Estonian Natl Audit Office: Quick decisions needed for developing power system

Estonian Natl Audit Office: Quick decisions needed for developing power system. Photo: Arvo Meeks

Auditor General Janar Holm on Monday handed over to Riigikogu speaker Lauri Hussar the National Audit Office's annual report, which this time focuses on the trends of the Estonian electricity system and in which the institution stresses that the question of how it is guaranteed that domestic and business consumers will have electricity in the necessary quantity, at any time and also at an acceptable price, is still waiting for a concrete and realistic answer.

It is not possible to postpone the making of decisions necessary to mitigate the risk of both a possible electricity shortage and sudden price increases, because energy-related developments are time- and money-intensive, the National Audit Office said. A long-term agreement is primarily needed on controllable production capacities, speeding up the construction of wind farms, as well as the establishment of domestic electricity grids and external connections.

«Decisions are not easy to make, because there are many variables, there are different options, each of them has its pros and cons. It is almost impossible to predict whether the choices made now and on the basis of current knowledge will be considered the best possible in the future,» Auditor General Janar Holm said. «Whether one or another decision may look one way or another in retrospect in the future should not hinder current decision-makers to such an extent that, fearing a mistake, the necessary decisions are rather not made. The worst decision would be not to make a decision.»

While the Estonian Energy Policy Development Plan 2035+ (ENMAK 2035+) is being drawn up, the National Audit Office said it can already be seen from the current work materials that the planned measures are too general.

«Estonia does not need simply another new development plan in a long list of development plans, but that the plan should contain who does what and when, and where the money comes from,» Holm said, adding that this information is currently missing in the work documents.

In terms of renewable energy, Estonia has set the goal that by 2030, renewable electricity will be produced in Estonia at least as much as the total electricity consumed in the country during the year, but there is no specific action plan to achieve this goal and the Ministry of Climate has no plans to prepare one either. The potential of renewable electricity has so far been underutilized. Although electricity production from solar energy has made a big leap in Estonia in recent years -- from 0.03 percent of total electricity production in 2016 to 7.4 percent in 2022 -- wind energy production is stagnating. No major wind farms have been added in 10 years.

In the event that after 2030, renewable energy is added in the planned amount, Estonia will have enough electricity production capacities, but there may be a lack of controllable production capacities, which are needed, among other things, to ensure the frequency of the electricity grid. The National Audit Office emphasizes that the choices and decisions necessary to ensure the controllable capacity must be made as soon as possible. A situation in which late action limits options and does not contribute to the introduction of new and better capacities to the market must be avoided.

In order to achieve the goal of renewable electricity, the electricity grid must also be strengthened, as the available connection capacities have been exhausted. The islands and most of the mainland do not have available connection capacity for new producers. The number of requests, offers and contracts to join the network currently significantly exceeds the amount of available network capacity: there are approximately twice as many of them as the network can currently accommodate.

So far, the development of networks has taken place in places selected by renewable energy developers, based on the capabilities of Elering, Elektrilevi and other network operators. However, from the point of view of the National Audit Office, the Ministry of Climate should consider how funding for the construction and renovation of networks should continue, and resolve the question of whether and from which sources funding should take place, so that the network investments necessary from the state's point of view can be made much faster than before.

At the same time, when it comes to the planning of new external connections, neither the profitability of the possible projects nor the financing options have yet been determined. The Ministry of Climate has considered the construction of a fourth Estonian-Latvian connection, a third Estonian-Finnish connection, as well as a sea cable between Estonia and Germany, but no decision has been made regarding any of the connections, because the profitability of the projects has not been analyzed and the financing possibilities for the construction of the connections are not known.

The National Audit Office also said that, according to Elering, there will be no additional controllable production capacities coming into the Estonian market at least until the year 2037. The addition of controllable production capacities is hindered by the uncertainty of market participants. The experts interviewed by the National Audit Office considered it unlikely that private investors would want to create controllable production capacity in Estonia without state support. The reason for this is the non-profitability of the investment, as controllable production capacity enters the market primarily when the wind is not blowing, the sun is not shining or when the production of renewable electricity is low.

While entrepreneurs are interested in developing electricity storage options, the state must decide whether to promote the entry of storage capacity into the market and how to do it. According to the National Audit Office, one of the obstacles to the development of the storage market is the incomplete vision of the development of the electricity system, meaning it is not clear how much storage capacity the state wants to use and for what -- for example, frequency control or balancing renewable electricity.

In addition, according to the National Audit Office, there are no solutions for the effective implementation of electricity consumption management options in Estonia. Changing the laws is a prerequisite for improving the capacity of consumption management -- the possibility of consumers to sell their willingness not to consume electricity in a situation where demand is high. The National Audit Office considers that it would be necessary to implement such a market model that would allow consumers to be involved in such a way that they would also benefit from giving up electricity consumption at a time of high demand.

In late 2022, both pan-European and regional security of supply analyses revealed for the first time that in 2027 Estonia may have a problem with security of electricity supply. There may be a shortage of both market-based production capacities and controllable electricity production capacities, which are needed, among other things, to ensure electricity grid frequency. The basis of the risk scenario is a possible situation where, from 2027, the old production capacities using oil shale in Estonia are no longer economically sustainable, which is why the owner may decide to close them.

Sufficient generation capacity is expected to exist in 2030 as renewable generation capacity enters the market. But then it may happen that there is not enough controllable generation capacity to start up or shut down when needed.

The National Audit Office notes that although Elering has conducted analyses of the security of electricity supply every year with a view of approximately 10 years, until 2022, neither pan-European nor regional security of supply analyses used a methodology that would have taken into account the economic sustainability of electricity generation equipment. Therefore, the solving of the possible problem of security of supply has only started now, when the options for this are narrower due to the limited time.

In a situation where the security of supply analysis shows a capacity deficit, the state can request a state aid permit from the European Commission to create a strategic reserve of electricity generation capacity, which gives Elering the right to organize a lowest bid auction and compensate the winner of the bid for the costs related to maintaining the readiness for starting up necessary capacities.

The late identification of the security of supply problem has created a situation in which there is unlikely to be a substantive competitive situation in the case of a lowest bid auction upon obtaining a state aid permit. According to the National Audit Office, it is highly likely that it will not be possible to plan or build new power generation capacities and the old dust incineration boilers belonging to Eesti Energia will most likely become the strategic reserve.

If it is not possible to obtain state aid permission for the creation of a strategic reserve, the resolution of the situation depends on whether and how much renewable electricity and storage capacities will be brought to the market in the coming years and how consumption can be managed additionally, the National Audit Office said. If these possibilities are not enough, in order to ensure security of supply, the Ministry of Finance can, in principle, oblige Eesti Energia to maintain a sufficient amount of controllable production capacity at its own expense also after 2026.

From the National Audit Office's point of view, the question is whether and to what extent Eesti Energia is able to bear the loss resulting from this obligation. Among other things, it must be taken into account that keeping the production capacities in working order requires constant maintenance of the plants and keeping the necessary people at work, but the plants would likely only be able to enter the market for a few hours a year. However, such activity can damage the entire Eesti Energia group, including renewable electricity projects.

The National Audit Office added that if the problems of the adequacy of production capacities and external connections are not solved, there will be a risk that the price of electricity will rise to a level that is unacceptable for Estonian society. If decisions are not made as a matter of urgency on how to ensure resource sufficiency in 2027 and especially after 2030, there is a risk that the price of electricity will rise to a level that will affect the well-being of consumers and become an obstacle to economic development. According to the rules of the European Union, the member states must ensure, in particular, adequate protection of persons unable to purchase energy, so to speak. In Estonia, persons entitled to subsistence allowance are considered to be unable to purchase energy.

At the same time, according to the National Audit Office, there is an unjustified regional inequality in support of persons unable to purchase energy in Estonia -- although the price of electricity does not differ from region to region, when comparing municipalities, the difference between the largest and the smallest reimbursable electricity consumption limits is 16-fold. This means that when compensating for the high electricity price, the recipients of subsistence allowance are not treated equally in different parts of Estonia.

However, preparations should be made for exceptionally high electricity prices and the Ministry of Climate should develop possible support schemes that would be based on consumers' need for support and that could be implemented quickly if necessary, the National Audit Office said. The high price of electricity in 2021/2022 showed that in certain situations even those consumers who are not classified as unable to purchase energy are sensitive to the price of electricity.