Summary of Elering's 2014 Security of Supply Report

ELERING’S 2014 SECURITY OF SUPPLY REPORT SUMMARY IN ENGLISH

Elering’s Security of Supply Report 2014

Foreword by Taavi Veskimägi Chairman of the Board

Integration of Energy Networks is the Key to Security of Supply Rapid development of energy networks in Europe is more relevant than ever in the current geopolitical situation if we want to reduce dependence of EU member states on gas, oil, uranium, electricity etc. supplied by third countries. Development of networks is a prerequisite for completing the EU internal energy market.

A common market will create the conditions for energy efficiency and the ability to speak along with third countries.

tion capacity for Estonian peak consumption after 2024 will add approximately six euros to the price of every consumed megawatt-hour for the consumers. At the same time, even in the most complicated emergency situations occurring in the power system, only 1000 MW available capacity in Estonia is sufficient to ensure security of supply for the consumers through the combination of domestic production and transmission capacities.

The key of future security of supply of energy for Estonian consumers is the strong integration of Estonia with the European electricity network and market. By itself, the Estonian electricity system is too small to ensure sustainable electricity supply to consumers for a reasonable price – a reasonable price for economic development from the perspective of investments as well as the price of energy.

In order to ensure security of supply through cross-border interconnections, Elering is completing the construction of an emergency power plant with 250 MW capacity in Kiisa. In addition to the capacities provided at Kiisa we have contracts covering 400 MW of capacity with other synchronous area system administrators, which enable replacing the largest network element, EstLink 2, in case of a failure at any time even in a situation where the connection is fully utilized for importing electricity from Finland to Estonia.

In cooperation with the Danish research company Ea Energy Analyses and Tallinn University of Technology, Elering conducted an analysis of the development scenarios of electricity production within the framework of preparing a long-term development plan for the Estonian energy sector (hereinafter ENMAK). The analysis shows that maintaining the availability of 110% local producElering’s Security of Supply Report 2014

The knowledge that from the point of view of security of supply for consumers, the interconnections are as reliable as power plants in Estonia will not mean that Estonia should be a country importing electricity. On the contrary, from the

view of broader economic development, it would be ideal if electricity export would be a major driving force of local economic development. However, this cannot happen on the basis of subsidies or at the expense of the environment.

The constructed production capacities must be competitive in the common internal energy market emerging in the European Union.

Based on the completed analysis of production scenarios, we can predict the decrease of the competitive ability of oil shale electricity in the longer term. This is mainly due to the potentially rising CO2 prices and broader use of oil shale in shale oil production. CO2 price is almost directly transferred to the marginal costs of an oil shale plant, as approximately one ton of CO2 is emitted for the production of one megawatt-hour of electricity. Therefore, it is extremely important whether CO2 costs five or 20 euros per ton. The development of the oil industry is even more important than the CO2 price. According to the most optimistic scenarios of shale oil producers, the total annual excavated amount of oil shale could be used in oil production as early as in 2025. However, this will open the possibility for production of electricity from retort gas, a side product of oil

production, in turn creating possibilities for electricity export in the future. Retort gas from oil production could be used to produce six terawatt-hours of electricity per year with very low marginal cost; the competitive ability of such plants on the integrated internal market of EU should thus be high.

Modest Increase of Consumption The forecast of increase of consumption has been significantly changed in this year’s security of supply report compared to the earlier versions. A sectorbased long-term electricity consumption analysis was conducted during the preparation of ENMAK. Based on this analysis, we corrected the expected growth of electricity consumption from the former 2.4 per cent to 1.2 per cent per year. The long-term forecast of Estonian economic growth is slightly more restrained and economic structure is constantly approaching well-developed economies with its intensity of energy consumption. No high growth is expected in the field of use of electricity and other energy sources in the coming decades.

For Estonia as a whole, the increase of energy consumption is largely dependent on individual investments and consumers. For example, the realisation of the Data Valley server park reported in Elering’s Security of Supply Report 2014

the media or any other project of similar scale would turn all previous forecasts upside down.

Development Plan of Estonian Electricity Network 2030 Accounting for the modest growth of consumption, Estonian electricity network is sufficient to satisfy the demand.

However, regional networks constructed in 1970s/1980s were built with the assumption that a large amount of electricity was consumed in rural regions, centres of former collective farms. In reality, the population is migrating to Tallinn, Tartu, Pärnu, and industry has concentrated in Ida-Viru County. While transmission capacity is sufficient for the country as a whole, due to the economic-geographic changes, we are facing the fact that the network is located in one place, the consumers of electricity in another. In rural regions, the existing capacity of the electricity network is no longer necessary for supplying the consumers, while the network in Tallinn and its close surroundings needs upgrading.

The electricity network must be optimised in cooperation with distribution networks to ensure as low total construction and maintenance costs of electricity system as possible for the society. Metaphorically speaking, in some places the main electricity network should be “rolled up” and expanded in other places. For this purpose, we are drafting the development plan of Estonian electricity network 2030 in cooperation with distribution networks; the main conclusions of this plan are also presented in this report.

Estonian-Finnish Electricity Market After the commissioning of the EstLink 2 connection in the beginning of this year, Elering’s Security of Supply Report 2014

Estonia has practically become a part of the Finnish electricity market. The new connection provides the possibility to our consumers to benefit from the potentially better electricity prices of Nordic countries virtually without limitations, and our electricity producers have an opportunity to sell the produced electricity in this direction. This assumption was one of the bases for the construction of EstLink 2 and has been proved in the first six months of operation of the connection. Thanks to EstLink 2, the market-based electricity price in Estonia has been lower than it would have been in a closed market situation.

This year, we have been able to consume electricity for the price of 30–35 euros for most of the time. At the current price level of CO2, the adjusted electricity price would have probably been about 40 euros. EstLink 2 is the best example of the positive impact of connections and larger market with more versatile production capabilities using various fuels and production methods on the operation of electricity market as well as the security of supply of consumers.

Synchronisation with Continental Europe Last year, a 1000-page report on scenarios for disconnecting the Baltic countries from the Russian network was commissioned by the system administrators of the three Baltic countries. The main conclusion of the report is that synchronous operation with the frequency area of Continental Europe is technically feasible. At the beginning of the year, we introduced the report to the Government of the Republic and the government set the objective to disconnect the electricity

network, but using evolutionary, not revolutionary means: in other words, to grow apart from the Russian network through the realisation of new investments.

As we all know, the situation has significantly changed compared to the beginning of the year. A clear and more specific approach should be adopted. We are able to work on such level that on 1 January 2025, we will metaphorically be ready to unplug ourselves from Russia.

This requires first and foremost the construction of new power lines. In case of Estonia, we speak of a Tallinn–Riga line or the establishment of a third direct connection between Estonia and Latvia.

The existing connections with Latvia through Valga need renovation. The current line with Latvia which runs partially through Russia should be reconstructed into a direct connection. In order to separate the Estonian and Russian electricity networks, it is also planned to construct a 500 MW converter plant in Narva which will separate the synchronous areas but will enable to continue cross-border power transfer.

For the connection of the Baltic countries with the European synchronous area, it is also necessary to update the electricity network in the territory of Poland in addition to the construction of connection lines between Poland and Lithuania, and to establish converter plants on the borders with Russia and Belarus.

Interaction of Production and Connections Similarly to the previous year, this year’s security of supply report emphasises that the location of power plants in Estonia is not just an issue of electricity supply to the consumers but a broader challenge to the economic development of Estonia. In case of sufficient connections, a power plant located in Olkiluoto (Finland) will ensure as secure electricity supply to the consumers in Tallinn as a plant in Narva. In this sense, this year’s security of supply report carries the same message as last year’s: the key to security of supply of electricity supporting economic Estonia’s economic development is not electricity production in Estonia based 100% on local primary fuel, but sufficient cross-border interconnections and a sufficient local electricity network. A direct benefit of strong interconnections for the consumers is the fact that these allow to refrain from building some power stations that would not be feasible for the small electricity market but are necessary to ensure security of supply. Security of supply of the Baltic countries is ensured if in 2030, the available production capacities cover 80 per cent of the expected peak consumption.

Elering’s Security of Supply Report 2014

Key Points of the Report Electricity Consumption

Electricity Market

• The energy consumption projection was renewed due to a new development plan for energy economy based on developments in the economic sector.

• In 2013, the prices of NPS Estonia and NPS Finland equalled in the dayahead market for 69% of the time.

With EstLink 2 becoming operational, the commercial transmission capacity between Estonia and Finland grew by 860 MW, Finland to Estonia, and 1000 MW, Estonia to Finland. As a result, Estonian and Finnish prices equalled for 89% of the hours during Q1.

• According to the baseline scenario of Elering’s renewed prognosis, electricity consumption in Estonia will grow by 1.2% per annum on average, reaching 10 TWh by 2030.

• Peak load will grow slower than consumption, reaching 1683 MW by 2030.

Electricity Production and Transmission System • Until 2023, the Estonian security of supply is most likely ensured by local generation capacities.

• Until 2030, the Estonian security of supply is ensured by the combination of local generation capacity and interconnection capacities.

• According to the scenario analyses of the Estonian Long-Term National Development Plan for the Energy Sector (ENMAK), the Baltics have in the 2030 perspective additional potential of building at least 800 MW of generation capacity.

• The development of Germany’s consumption adequacy is important for the security of supply of the Baltic Sea region.

Elering’s Security of Supply Report 2014

• In 2013, the average price in the NPS Estonia price area was 43.14 EUR/MWh being 13% higher than the average NPS system price (38.1 EUR/MWh): • Since June 3rd, 2013, the NPS ELE area was closed and the NPS Latvian bidding area was opened. All transmission capacity between Estonia and Latvia is given by the TSOs Elering and AST to NPS for distribution through means of implicit auctions. In 2013, the NPS Estonian and NPS ELE/ Latvian prices equalled for 67% of the hours in the day-ahead market.

• In total, in 2013 electricity generation in Estonia exceeded domestic consumption by 45%, resulting in 3.6 TWh net exports. • Generation from renewables (1.15 TWh) made up 12.6 % of total power generation in Estonia, being 2.4 percentage points less than in 2012.

Desynchronisation Whereas previously the target for desynchronising the Baltic States from the UPS/IPS area was projected for 2025+, in the light of recent geopolitical events, synchronising the Baltics with the synchronous grid of Continental Europe is estimated to be concluded by 2025.

Elering’s Security of Supply Report 2014