Alexela CEO Marti Hääl recently posted a call to action, urging the implementation of quick solutions to slow the "unprecedented growth" of electricity costs.

Hääl highlighted several extra charges that have recently arisen for energy companies or Elering, which will eventually reach consumers, one way or another.

For example, the cost of balancing energy, i.e. electricity traded to maintain system balance, tripled in February due to the power grid's desynchronization from the Russian-controlled IPS/UPS system. Hääl noted that consumers will soon face not only this cost, but also the significant differences in energy prices between Estonia and Finland, which energy companies covered out of their own pockets in February.

That month, when electricity prices soared in Estonia, the difference in average prices between Finland and Estonia reached over €100 per megawatt-hour (MWh) in some instances. To hedge against such price differences, market participants trade in financial transmission rights, or FTRs. Since the larger, 650 megawatt (MW) Estlink 2 connection is under maintenance until at least the beginning of August, Elering is currently only selling FTRs for the 350 MW Estlink 1.

Elering stated that they can sell FTRs up to the capacity of the connection, and FTRs have already been sold to the extent of Estlink 1's capacity. However, as Estlink 2 is currently offline, Elering cannot currently sell monthly FTR capacities at the moment. Annual FTR capacities have been sold through auctions, and are in the hands of market participants, the TSO added.

Hedging instruments are funded by congestion charges, and they enable power companies to offer fixed-price electricity plans.

Amount spent on frequency reserves fluctuates

Another extra charge looming over consumers involves frequency reserves. To ensure Estonia's power grid maintains the necessary frequency at all times, part of its production capacity must be kept in reserve. Elering purchases these reserves a day in advance from the market, which opened in February.

Purchasing these reserves, of course, requires money. Until last week, the plan was that during a so-called "transition period," i.e. until July 1, Elering would use the money it collects in the form of congestion charges. After that, electricity producers and consumers would begin to pay for it, with the charge for each to be set at €5.31 per MWh or €0.53 per kilowatt-hour (KWh).

Last week, however, the government decided that Elering would cover the cost of purchasing frequency reserves through the end of the year, using congestion charges.

According to Hääl, Elering's estimate that frequency reserves would end up costing €60 million a year may not hold, and the actual sum could be higher. The TSO itself also confirmed that the actual cost will depend on market offers on a running basis, and could differ from last year's forecast.

In February, when the frequency reserve market first opened, Elering spent about €3 million on purchasing reserves, Elering board member Erkki Sapp told ERR. By March, the cost had already clearly increased to about €11 million.

The primary reason for the cost difference is the limited supply of reserves. For example, in March, the Kruonis Pumped Storage Power Plant (PSPP) in Lithuania was partially under maintenance.

Sapp explained that Latvia's hydroelectric and gas resources are also participating less actively in the reserve market than expected. "We are in discussions with our Latvian colleagues on how to increase the supply," he noted.

The Elering board member added that surprises are typical when launching a new market, and that the situation should improve in the months ahead.

"We are working with our Latvian and Lithuanian colleagues to increase the supply on the market," he said. "For example, more renewable energy-based reserve providers as well as batteries will be added in the coming months."

Future frequency reserve charge rate still uncertain

As mentioned, the Estonian government decided that consumers will not have to pay for frequency reserves at least until next year. However, the fact that this charge is currently planned to be split between consumers and producers does not mean that this will actually end up being the case in practice.

As Hääl pointed out, electricity producers will add their share of this charge to their producer electricity cost, meaning that it will ultimately still be consumers footing the full cost of the charge.

If the deficit of dispatchable production capacities in the region isn't addressed quickly, he added, the frequency reserve charge may increase even further for consumers.

According to regulations, Elering as the system operator cannot profit from purchasing reserves. The exact amount that electricity producers and consumers will have to pay in the future for purchasing frequency reserves, i.e. the balancing charge, will be announced by Elering two months before it goes into effect.

Sapp explained that the fee amount may change from the current planned €5.31+€5.31 per MWh.

"If necessary, we will update the balancing service charge according to the actual cost of frequency reserves," he said. "The service charge will be applied based on the volume of consumption and production, and since these change month by month, the total service charge collected each month will not be the same from one month to another."

Using congestion charges sparks mixed opinions

Prime Minister Kristen Michal (Reform) stated last week that in the second half of the year, Elering will need around €30 million to pay for frequency reserves, which he also based on Elering's own annual forecast of €60 million.

Congestion charges, which the TSO will use to pay for frequency reserves this year, total more than €100 million annually. According to figures submitted by Elering last week, they have accumulated a total of €643 million from congestion charges over the years, of which €337 million remained as of the end of last year.

Congestion charges arise due to the price differences between electricity price areas, such as between Estonia and Finland, and the electricity market operator distributes these funds to system operators such as Elering. According to European regulations, congestion charges must primarily be used to maintain and build new electricity transmission capacities.

Elering noted that the purpose of using congestion charges for investments is to reduce price differences between pricing areas, and once price differences disappear as a result, so will congestion charges.

As ERR reported in March, electricity reaches Estonian consumers several times more expensive than the price at which Finnish producers sell it due to the congestion charges applied to the transmission system.

According to Andrus Durejko, CEO of the Estonian state-owned energy group Eesti Energia, a system like this is neither practical nor beneficial to society.

It has also been proposed, including by Alexela CEO Marti Hääl, that congestion charges could be used to reduce or at least stabilize network charges or other costs for consumers. According to Elering, these two matters are already connected, as congestion charges can most effectively be used to reduce network charges by investing in transmission capacities. If congestion fees were not used for this purpose, investments would have to be funded from network charges, prompting the latter to be raised.

"If the investment is financed from network service fees, Elering's regulated assets will increase, and the network service price must cover not only the investment, but also the owner's expected profit and possible loan costs," Elering stated. "Therefore, investments funded from congestion charges are cheaper for electricity consumers than those funded from network charges."

From the electricity consumer's perspective, utilizing congestion charges this way is the most favorable in the long run, even if there may be a temptation in the short-term to immediately use the collected funds to temporarily reduce network charges, the company added.

Hääl, however, is unsure whether the construction of new transmission capacities, such as Estlink 3 or a fourth Estonian-Latvian interconnection, is the most reasonable way to ensure security of supply and lower prices.

"Or perhaps we should instead invest in production and storage assets in Estonia that offer greater flexibility and higher added value," he said. "But this could be financed much more effectively than by using a consumer prepayment collected ten or more years ago," he added, referring to congestion charges.

Islanding charge coming to power bills

Security of supply, however, must also be ensured without external connections, i.e. in what is known as island mode operation, or islanding. Maintaining islanding capacity, in turn, requires money, and the plan is for consumers to start contributing to this cost. The relevant bill has already passed its first reading in the Riigikogu.

Islanding means that, when necessary, only production capacities located within Estonia will be capable of ensuring the independent operation of the country's power grid. These capacities are currently, and for the next few years will remain, oil shale-fired power plants, which no longer generate enough revenue from the electricity market for their owner, Eesti Energia, to maintain them on the market.

Therefore, the state, which currently requires Eesti Energia to keep these plants in reserve until 2026, will need to extend this obligation. The energy group, however, wants the state to compensate for the annual costs involved, which amount to tens of millions of euros.

Eesti Energia has estimated the annual cost at €40 million.

According to the bill, the estimated cost of procuring this islanding capability service is €34 million annually, which would increase electricity bills for consumers by about 2.4 percent, or €0.42 cents per KWh. Power bills will list this charge separately.

Elering will conduct a public procurement to secure islanding capability, in which all qualifying Estonian electricity producers can submit bids. Elering intends to present the technical requirements and procurement principles for public consultation in May and June of this year, and the procurement itself will take place between August and October.

The main requirement will be that the electricity producer must be able to provide production capacity for ten consecutive days in islanding mode.

Hääl pointed out that with the frequency reserve procurement, Elering aims to purchase 500 MW of new dispatchable capacity, and considering the procurement conditions, the estimated total cost to society will be €120-150 million annually.

The letter of explanation accompanying the bill states that this is a short-term measure, and that the islanding capability service will be procured from the the beginning of 2026 at the latest and until the need for it disappears, which could occur if a different type of reserve capacity mechanism is developed — such as a strategic reserve — or a cross-market capacity mechanism is implemented.

Thus, the islanding service charge is expected to enter into effect next year.

--

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