Summary of elering’s 2013 security of supply report

Elering’s 2013 Security of Supply Report Summary in English

Elering’s strategic outlook: combination of interconnections and generation facilities will ensure a secure supply of electricity for the consumer at the best price Estonia is part of Europe’s internal energy market. We are located at the crossroads of European electricity systems, and future opportunities for the local energy industry lie in the networking of power grids. The European Union’s vision for its energy strategy – a single grid, a single market – works to the benefit of the Estonian energy consumer. The electricity supply for a consumer in Valga can be secured from power plants located in both Riga and Narva. From an electricity supply standpoint, just as with many other goods, there is no longer any significance in the borders between member states of the European Union. This is exactly how a single internal market is supposed to work. Bottlenecks in power systems may often be located within countries, not between them. But even more so inside people’s heads. There is a habit of thinking about the security of energy supply on a country basis. Is a power plant in Latvia any worse in terms of supplying electricity for an Estonian consumer than a power plant in Estonia? No, not as long as we trust the Latvians. A single country based approach to security of supply is not compatible with

regional solutions for the energy industry. This mindset also holds back the execution of investments that are necessary for the creation of a single European internal market, and whose effects extend across borders: the costs must be borne not only by the countries physically connected by the link, but by all beneficiaries. For example, the EstLink 2 investment should be financed not only by Estonian and Finnish consumers, but also

by Latvian and Lithuanian ones, who will also benefit from it.

The approach ensuring a secure electricity supply for the Estonian consumer must shift from a country based to a regional approach. This report addresses the security of consumer supply through the combined effect of Estonia’s domestic production capacities, and its interconnections. Over the next 10 years, the installed capacity for electricity generation within Estonia, as well as its transmission system, will be sufficient to ensure that consumers will have power both during peak consumption and in cases of extreme weather conditions.

Summary of Elering’s 2013 Security of Supply Report

On June 3rd of this year, Latvia will become the last country in the Nordic-Baltic region to join the Nord Pool Spot power exchange, which will ensure efficient joint market management across all countries in the region. The single market and the single grid are expected to reduce the required investments into electricity production by 25 percent compared to a situation where every country would need to cover the electricity demand with domestic electricity production.

The smaller the system is, the less efficient are the investments in electricity production to cover only the domestic electricity demand. Over the last four years, the consumption load in the Estonian electrical system has exceeded 1200 megawatts only for an average of 13 percent of all hours in a year. Some 600 MW of installed production capacity, with an estimated construction cost of half a billion euros or more, would be used for 1100 out of 8760 hours in a year, at most. Thus this is an important choice for Estonia, and one that carries a major price tag. Shall we continue with the strategy that an integrated market and interconnections are nice to have, but the entire production capacity must be available in our own back yard, just in case? This approach would require the consumer to cover around half a billion euros in expenditures on top of market-based investments. All

while the electricity supply for the Valga consumer is much more easily secured from a power plant in Latvia, since the main bottleneck within the Estonian-Latvian power grid actually lies between Narva and Tartu.

Looking at production and interconnection capacities as a whole, Elering considers the requirement to maintain sufficient generation facilities to cover 110 percent of peak load to be burdensome for the consumer, as well as technologically unnecessary.

Considering the external interconnections currently under construction and those being planned, it is enough for the Baltic states as a whole to maintain a production capacity of 80 percent of the region’s peak consumption. The most important investment from the viewpoint of regional security of supply is the construction of a third interconnection between Estonia and Latvia. This would enable the unification of production and consumption in the Baltic states into a single whole with small transmission limits. This would also provide access to export and import opportunities via the external interconnections of the other Baltic states. While security of supply does not necessarily require that local production capacity must completely cover demand, this does not mean that Estonia and the Baltic states cannot have power plants that exceed local consumption many times over. As long as it is market-based, power production can

Summary of Elering’s 2013 Security of Supply Report

be a pillar of the local export sector.

The opportunities are great – there is access to the Russian, Nordic, and in the near future also the Central European electricity markets. Long-term market integration is also in the interest of local producers.

According to the current assessments, achieving generation capacity levels that would cover 80 percent of peak consumption in the Baltics by 2030 will require the construction of additional power plants of 800 megawatts. Nobody knows what kind of power plants these will be, nor who will build them. With the current uncertainity in the Europe’s energy economy and its low electricity prices, nobody in Europe dares to invest in the required new production facilities on a market basis. In order to attract the kind of investment into power plants or consumption management that is necessary to keep the electrical system in operation, the creation of a capacity market is being considered in addition to the energy market (the current Nord Pool Spot model). The aim of the capacity market would be to ensure the existence of a sufficient amount of reliable production and consumption capacity in the electrical system. It is important to price all capacity, both on the production side and on the consumption side, on a unified basis. This would cover the fuels and generation methods used, both in new and existing power plants, as well as various

consumption management measures.

The European Commission has promised to release the first guidelines for this process in July of this year.

The “big idea” of the Estonian energy sector could largely be based on the use of ICT in the power industry.

Such products would be universal and exportable to other systems and countries. This is a good opportunity to make use of Estonia’s ICT brand, which is trusted in the region. The responsibility for ICT cooperation among regional transmission system operators generally tends to somehow naturally land in Estonia’s lap. This covers everything from constructing the viability modeling frameworks, to consumption management solutions.

The latest solution to point the way is the central data exchange platform, the Data Warehouse, which enables the provision of consumers’ metering data to sellers. The conservative electrical energy sector is currently undergoing a paradigm shift, where ICT shall play a central role. This is an area worth betting on. Elering has initiated a significant number of research projects in this area in cooperation with universities.

The creation of a joint Nordic-Baltic electricity market along with the necessary interconnections has so far been the preeminent strategic goal of Estonia’s energy economy, ensuring a long-term security of supply for consumers at the best price. The

Summary of Elering’s 2013 Security of Supply Report

next goal is the de-synchronization of the electrical systems of the Baltic states from the Russia’s unified power system (IPS/UPS) and working on synchronization with mainland Europe. This is the grand finale of the geopolitical U-turn of Estonia’s energy economy – out with the east, in with the west. Integration with Europe’s electrical systems will not only help ensuring the energy security, but also the development of energy commerce. The future open market conditions will allow the power traders to offer consumers the best electricity price, formed within a market that encompasses all of Europe.

Taavi Veskimägi Chairman of the Board of Elering

Summary of Elering’s 2013 Security of Supply Report

Key points of the report Electricity Consumption • A 70% rise in global demand for electricity is forecast by 2035, compared to 2010 levels – an average increase of 2.2% per year.

• According to the main scenario of Elering’s projections, electricity consumption in Estonia will grow by an average of 2.4% per year, reaching 12.5 TWh by 2030.

• Peak load will grow slower than consumption, reaching 1800 MW by 2030.

Transmission System and Electricity Production • Over the next 10 years, both Estonia’s power plants and its transmission system will be sufficient to ensure that consumers are supplied with electricity both during peak hours and in extreme weather events.

• Joining the Continental European synchronous area is the most important strategic goal in the continued integration of Estonia’s electricity system with that of Europe, promoting the development of energy commerce. The future open market conditions allow power traders to offer consumers the best electricity price, formed within a market that encompasses all of Europe.

• The third electrical interconnec-

tion between Estonia and Latvia is the energy economy’s most important investment in the next decade, for ensuring a secure, reasonably priced supply of electricity for Estonia’s consumers.

• Estonia’s current level of security of supply for local fuels, required for electricity generation is good – we can use oil shale, biomass, peat, and wind power resources.

These are capable of ensuring a fuel supply for local electricity generation methods.

• The creation of an efficient, open and competitive natural gas market will allow gas-based electricity production to compete on an equal basis with generation methods that use other fuels.

• To improve the level of the electricity supply for consumers, Elering has developed the “TreeFree Overhead Lines” program, which encompasses a number of measures that reduce equipment failures caused by trees falling onto power lines, bird activity, and the aging of the wires.

Electricity Market • The launch of the Latvian price area for electricity trading in the Nord Pool Spot on June 3rd of this year will complete the merging of the Nordic and Baltic states into a single market area.

• Europe is currently debating

Summary of Elering’s 2013 Security of Supply Report

over the further development of the single market model, which would ensure both the fulfillment of renewable energy goals and a high security of supply without subsidies. One of the things being considered is the launch of a capacity market, which is an opportunity to ensure the constant availability of the necessary power plants to maintain the electrical balance.

• The stable functioning of a regional electricity market requires the creation of a transparent trade system on the border with third countries. The Baltic transmission system operators have proposed the creation of a single virtual price area on the border between Finland/Baltics and third countries.

deficiency of 800 MW from that level. At the same time, there is reason to believe that such additional facilities will be constructed, either on a market basis or using subsidies.

Estonia’s Security of Electricity Supply up to 2030 • The security of the supply of electricity for the Estonian consumer has been assured until 2030 by combining existing power plants and available cross-border transmission capacities.

• The security of supply in the Baltics requires the existence of sufficient domestic generation capacity to cover at least 80% (or 5150 MW) of peak load in 2030.

According to current estimates, there is a generating capacity Summary of Elering’s 2013 Security of Supply Report