The construction of the fourth Estonia-Latvia electrical connection, expected to cost at least one billion euros, is somewhat misleadingly named as it also includes a new connection between the mainland and the western part of Saaremaa. This allows future Estonian offshore wind farms, planned on the western coast of Saaremaa, to connect to it.

Confusion has arisen over the cost of establishing this new connection. The head of the Climate Ministry's energy department, Rein Vaks, told ERR that the confusion likely stems from mixing up the strengthening of Estonia's electrical grid, estimated by Elering to cost about €320 million, and the new Estonia-Latvia electrical connection, expected to cost €1-1.2 billion.

The mainland network is being reinforced to meet the renewable energy targets set for 2030 and connect onshore wind farms to the grid. However, the new Estonia-Latvia connection also concerns offshore wind farms and their grid integration. Although the connection is planned to be completed by 2033, the financing model is already in place.

One component of the financing is the congestion charge collected by Elering.

MP Rain Epler noted in an opinion piece published by ERR that he received two different responses regarding the use of the congestion charge for the construction of the fourth Estonia-Latvia electrical connection: while Climate Ministry Secretary General Keit Kasemets said it would not be used for this project, Elering CEO Kalle Kilk stated the opposite.

Vaks confirmed that the congestion charge is planned to be used. "We hope to cover most or at least half of the investment from the congestion revenues that accrue to Elering under the current electricity market regulation. And we aim to request the remaining half from the European Commission," he said.

Although Epler suggested that such use of the congestion revenue should prompt intervention by the Competition Authority, Vaks argued that the congestion charge could be used for financing connections.

"The congestion revenue is intended for financing such additional connections to minimize cross-border price differences. That is the purpose of using the congestion revenue, and we believe there should be no question about it," Vaks explained.

Thus, the Paide-Lihula-Saaremaa-Latvia connection should help reduce cross-border price differences.

"This is the logic: if we can make the pipe thicker between two vessels, which in this case are Estonia and Latvia, the level of liquid will equalize, meaning the more connections we have between us, the more similar our electricity market prices will be," said Vaks.

Epler, however, pointed out that the bottleneck in Estonia's electrical connections is more towards the north, i.e., Finland, and that southern connections only exacerbate the problem.

An Elering representative told ERR that system operators can use the congestion charge primarily to maintain and increase transmission capacities, and the congestion charge received and to be received by Elering will fund the next years' two major synchronization projects: the EstLink 3 between Finland and Estonia and the fourth Estonia-Latvia connection.

Elering has already received European Union funds for synchronization with the Continental European electricity grid and similarly hopes to obtain EU support for the construction of new external connections. Using congestion revenue and European funds means that it's not necessary to reach out to electricity consumers and raise network fees.

"Hopefully, the European Union's support will be so substantial that, together with the congestion charge, it will be possible to cover the entire investment with these two funding sources in such a way that building new connections will not raise network fees for consumers," said Liis Eister, spokesperson for Elering.

System operators like Elering earn congestion revenue from the price differences in electricity between countries. For example, Elering earned congestion revenue of €228.7 million in 2022 due to significant price differences.

State aid would only be paid for power consumed in Estonia

Given the scenario where offshore wind farms produce more electricity at peak times than is consumed in Estonia, a question has arisen about the appropriateness of using Estonian taxpayer money to fund renewable energy subsidies for producers who sell a portion of the electricity outside Estonia. A proposal has been made that the state should only subsidize electricity consumed by Estonian consumers.

This raises the question of whether such subsidization is permissible under European Union rules.

According to Vaks, the Climate Ministry's preliminary assessment is that it constitutes state aid. Now, this needs to be clarified with the European Commission.

"Our initial assessment suggests that such a criterion should be in compliance with state aid rules. This will likely be a major discussion point with the European Commission in granting state aid approval for the entire scheme. We are open and will continue to present our justifications and explain why we see this as sensible and why we believe it is definitely in accordance with European Union regulation," Vaks stated.

Vaks mentioned that such domestic subsidization would not conflict with the principles of the free electricity market.

"I don't believe it conflicts, because we do allow electricity to move freely in the market, and there is no problem with that. We are simply saying that we are willing to support the portion that goes to Estonian consumers and do not prohibit exporting electricity, on the contrary. Offshore wind farms produce more electricity during several hours of the year than can be consumed in Estonia, meaning that it goes directly to the European common market, supporting the activities of the common market. I don't believe there should be a significant problem," Vaks explained.

Germans interested in a connection, Estonia would leave construction to the private sector

The electricity surplus from offshore wind in Estonia is not intended to flow only through the newly established connection to mainland Estonia or Latvia. There has also been talk of electrical connections to Sweden and Germany.

Vaks mentioned that the Germans have expressed interest in a connection.

"The Germans have shown interest towards Lithuania and Latvia, and the option of creating an electrical cable between Germany and the Baltic States is definitely under discussion. We are still discussing with system operators to understand how profitable this venture would be for us, as we don't want to pay for it unnecessarily. If we see that it has some benefit for Estonia, then we would gladly proceed," he said.

Vaks added that ideally, this project would be led by wind farm developers, rather than system operators, in Estonia's case, Elering.

--

Follow ERR News on Facebook and Twitter and never miss an update!