Thanks to technology revolution, the Estonian eager for innovation will within years break free from energy taxes imposed by the state, and of the major producers pampered with subsidies, predicts World Energy Council's European region head Einari Kisel.
Mr Kisel says that regarding rearrangements of Estonian energy model we ought to learn from Africa to where tens of millions small and autonomous energy production systems have been sold.
At World Energy Council, Mr Kisel is coordinating the activities of 36 European countries and helping with assessments of national energy policies.
-In the wake of the Paris climate conference, what do you think of the green-thinker claims that the bell now tolls to oil shale energy, an integral part of Estonian identity and energy security?
The climate accord contains no clauses commanding us to stop using oil shale. The accord does feature the requirement to lower CO2 which also corresponds to our plans for developing oil shale technologies. If we do not lower the percentage of CO2 in use of oil shale, then naturally the share of that resource will begin to diminish.
That the share of oil shale in Estonian energy production will diminish is rather obvious as quite a few alternatives are entering the market. Hence the issue of the competitiveness of oil shale: at the current prices, how long will it make it?
-Lots of decisions that shaped Estonia’s current energy were taken while you were energy vice chancellor at economy ministry. With how many issues have we missed the mark while planning our developments?
As compared to other European nations, we have done relatively well: the percentage of renewable energy is as high as in Denmark, energy prices are among the lowest in the EU. Via our power stations and connection channels, we are able to ensure electricity, oil products and heat supply at all times.
The assessment of what could have been done better is based on the developments on global energy markets, both with technology and in politics.
At the moment, it is important to improve energy efficiency which must be strongly supported by governmental investments and benefits. Currently, the low energy process are playing against efficiency, as the pay-back period of investments made based on today’s data will stretch to be very long.
-How long will the low energy prices last?
At the moment, there are no signs of rapid price rise. Oil markets feature lots of new producers able to offer at cheap prices. As many electricity producers are toed to fossil fuel prices, electricity process will stay low also.
On the electricity exchange, the weather plays the main role. A few weeks ago, the prices were very low; now, in the biting cold, they skyrocketed. Hence the logic why, in addition to the external connections, we also need the Narva power stations which are currently producing at the highest level of the past decade.
-When the grass was green at the beginning of December, it was fun talking about the nonsense of investments made into building the new power station at Auvere. Looks different now?
It would be too early to judge the necessity of the Auvere power station as the cost-effectiveness of the investment is evident in 15–20 years. This is the most effective bloc of Narva power stations.
-How are politics affecting the currently low oil prices?
There are lots of oil producers at the moment and the price pressure stays at a level not seen for decades. Two years ago, the usual barrel prediction was at $120. At the moment, the pessimists are talking about $20 and the optimists of $50. The market development is impossible to predict and market price is always emotional. Sometime, emotions have been blown up at political level to get the oil price to rise.
What altered the current logic a couple of years ago was that shale oil and gas got reckoned as part of known oil resources which spelled a fivefold rise to known oil resources – on the basis of which a price drop may have been predicted. Some indeed predicted that, but were not heard.
-How secure is Europe’s and Baltic Sea region energy system right now?
High officials at the European Commission acknowledge that the European electricity market is in crisis as the current market models have not sent the right investment signals. Because of the renewable energy subsidies, now those producing energy from fossils are demanding subsidies as well: via tariff, they must be paid extra for staying available, so they would not close their stations down. A funny situation is created where, on electricity market, money is no longer made on the market but is earned from subsidies i.e. by political lobbying.
The current schemes of support and subsidies are calculated for small businesses being launched so these could compete. In Germany, for instance, situations may occur where consumers or producers must be switched off the network. In Germany, the share of turbines and solar panels has grown so vast that they are able to produce twice the minimal amount of energy needed. The transmission network operator is obligated to buy all that energy. Where to put the energy is the transmission network’s business alone.
-What is the condition of Estonia’s electricity market?
The networks have been shaped in a way to offer us a superb position right now. When the Lithuania-Poland and Lithuania-Sweden connections are completed, that will change the way the Baltic market works; at the moment, electricity is more expensive in Latvia and Lithuania than in Estonia. Estonia will become a big transit corridor for electricity through which electricity will move from Finland to Poland, From Russia to Sweden or the other way round.
Our situation is above the European average, but the problems are already in sight. For most of the time, Estonia may rely on import from other countries. In cold weather, however, neither do the others have cheap electricity to offer to us. Finland, Latvia and Lithuania are deficit nations regarding energy, wherefore spare capacity is nowhere to be found.
For 95 percent of the time, Russia has production volume enough to export at cheapest prices. 70 percent of electricity consumed in Lithuania comes from Russia. But for very cold weather even the Russians have no sufficient capacity.
In the winter of 2006, there was a situation when for a week, from Moscow to Oslo, there was minus 35 Celsius outside, and the winds blew strong. Then, all systems were stretched to the max. Should such a situation be repeated, I am not sure that Latvia and Lithuania would make it supply-wise. The connections are strong, but not enough electricity.
-How are we affected by the car industry’s race to make increasingly efficient electrical vehicles?
Unavoidably, market changes bring changes in national energy policies. Beholding how one after another the producers are launching their electric vehicles, and in a couple of years cheap batteries will enter the market, this may alter the way the entire electrical system functions.
When electricity supply is cheaper at the summer house with a battery and solar panels that the electricity from the network, or you bring the electricity there with the electric vehicle, then such isolated systems will increasingly be created. It is currently being predicted that in five short years one can buy a decent electric family car costing less than €20,000 and driving over 600 kilometres before needing to be recharged.
We may arrive at a point where small electricity consumers are no longer connected to networks. As electricity is largely taxed through these very networks, then network electricity price will lose out in competition with outside sources. At the moment, small electricity producers are kept in the network by the subsidies. When the subsidies will be no more, small producers will no longer tie themselves to the network, and the state will miss the taxes related to electricity.
When car batteries will be charged in isolated systems, the state will also miss electricity excise income. It is unclear how they will finance road construction and repairs if in ten years electric vehicles will amount to 50 percent in Estonia.
-How could the economy function without energy produced from fossils, because the alternatives are ineffective, unpredictable and unstable?
The renewal of battery technology will alter the current understanding. The current logic that one needs this large balancing capacity will disappear.
The network electricity price is pushed up by the subsidies and taxes. When consumers see that the alternative is own production with storage option, the change may happen very fast. At the moment, the revolution is only held back by the fact that cheap batteries have not yet entered the market.
-How are financial markets and banks able to help such change along?
The banks are interested and in readiness as this is obviously a place of investment. We should turn our sights to Africa where electrification is indeed happening via small solutions and not the networks. Tens of millions of small systems have been sold into Africa, which are worthwhile to learn to operate. This is a trend that is slowly moving towards the Nordics as well.
-How does one integrate small electricity producing systems to the ground heating systems in private houses which are currently working as fed by the network?
Micro-production can be integrated with ground heating systems; the solution is a bit more complicated than re-inserting a plug, but it is technically doable.
-What will be happening on the natural gas and LNG market?
At the moment, it is risky to make very large investments into natural gas and LNG market as the consumers cannot be relied on. In our entire region, gas consumption is down significantly.
If there are places where additional amounts of energy are needed at peak moments, then LNG would fit as this can be transported in trucks. Shipping is increasingly adopting LNG and creation of bunkering spots provides ports with competitive edge. There is no cause to hope for gas market to grow when it comes to the usual district heating, industry and private consumers.
-How do you view outlook for Alexela and Vopak in the race for building an LNG terminal?
When the Balticconnector pipeline is built, both terminals can operate here simultaneously as these are two different business models. Vopak sees shipping as the main market for its LNG business, Alexela eyes gas market in the Baltics and in Finland. With both models, there will be the ability to offer LNG to a market differing from the main market.
-How will the pipeline affect the ordinary Estonian consumer, with Elering becoming a vital transit company between Latvia and Finland due to Balticconnector?
The competition between gas suppliers will be tougher and for consumers gas price will fall as low as at all possible.
-What will it mean for unhooking our electricity networks from Russia when Estonia is becoming a vital transit state for electricity and gas?
As during the past decade Russia has maintained the frequency better that Central Europe, the question may arise whether the change is needed at all. Unhooking Estonia electricity networks from Russia is a political project. The application of all kinds of regulations would for us be a lot easier if we’d be in the same frequency area with Central Europe and if Russia’s impact on that market would no longer be as strong. Economically this is a large investment and it can be done with EU money.
-How should Estonia alter its energy policy?
We should take time out and see what is actually happening in the market. When setting some big decisions in stone right now, like in development plans, this is a very big risk. Should the state need to raise subsidies when numbers electricity network consumers may sharply drop, the competitiveness of producers tied to the network will suffer greatly as subsidies will be collected from a significantly smaller number of consumers.
On the market, the prices of technologies have significantly dropped and renewable energy companies will soon be competitive on the market even without some kind of subsidies. Which means that the current support schemes are no longer be successful and when introducing new scheme, the mistakes thus far by us and others will have to be seriously analysed.
We need to keep out eyes open to the changes about to occur in technology, in the five to ten year perspective. Rather, the consumer needs to be granted more powers and options to decide, to support introduction to the market of new solution. Knowing the readiness in Estonians to adopt new technologies, the changes may occur rather sooner than later.
In fifteen years, we have made very big changes in our energy system and now we need to analyse what their effect has been. This must be done by politicians, and also by consumers. It is a befitting moment for investments, as borrowed capital is cheap. New technology is reaching breaking point and investments must be made at the right moment to pocket the biggest win.