see a risk associated with district heating. We rely heavily on wood chips to provide both heat and power in Narva. Nevertheless, the European Association of Science Academies has ruled out the use of wood. My gut tells me such a directive may eventually come also from Brussels.
The European Parliament voted last week that both nuclear and natural gas are environmentally sustainable. How is this judgment regarding gas not treacherous? Why does it leave a bitter aftertaste? Yes, the increased use of gas has significantly reduced the EU's CO2 emissions, but the EU has also pledged to forsake fossil fuels.
Gas is not inherently bad. It matters now from an ethical standpoint—we buy gas and pay a high price for it to people who use it to kill other people.
Biogas production would be a priority for me in Estonia. We could even create national programs using resources from the restitution fund. The Biofuels Association estimated a few years ago that Estonia could easily produce 380-400 million cubic meters of biofuels. Our annual consumption rate is 450 million cubic meters. We have more than ten biogas plants that purify biomethane in operation, but we could build many more quickly. These projects cost tens, not hundreds of millions of euros.
Unfortunately, our infrastructure is now once again reliant on Russian gas. This gas molecule is no longer just red, but also bloody; we should now only rely on LNG. We can't completely eliminate gas because we need those quick-start capabilities.
Secondly, each nation should have a manufacturing capability that is within its own means. While EU member states' solidarity is admirable, Sweden's behavior with its electricity generation capacity last winter demonstrated that this ideal cannot be relied on in times of crisis.
What impact does lumping together of gas and nuclear energy under the same low-carbon fuel standard have on the establishment of European nuclear strategy and its potential revival? Can they both exist on the market at the same time?
They most certainly do. I believe the world is undergoing a nuclear renaissance, which is accelerating in Europe due to the continent's scarcity of resources.
The two sources of energy complement one another, and despite the fact that current nuclear reactors can be underutilized at 30 percent capacity, economics argue against it. If I make this major investment and build a 400 MW reactor, I want it to always run at full power. In comparison to all other costs, variable costs and fuel costs are insignificant. Fast-start capacities are also required in the event those 400 MW turn out to be insufficient. This is especially true in gas-fired power plants.
Also, wind and solar energy storage capacity should be carefully considered. If we intend to do so with hydrogen, we should keep an eye on energy prices. If you pay for 50 units of electricity to do this, then get 15 units of power back by regenerating it, then add the cost of storage and liquefaction, which reduces the volume of the gas, you'll probably wonder if this is even profitable.
I am not saying that the hydrogen solution has no future, but most certainly it won't play a significant role in energy storage. To put it simply, it is not physically possible.
It might potentially replace gas and coal in the metallurgical and chemical industries as well. However, if we were to put wind turbines around Saaremaa and immediately connect the gas produced there to Germany, we would need to carefully assess whether the metal produced thereby could compete in terms of pricing with Iceland and other countries. Another aspect is agriculture development, as natural gas is now used in the production of fertilizers.
When confronted with serious societal challenges, people frequently either deny their existence or turn to techno-utopianism. There is sometimes a basis for this—the price of lithium batteries has dropped by 97 percent since their introduction, and solar panels are now ten times less expensive than they were a decade ago. However, as technology advances, we are seeing an increase in dystopian realities, such as cryptocurrency with electrical consumption comparable to major world nations. What are our expectations for technological development?
Without a question, technology is responsible for making the world a better place. This is undeniable. That is unquestionable. Instead of outlawing the use of certain fuels, one of the simplest technological solutions that could and should be implemented soon is CO2 capture and conversion into synthetic fuels and other products. Endel Lippmaa stated 45 years ago that if we are unable to use CO2 today, we should collect it and store it beneath the sea. He had no idea his solution would be adopted in Norway; he was a visionary.
In my opinion, all industrial byproducts, including CO2, are not hazardous and can be used to create higher-value products. We have made significant investments in oil shale research and development, and at the very least, we can mine and export it to Norway. According to Alar Konist, [the head of the Sustainable Energy and Fuels research group at Tallinn University of Technology's Department of Energy Technology], a CO2 price of €85-90 per ton is economically feasible.
As a result, energy strategists should follow the example set by Silmet [an oil shale processing plant in Sillamäe] a decade ago. Tiit Vähi sold the company to Americans who owned mines in China when it became impossible to receive minerals from China due to a lack of connections. These resources are shared on a global scale. This means we need geopolitical negotiations with those with whom we share access to energy-related metals. there are some reserves here, but who would want a mine in their backyard?
I'm not as optimistic as to claim that a single great revolution will suffice. According to the analysis of Finnish geologists, transitioning heavy transport to hydrogen across the country requires 2.7 times more electricity.
Whether it's oil shale, peat or fertilizer production, Estonia should make the most of what it has. When we say, for example, that Estonia is beginning to develop wind power and that there have been significant advances in this field, we should examine what the criteria are and whether we have enough practice and know-how in this subject.
For over a century, we have explored oil shale and been its number one utilizers in the world, not only for electricity and oil production, but also for the chemical sector. If we have all of this knowledge but can't use it because we consider the product itself to be a waste, something is wrong. Even though this half-truth is widespread, we could try to minimize its sway by saying, yes, it's bad, but on this and that assumption, and those we can change.
Although the situation is difficult, our oil shale nevertheless provides for the manufacturing of a diverse range of goods in the Estonian chemical sector. Of course, the volumes are low—the world doesn't wait for us—and the same compounds are also generated polymerically, but there are promising possibilities. For example, there is opportunity to improve oil shale pyrolysis and use it in the circular economy for plastics. This is more challenging for Latvians, Swedes, and Finns, for example, because they have no prior experience with oil shale.
Someone might say that we don't have much experience building nuclear power plants. This is yet another cause for concern. It is necessary to have at least ten to fifteen serious scientists, they don't have to be specialized in energy technology, but if we don't have them, we should invest in hiring them, and this is one way forward.
Estonia's small size is both an advantage and a drawback. Although it allows us to progress very quickly in some areas, it can also lead to a narrow concentration of skill. This was true of the oil shale sector in the past, and the same is true of nuclear energy now. Journalists stick to the maxim that one must always assess who is paying whom. So even if scientists and experts are fair and impartial, how can they be trusted?
Simply put, we need more competent people. The problem is nurturing them. For example, 15 years ago, the University of Technology and the University of Tartu launched a joint master's degree program in nuclear energy. The education minister at the time, Jaak Aaviksoo, stated that a nuclear power plant would never be built in Estonia and that such a specialization would never be taught in Estonia. Naturally, this collaborative curriculum was never adopted, and there is no counterpart today.
In 2013-2014, Eesti Energia sent three people to Sweden, one of them, Henri Ormus, who had served as vice president of the European Nuclear Society (ENS) and Merja Pukari, an Estonian, who is the current director of Swedish Center for Nuclear Technology and Technical advisor for radwaste and decommissioning at Vattenfall AB, [Swedish state-owned multinational power company], which testifies to the interest in the subject in Estonia. If there is no demand in Estonia, the borders are wide open and people seek opportunities elsewhere.
As far as I know, there is currently only one company in Estonia promoting the benefits of nuclear energy, which can be labeled as advertising, and that is exactly what it is. They did a great job explaining it, but if I were in their shoes, I would emphasize the numbers more. They commissioned hundreds of pages of research, but few people have read it. I most emphatically have not. Promises of universal power for €55 make little sense to me. I'd prefer to see how the price is determined.
28 nations developed harmonized safety requirements under their leadership. Prior to that, the situation was comparable to Boeing's need to comply with numerous national standards in each country. Second, they have developed a tried-and-true method for fuel disposal [waste management plan] in deep boreholes. I'm not sure about the technicalities, but it appeared to be a novel alternative to hollowing out rock crevices.
Given the current state of affairs, my skepticism over the predicted time-frame for constructing a nuclear power plant grows. The firm claims that it takes four years to negotiate the requisite contract for nuclear fuel preparation and post-contract activities in France. I have my doubts that the plant could be operational by 2030, even on the most optimistic projections. In any case, the next seven years will be most challenging for us.
To phase out the use of fossil fuels completely, the world needs to generate around 38,000 TWh of electricity per year. However, a study conducted by the International Energy Agency (IEA) just prior to the latest climate meeting established that even if all countries were to meet their objectives, only about 8,000 TWh of electricity would be generated from renewable sources by 2030. What does this difference reveal? Are pressure groups overly optimistic, are politicians too committed to the industry, are our power plants still underdeveloped, or is it something else?
Whether they are IEA or European Commission objectives, these could and should be set, but they need be supported by a clear execution method and plan.
Consider offshore wind power. Certainly, generation capacity [i.e. the amount of electricity a generator can produce when running at full capacity] is critical; this is as obvious as day, but not so fast. I measured the efficiency of all wind turbines in the Nordic-Baltic region last year and found it to be 0.34, indicating that they only use one-third of their rated capacity and when they are operating is completely random.
We can insist on building three wind farms near Saaremaa, but this is only half of the solution, because they will not provide us with enough energy to last a year. This appears to be a marketing campaign in some ways. We notice a potential solution and begin to push it.
Transitioning away from fossil fuels is clearly difficult because there is no new technology that allows for continuous energy consumption. In addition, physics is involved. In terms of the amount of energy required to produce a unit of energy, fossil fuels, for example, are more efficient than wind and solar. Energy generation will consume even more energy in the future.
Because the world is already struggling to feed its population, solar panels also pose a dilemma in terms of land use. It is absurd to propose building solar plants on fertile farmland. As there is little desolate land in Estonia, we should prioritize for solar plants building's rooftops and use only some topsoil cover. We could also keep speculating about covering the Sahara Desert with solar panels, but as I've been hearing for the past fifty years that the superconductivity needed to make this a reality is just around the corner, and going on like this, probably I shall die before I see it happen.
Technologies just do not advance very quickly. Crises tend to spur these advancements, and I'm optimistic about this today: high prices and shortages of electricity are undesirable and this motivates us to explore how to put it to use more efficiently. Sparks of innovation may fly, and some processes have already been ignited. The larger issue, however, for Europeans, and Estonians in particular, is that our industry is not very well structured.
Although people tend to overlook it, the cheapest source of energy saving is not the sun or the wind, but energy efficiency improvements. In addition to insulating homes, using Denmark as an example once again, it is possible to provide significantly more added value for the same energy consumption: their GDP doubled between 1990 and 2015 and yet their energy consumption decreased by 10 percent. Given the structure of the Estonian economy, what could we achieve in this respect?
This requires a clever way of consuming that one kilowatt-hour. Is this always the cheapest solution? Certainly not! If I replace my AAA washing machine with a AAA+ model, I won't likely save money, but there are lots of ways to save and consume energy more efficiently in Estonia as a whole.
For instance, I just visited Iru, where the incinerator is operating properly and there is district heating, but the ventilation system, which is extremely power-hungry, does not leave anything to the district heating network. Why are we not harnessing this heat?
Similarly, we could implement seawater heat pump (SWHP) and low temperature district heating (LTDH) systems. There is no need to raise temperatures above 100 degrees, increasing network losses, as even 40-50 degrees would be sufficient for underfloor heating in new buildings. There are several low-tech methods for increasing energy efficiency.
Estonian Cell [Kunda-based aspen pulp mill] is a great example. What they have accomplished with biogas purification is impressive. Industrial leftovers should be utilized more intelligently, even though we can't solve all the problems at once.
Insulating a home is something that everyone agrees on. We know that buildings consume approximately 60 percent of the world's electricity. Wise people among us have figured out what needs to be done to insulate homes. It's incredible that we haven't planned for building insulation 10 to 15 years in advance. Instead, we give away millions of euros through quick application rounds and that's it, despite the knowledge that we could be saving much more.
Efforts should be made to secure public funding for this purpose in the future.
Because approximately 80 present of houses are built to a standard blueprint, we could use factory components and mass production. A continuous program would also allow the construction industry to better plan for the future. Knowing that there will be a job market within the next 10 to 15 years would allow for more confident professional training and investment climate.
The structure of electricity production also has a significant impact.
If there is a lot of sunlight and wind, it may be possible to start a business that consumes energy intermittently. The Kunda cement factory was the most effective load regulator during the Soviet era. Back then, no one wanted to under-load the oil shale plants, so the excess energy was used by the cement industry.
We shouldn't go off the rails, however, in seeking ways to increase savings and efficiency. For instance, I was asked to assist in analyzing Estonia's gas network, because Europe had enacted yet another directive. Reason should be what dictates the numbers, not the other way around.
The basics of a new coalition agreement were finally announced last week, which seem to offer relief from the symptoms of the energy crisis. What national policies do you think could structurally improve the situation?
Reform of the electrical market, or the so-called social electricity solution, is undoubtedly a mitigating factor, and it is very much needed given the current state of affairs.
Next to that, I would certainly reassess the green energy fee in the future. Is it still necessary to charge consumers 1.13 cents in current market conditions?
Secondly, even though Jürgen Ligi [Reform] believes that any alteration of taxes is absurd, the tax policy should be reviewed. Even though the power excise tax is relatively small, it sums up to a significant amount, while the gasoline excise duty is not small at all.
Thirdly, the construction of the Paldiski LNG terminal is absolutely vital, and the squabbling between government officials and companies in this respect has to stop.
Fourthly, interstate transfer fees have to be evaluated. At least a fraction of the capacity of the transmission lines should be made available for the consumers in the Baltic countries and Finland to purchase power from another countries. This is currently only possible through financial investment.
In addition, I have also suggestions for universal service in the electricity market. All Estonian producers with capacity greater than 10 MW could sell one-fifth of their output through the direct service. This would then be removed from the market, leaving the price of the remainder to be determined by the market. In Europe, there will be no problems because competition authorities will regulate this for smaller clients. Eesti Energia is currently required to provide universal service, which neither Hando Sutter [CEO of Eesti Energia] nor I could agree with.
In Brussels, I would examine the EU power market and CO2 exchange, which could be subject to a price cap or quota allocation if a certain threshold is reached. Speculators have driven up the price of quotas in recent years. When it became clear that there would be too much wind and solar energy and not enough quotas, the quotas were sold, and the price of CO2 fell by one-third. Everyone was happy, but I don't think financial investment should be the driving force behind the CO2 market.
The power market was useful 20 years ago, but it no longer serves us well. It could be re-established, at least within the EU, by protecting investments and providing system services.
Finally, we still need a major comprehensive energy strategy. This begins with a mapping of Europe's natural resources and ends with a carbon footprint assessment of renewable energy alternatives, allowing for fair comparisons. We should decide the positions of various plant structures altogether at a large EU table.
Focusing on the Baltics, we should pay close attention to the synchronization with the EU and security. Seven transmission lines are now crossing the Suwalki Gap, connecting us to the rest of Europe. In this sense, regardless of how good or bad the European electric system is, our connection with it is precarious. This is, however, the long-term goal; for the time being, we should focus on production.
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Editor: Kristina Kersa