There are currently no offshore wind farms in Estonia, even though the first such project was initiated back in 2006 when Enefit Green started its Hiiumaa venture.

To date, five companies have either initiated the building permit procedure or won the auction for areas in Estonian waters: Enefit Green, Saare Wind Energy, Tuuletraal, Utilitas Wind and Ignitis Renewables. Building permit applications have also been submitted by Sunly, Swedish renewable energy company Eolus and major renewable energy project financier Copenhagen Infrastructure Partners/CI NMF. In addition, Estonia and Latvia are jointly developing the Elwind project.

Lithuanian company Ignitis recently won the auction for the Liivi 1 and Liivi 2 marine areas, planning to build the largest wind farm with a capacity of 1,600 megawatts.

Utilitas started the development of Saare-Liivi 5 in 2021, with the wind farm's planned capacity being 1,200 megawatts.

Priit Koit, CEO of the Utilitas group, explained the plan to ERR to establish an offshore wind farm, stating that as one of the leading renewable energy producers in the region, they are involved in nearly all renewable energy sectors, aiming to make their operations carbon neutral by 2030 at the latest.

"To achieve this goal, we are establishing new renewable energy production capacities across the region, investing in solar and wind energy and implementing the first green hydrogen pilot project," said Koit. "At the same time, we support, for example, the synchronization of Estonia with the Continental European network, offering [TSO] Elering suitable equipment for network stabilization services."

Koit noted that meeting climate goals and ensuring electricity supply at reasonable prices is an extremely challenging task, necessitating the use of the best available options.

"The most cost-effective solution is provided by a production portfolio that operates maximally when we need energy the most, meaning we can't just look at how much electricity individual production units produce over the course of a year, but also when it is produced," Koit said.

Since Estonia's winter electricity consumption is three times higher than in summer, and the difference in heating needs is tenfold, Koit highlighted the importance of establishing production portfolio sources that operate maximally in the fourth and first quarters.

"The more such sources we have, the less need there is to produce electricity from balancing fossil-fueled stations, and the total cost of the energy portfolio is more favorable," stated the CEO of Utilitas. Consequently, Koit finds it understandable that Estonia's goals for achieving 100 percent renewable electricity by 2030 envision roles for both onshore and offshore wind farms.

However, Koit emphasized that while Utilitas is actively developing onshore wind farms, relying solely on them to achieve the 2030 goals is questionable. He referred to a report published by the National Audit Office at the end of January, which indicated that it is relatively doubtful whether Estonia will achieve its goal by 2030 of producing at least as much electricity from renewable sources within Estonia as is consumed throughout the year.

Onshore wind may fail

Saare Wind Energy began its development in Saaremaa in 2015, with the planned capacity of its offshore wind farm being 1,400 megawatts.

Wind farm developer Kuido Kartau agreed with Koit, noting that although he does not wish to oppose onshore wind, he does not see anyone in that sector actually doing things to ensure their projects are completed by 2030. Therefore, in his opinion, offshore wind should exist at least as a contingency plan.

"It seems to me that onshore wind may fail. Therefore, offshore wind should be on the table at least as a Plan B. Even our project has not made an investment decision today," acknowledged Kartau. "Now the question is whether to invest over three billion or not. If at that moment someone produces electricity very cheaply, which happens automatically, then there's no need to make that investment decision. But we see a considerable risk that it won't happen and if society starts to move to do something else in five years, we will have lost five years, as well as a lot of Estonia's competitiveness."

Priit Koit pointed out that to meet the 2030 goals, it's necessary to reduce the use of fossil fuels as quickly as possible, where, in his opinion, the best solution is a combination of different renewable energy sources that produces maximum energy when it is most consumed.

"We need to use solutions that are realistically achievable within this timeframe for both renewable energy sources and balancing capacities. Moreover, it's most efficient and ultimately cheaper to address challenges across multiple sectors simultaneously, examples of which include co-generation plants and, for instance, our green hydrogen production facility being built in Tallinn where we can direct the residual heat produced in the manufacturing process into the district heating network," stated the CEO of the Utilitas group.

According to calculations by the Ministry of Climate, the average annual price of market electricity in 2030 is €66 per megawatt-hour.

Koit noted that the external expert Aurora Energy Research has forecasted the average electricity price in Estonia in 2030 to be in the range of €65-72 per megawatt-hour in 2022 real prices, depending on many different factors and assumptions regarding the production portfolio and the costs of energy carriers and CO2 quota, where the scenario including both onshore and offshore wind farms is the most favorable.

"This is primarily because the higher output from offshore wind farms in the first and fourth quarters, when electricity consumption is also highest, reduces the need during these times to produce electricity from significantly more expensive fossil sources," explained Koit.

Lithuania estimates need for subsidies at €193 million over 15 years

Regarding subsidy expectations, Koit mentioned that competitive bidding for introducing onshore and offshore wind farms to the market through a two-way contract for difference (CfD) is common practice in Europe. This allows renewable energy producers to submit a bid that covers the costs associated with establishing and operating production equipment, while simultaneously protecting consumers against unstable market prices during periods when electricity prices are high.

"How does it work? At the competitive bidding, the producer submits their bid to sell electricity at a certain price, known as the reference price. The producer who submits the bid with the lowest reference price level wins. However, the market price is dynamic and changing, depending on the demand and supply of electricity in the market and other factors such as fluctuations in fuel prices. If the market price exceeds the reference price, the producer pays back the excess amount to the state. If the market price is lower than the reference price, the difference is paid to the producer as compensation," explained Koit.

Koit added that among Estonia's neighboring regions, a contract for difference (CfD) auction for offshore wind farm development is already underway in Lithuania and has received state aid approval from the European Commission. It has already occurred in Poland, with a similar solution being used in many other European countries.

"In Lithuania, the state aid amount related to the offshore wind farm CfD has been estimated at approximately €193 million over a period of 15 years in total, not billions of euros, as has been claimed in the public discourse regarding the cost of state aid for offshore wind farms," Koit stated.

Kuido Kartau also did not consider the proposed subsidy cost realistic.

"If the price is too low, the state supports the producer, and if high, the state takes the higher price for itself," Kartau explained the subsidy logic. "There are some figures circulating that €200 million a year would be spent on support. I have not seen on what assumptions these figures are based. When I look at my assumptions, it's quite different. For example, in 2022, the Estonian state would have earned half a billion euros from the high price if a CfD at the price proposed by the government had been concluded at that time."

Kartau added that some level of support is likely needed, but certainly not €200 million a year, as that is not a realistic estimate.

Kartau could not provide exact figures but acknowledged that supporting electricity producers would actually bring market prices down.

"It sounds contradictory, but if you give something to the market, to market participants, then the market behaves more rationally and brings the price down for everyone," Kartau commented.

Price forecasts always include a crystal ball component

According to Kartau, the average market price of electricity in 2030 will depend on production capacity and consumption volumes.

"Despite all analyses, there is always an element of crystal ball gazing – who sees what. Mainly, as developers, we look at how to implement the best technical and other solutions in the location we are developing, which we believe is very good both in terms of environmental impacts and technically, so that the cost price of electricity produced is as reasonable as possible," Kartau said.

Kartau emphasized that the cost of electricity production and the exchange price are not always the same, but in the long term, the exchange price is lower if it is produced in a reasonable manner.

"We believe that we can produce electricity in this park in any case in a reasonable manner and that the price will be competitive. We do not see who and with what technology could do it more profitably and cheaply," Kartau admitted and added that maybe it's possible on a sunny summer day with solar energy, but it's not always summer in Estonia. "No system can rely solely on solar panels, offshore wind farms or even coal."

Kartau noted that constructing an offshore wind farm is not very complex or expensive – there are far more costly things. He mentioned that if a large part of Europe, the smarter and more successful countries are doing it, then maybe they are not all making huge mistakes.

Regarding investments, profitability is also important, and Kartau said that in mature markets, such as Germany, it might be lower because consumers are present and countries act smarter and more predictably with their support mechanisms throughout the system. Therefore, the market is ready to accept lower profit margins because everyone values stability.

"Clearly, good news for offshore wind came to Estonia two weeks ago, but the details are still not in place. Compared to some countries, there is a relative ambiguity, and it's not entirely clear how things operate, which also creates greater expectations for profitability," said the head of Saare Wind Energy, adding that, in general, energy is not an overly profitable business, except for some companies in 2022.

The CEO of the Utilitas group mentioned that precise financial calculations for offshore wind farms are still being figured out by developers and depend on various factors including environmental constraints, geological and other sea conditions, technology choices particularly for foundation solutions, cost, supply chain limitations, investment expenses, capital availability and cost, and many other factors, all of which will be specified by the time actual bids need to be submitted.

Offshore wind developers happy with the change

Clearly, recent developments have been positive for offshore wind energy in Estonia, with all current government parties' election programs committing to the construction of offshore wind farms, highlighting the years of discussion and preparation for such initiatives both in Estonia and neighboring countries.

Koit emphasized that a balanced portfolio, featuring various sources that operate during times of peak consumption, is most cost-effective from the consumer's perspective. The promise is to quintuple renewable electricity production, bringing affordable renewable electricity to the market and driving down exchange prices. Moreover, it was assured that this would not increase renewable energy support compared to today.

As a result of establishing renewable energy capacities, Koit believes that the state's revenues will ultimately exceed the expenses, as both the construction of onshore and offshore wind farms, as well as new industrial investments, contribute to the state budget and add value to the economy more broadly.

Kartau noted that the latest news is clearly positive, and the state is moving in the right direction, expressing a desire not to pit offshore against onshore wind. He mentioned that overall, things are going well, progress is being made and solutions are being offered that fit the system.

In October, the Ministry of Climate published a plan indicating that Estonia's goal of 100 percent renewable electricity by 2030 could be achieved with onshore wind farms, supported by a six-terawatt-hour electricity production price guarantee, the level of which will be determined through bidding.

However, two weeks ago, the government unexpectedly approved a more costly solution, offering price guarantees for a larger production volume of four plus four terawatt-hours in bidding, part of which is reserved for the construction of offshore wind farms. This construction will be more expensive for electricity consumers and society compared to onshore parks.

Climate Minister Kristen Michal has stated that the objective is to lower electricity prices. However, energy expert Arvi Hamburg informed the Riigikogu's State Budget Control Select Committee that the cost of offshore wind farms is significantly higher than that of onshore ones, necessitating higher support for the former.

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