Summary 

“The state must plan its energy sector policies at least 30 years ahead, keeping in mind the principles of an open electricity market, the need to ensure the security of supply, EU climate goals and energy policies and the cost of the decision for consumers.” This was one of the key messages in the 2012 audit “Alternatives for electricity production” of the National Audit Office. The annual report of the National Audit Office to be presented to the Riigikogu eleven years later, which this time addresses the problems of the energy sector in depth, could start the same way.

The Government of the Republic has not yet found a concrete and realistic solution to ensure that domestic and business consumers have the necessary quantity of electricity at all times and at an acceptable price in the future. Therefore, there may be a risk that in the event of a shortage of electricity in our region, the price of electricity will become too expensive for consumers. A clear perspective and action plan in the energy sector are also necessary for the development of economy and industry, and it would lead to the growth of Estonia’s prosperity and competitiveness. In order to achieve security of electricity supply and attract investments to Estonia, it is necessary to invest in energy production, networks, including external connections, and stable availability of electricity at a reasonable price.

1. The long-term planning of Estonia’s energy economy has been difficult for years and years, and many important fundamental decisions regarding the development of the electricity system are still waiting to be made.

Although the energy economy development plan 2035+ (ENMAK 2035+) is being prepared, the current working materials already suggest that the planned measures are too general. For example, the materials lack information about who does what and when, and where the funds come from. However, Estonia does not need just another development plan among many development plans; instead, Estonia needs clearly agreed goals, financing sources, concrete action plans, and to operate according to them.

In terms of renewable energy, a goal has been set that by 2030, at least as much energy is produced from renewable sources in Estonia as the total electricity consumed in Estonia in a year, but there is no specific action plan and, according to officials in charge of energy policy, there is no plan to prepare one either. 

A long-term agreement is needed foremost with regard to dispatchable production capacities, speeding up the construction of wind farms as well as the establishment of domestic electricity networks and external connections.

• According to the electricity system operator Elering AS, dispatchable production capacities will not be added to the Estonian market until at least 2037. The addition of dispatchable production capacities is hindered by the uncertainty of market participants. The experts interviewed by the National Audit Office during audits  considered it unlikely that private investors would want to establish new dispatchable production capacity in Estonia without State support. The reason for this is the non-profitability of the investment as dispatchable production capacity enters the market primarily when there is no wind, the sun does not shine or when the production of other renewable electricity is low. 
  According to the European Union regulation on internal market for electricity, a Member State can only support the establishment of production capacities based on renewable sources without applying for a permission for granting state aid from the European Commission. However, renewable sources are mostly not used in dispatchable production capacities.
• The potential of renewable electricity has so far been underutilised. Electricity production from solar energy has made a big leap in Estonia in recent years – from 0.03% of total electricity production in 2016 to 7.4% in 2022, but no major wind farms have been added in ten years, so production of wind energy has not increased either. 
  The reasons for this are varied: problems arising from national defence restrictions and their time-consuming resolution, court cases, slow planning and impact assessment procedures, etc. The Ministry of Economic Affairs and Communications (MEAC), which was responsible for the energy sector until the second half of 2023, has not been able to prevent problems in cooperation with other ministries and has instead attempted to resolve them after the fact. In March 2023, amendments to the Planning Act entered into force, which should give some time gain, mostly only a few months, in the planning process lasting approximately 3–5 years. At the same time, it is still necessary, for example, to simplify the process of connecting to the electricity network and speed up the timeframe of conducting environmental studies. 
• The available connection capacities of Estonian electricity networks have been exhausted. The islands and most of the mainland do not have available connection capacity for new producers. The number of applications, tenders and contracts to connect to the network currently significantly exceeds the amount of available network capacity – the applications are approximately twice as many as the network can currently accommodate. 
  Until now, the development of networks has taken place in locations selected by renewable energy developers based on the capacities of Elering AS, Elektrilevi OÜ and other network operators. The Ministry of Climate should consider how funding for the construction and renovation of networks should continue and resolve the issue of whether and from which sources funding should be provided, so that network investments necessary from the State’s point of view could be made much faster than before. 
• In the planning of new external connections for Estonia, neither the profitability of the possible projects nor the financing options have yet been determined. The Ministry of Climate has considered the construction of the fourth Estonian-Latvian connection, the third Estonian-Finnish connection as well as a submarine 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 analysed and financing options for the construction of the connections are not clear.
• Entrepreneurs are interested in developing electricity storage options, but the State must decide whether and how to promote the entry of storage capacity into the market. One of the main obstacles to the development of the storage market is the incomplete vision of the development of the electricity system, i.e., it is not clear how much storage capacity the State wants to use and for what – for example, for frequency control or balancing renewable electricity.
• In Estonia, there are no solutions for the effective implementation of demand response. The prerequisite for improving demand response – the ability of consumers to sell their willingness to not consume electricity in a situation where demand is high – is the amendment of the laws. It would be necessary to implement a market model that would allow consumers to be involved in such a way that they would also benefit from lowering electricity consumption when demand is high.

2. There will be enough electricity production capacity until the end of 2026, but then the owner’s expectations given to Eesti Energia AS by the State that require the company to ensure Estonian domestic dispatchable electricity production capacity of at least 1000 MW will come to an end.

Because in 2027, according to the security of supply analysis, there may not be enough market-based capacity to cover consumption to the prescribed extent, the State can request a permission to grant state aid from the European Commission to establish a strategic reserve of electricity production capacity. In all likelihood, the old pulverised oil shale combustion capacities owned by Eesti Energia AS would most likely become a strategic reserve because there is not enough time to plan or build new electricity production capacities by that time. 

• At the end of 2022, both a European level and regional security of supply analyses explicitly stated for the first time that Estonia may have a problem with security of electricity supply in 2027. Every year, Elering AS has analysed the security of electricity supply with a view of approximately ten years, but until 2022, neither the European level nor regional security of supply analyses of used a methodology that would have taken into account the economic sustainability of electricity production equipment. Therefore, finding a solution to the possible problem of security of supply has only commenced now when options for this are fewer due to the limited time.
  In a situation where the analysis of security of supply shows a capacity deficit, the State can request a state aid permit from the European Commission to establish a strategic reserve for electricity production. The permission to grant state aid gives Elering AS the right to organise a reverse auction for electricity production in order to establish a strategic reserve. A tenderer for the strategic reserve may not participate in the market at other times and is compensated for this.
  The Ministry of Climate is planning to submit an application for the permission to grant state aid to the European Commission for the establishment of a strategic reserve for the years 2027–2030 at the beginning of 2024. Elering AS can enter into an agreement to establish a strategic reserve only after the permission has been obtained. Given the fact that there is very little time left to establish a reserve, it is highly unlikely that there is time to plan or build new electricity production capacities. According to Elering AS, the old pulverised oil shale combustion capacities owned by Eesti Energia AS will most likely become the strategic reserve. The late identification of the problem with security of supply has created a situation in which there is unlikely to be meaningful competition in the reverse auction, and new and potentially better, including cheaper, production capacities will not be entering the market. 
• If the permission to grant state aid is not obtained from the European Commission, the resolution of the situation will depend on whether and how much renewable electricity and storage capacities will enter the market in the coming years, and how consumption can be further managed. 
  If the aforementioned possibilities are not enough, the Ministry of Finance can obligate Eesti Energia AS to maintain adequate dispatchable production capacity at its own expense after 2026 to ensure security of supply. The question is whether and to what extent the entrepreneur 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 and keeping the necessary people employed, but the generation capacities would probably only be able to enter the market for a few hours a year. However, such operation could damage the entire Eesti Energia Group, including its renewable electricity projects. 

3. In the event that after 2030, renewable energy is produced in the planned amount, Estonia will have enough electricity production capacities, but there may be a lack of controlled production capacities. Dispatchable production capacities are needed, among other things, to ensure the frequency of the electricity network.

The choices and decisions needed to ensure dispatchable capacity must be made as quickly as possible. We must avoid a situation where late action limits options and does not contribute to the market entry of new and better capacities.

4. If the problems with the adequacy of Estonian production capacities and external connections are not resolved, there is a risk that the price of electricity will rise to a level that is unacceptable to our society.

If decisions regarding how to ensure resource adequacy in 2027 and especially after 2030 are not made as a matter of urgency, there is a risk that the price of electricity will rise to a level that will worsen the well-being of consumers and become an obstacle to economic development. Ensuring affordable electricity prices to consumers is something that must be addressed now.

• In Estonia, there is an unjustified regional inequality in the support of persons suffering from energy poverty. According to the European Union directive on internal market for electricity, the Member States must ensure, in particular, adequate protection of vulnerable domestic consumers, i.e., persons suffering from energy poverty. These consumers are supported through subsistence benefit. Although subsistence benefit is state aid, the limits for housing expenses, including regarding the costs related to the consumption of electricity, are established by the local government. 
  The limits for housing expenses are different in local governments, which is why the subsidies paid by the State to compensate for the high price of electricity are not the same for the recipients of subsistence benefit and they are not treated equally in different parts of Estonia. This, in turn, means that in some local governments, the support fully covers the electricity bills, while in others it does not, because the actual costs exceed the established limits. The price of electricity, however, does not differ in local governments. As of 24 July 2023, the difference between the largest and the smallest limit for reimbursable electricity is 16 times in local governments, similar to the results of the previous audit. 
• We should prepare for exceptionally high electricity prices and develop possible support schemes that would be based on the support needs of consumers and that could be implemented quickly. The high price of electricity in 2021/2022 showed that in certain situations even those consumers who are not directly classified as persons suffering from energy poverty or less privileged are sensitive to the price of electricity. However, the MEAC had not developed an opinion on what is an affordable price to the consumer or what measures should be implemented should the price exceed this limit. Therefore, the State was forced to urgently seek solutions to keep high electricity prices affordable, which ultimately resulted in the introduction of blanket subsidies for everyone. In 2021–2023, almost 190 million euros were spent from the state budget to support (domestic) consumers. 

The transformation of Estonia’s electricity supply requires the State to make timely decisions, including amendments to legislation, as well as sufficient time, human, technological and financial resources. Unfortunately, this knowledge is also borrowed from the 2012 audit “Alternatives for electricity production” of the National Audit Office. 

However, the difference compared to 2012 is that everything has to be done under even greater time pressure than before because many important decisions regarding the future of the energy sector have not been made in the intervening time. Due to its location and the security situation, Estonia must also be prepared for some part of the electricity system going out of order, in which case it must be possible to replace one element of the system with another. In such a situation, in order to avoid a deficit of production capacities, it is necessary to deal with external connections, renewable energy capacities as well as dispatchable capacities, including the control of electricity consumption and storage. 

Unfortunately, in the autumn of 2023, the National Audit Office has to admit that we as a State do not currently know how to ensure security of supply and be ready to replace lost production capacities and external connections where necessary in four years. Our situation would be better if we could prepare reasonable and realistic plans for more years in advance. 

What next? It is not easy to make choices because there are many variables, there are different options, and each of them has its pros and cons. When choosing one or another alternative for ensuring security of supply, it is important to find a balance point so that the choices are also affordable to consumers. It is nearly impossible to predict whether the decisions made now based on today’s knowledge would be considered the best possible in retrospect sometime in the future. But it should not make decision-makers seize up. Worst of all is to not make decisions at all.

Janar Holm
Auditor General

6 November 2023