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Watchdog: Grid investments sought by DSO would deliver a sharp fees hike

Elektrilevi. Source: Siim Lõvi /ERR

Estonia's distribution system operator Elektrilevi wants to change the way it calculates tariffs and base it on replacement value of assets instead of financial residual value to boost its investment capacity. The Competition Authority believes this would hike the transmission fee consumers pay by at least 2.5 times.

Elektrilevi CEO Mihkel Härm told ERR that the company's recent tariffs policy means it can spend one-fortieth of its fixed assets on investments. The logic this proceeds from is that assets have a lifespan of 40 years and replacing one-fortieth annually helps maintain consistent grid updates.

"The problem is that prices grow over time, and replacing a transformer procured 40 years ago costs many times as much today. In Sweden, system operators' assets are indexed annually to overcome the problem, while Finland periodically reevaluates its assets to have them reflect current replacement value," he explained.

Härm said that basing asset indexation on the year 2000, the tariff could be at 5 cents per kilowatt-hour. The average tariff today is 4.11 cents per kWh.

However, calculating asset value based on what it would cost to replace, the tariff would have to be roughly 10 cents per kWh at a total asset value of €5.67 billion.

While the current tariff amounts to €34 million for annual investments, the 2000 indexation would put the sum at €85 million, while the replacement value calculation would hike that further to over €250 million annually.

"Elekrilevi's development plan until 2035 prescribes investing €150-200 million annually in grid reliability in the coming years. The DSO finds that using asset indexation and covering the rest of needed investment volume from the state budget or using EU subsidies would be a sensible way to meet customers needs and ensure grid reliability," Härm said.

Külli Haab, head of the Competition Authority's regulation service, said that the principles of calculating transmission fees proposed by Elektrilevi would first require amending the Electricity Market Act.

"Whereas it should be kept in mind that the change would result in a transmission fee hike of at least 2.5 times," she remarked, adding that it could also affect how prices are formed in other regulated sectors.

ERR asked Elekrtilevi's parent company Eesti Energia for a comment but was told by the national energy giant that the DSO is completely independent in its activities.

Remote areas in Southeast Estonia and elsewhere have been forced to go without power for weeks this December as the transmission grid is outdated and Elektilevi lacks the manpower to carry out repairs quickly enough. Outages have been caused by trees breaking under the weight of snow and falling on uninsulated power lines. This has sparked a debate on whether the DSO could be allowed to raise more money from transmission fees paid by consumers in order to invest in a more robust grid.


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Editor: Marcus Turovski

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