The Riigikogu discussed the impact of the rise in the CO2 price on the state budget and economy

NordenBladet —

Today the Riigikogu discussed the impact of the rise in the CO2 price on the state budget and economy as a matter of significant national importance, initiated by the State Budget Control Select Committee.

Chairman of the State Budget Control Select Committee Urmas Reinsalu, Minister for Economy and Infrastructure Taavi Aas and Member of the Management Board of Baltic Energy Partners Marko Allikson made reports.

In his report, Reinsalu noted that the current forecasts on the formation of the electricity price had proved inaccurate and they were jeopardising all Estonian residential customers and businesses and consequently the competitiveness of our whole economy and the livelihoods of people.

Reinsalu pointed out that businesses and consumers were paying a higher electricity price in connection with a rise in the CO₂ trading price and, in reality, the money was all being accrued to the state budget. “When the burden increases for customers, this does not mean at all that the money accrued to the state budget will actually return to the consumers,” Reinsalu said. He added that the rise in the electricity price was projected to cost at least 250 million euro to Estonian consumers this year.

In Reinsalu’s words, the state needs a clear and dispassionate analysis of the impact of both emissions trading and climate policy, and of the cost of these for Estonian consumers. “In the conditions of the drastically increased energy deficit we need a clear and dispassionate analysis of what our national electricity supply security will be like,” Reinsalu said. He recalled that, at the beginning of the coronavirus crisis, when countries had closed their borders, the countries had each stood for their own residents. “There is no doubt at all about the stock exchange conditions either. If a soaring deficit arises, countries will begin to make dispassionate decisions, choosing to ensure supply security for their own population, for the consumers in their country.”

Reinsalu also pointed out that, besides the supply security of electricity generation, a clear position was needed on what Europe’s current emissions trading dynamics meant in terms of electricity consumers.

Reinsalu pointed out the options for the Government to operate in the regulative market. He mentioned the renewable energy charge paid by consumers. “We have the opportunity to fully cancel the renewable energy charge and to compensate it to renewable energy producers with a corresponding state budget appropriation, like many European countries are doing,” Reinsalu suggested.

He noted secondly that it was necessary to review the ensuring of energy supply security and the decision to close down oil shale energy in Estonia. “We must also urgently increase the payments from KredEx, and simplify the support mechanisms to increase the energy efficiency of the housing stock, including private houses, and to promote local energy generation,” Reinsalu said.

In Reinsalu’s opinion, the electricity market is a politically distorted market but, in his words, the state must use mechanisms to prevent the price from skyrocketing for the consumer. In his words, the money the state accrues from the value added tax and the CO₂ units must be used to develop an automated stabiliser as several European countries have started to do without delay.

Minister Aas explained the reasons for the rise in the electricity price. He noted that the price was formed by the fossil fuel power stations across Europe. Their price depends on the CO₂ quota and the world market price of fuel.

The minister explained that this summer had been exceptionally hot not only in Estonia but in Scandinavia as well. The low rainfall meant that the amount of the water collected behind the dam of the hydroelectric power station in Norway was smaller than usual. Therefore, in the minister’s words, electricity power stations using fossil fuels need to be kept in operation. At the same time, the economy is undergoing a rapid recovery not only here in Europe but also in Asia and North America. The recovery has created an exceptionally high energy demand, and this in turn has given a push to the world market prices of fossil energy carriers.

Aas said that the Government did not have a lever to increase rainfall in Norway or to generate wind that would increase the production in European wind farms. Nor is it in the Government’s power to meaningfully influence the price of fossil fuels that is formed in the global market. “In the formation of the price of electricity, the CO₂ emissions trading system and the measures to bring renewable energy to the market sooner are the only components dependent on the European Union energy and climate policy,” Aas said. He added that the Government had taken steps in both directions, but neither of them was a quick solution or a magic wand. However, they will help avoid such problems in the future.

Aas emphasised that the price pressure was caused by the high price of fuel, in particular the price of natural gas. “Once the price of natural gas begins to fall or the amount of rainfall normalises to what it has been on the average over the last ten years, the market price for electricity will fall as well,” Aas said. In his words, renewable energy is the long-term solution to avoid a price-shock, and this transition is being attended to on a daily basis.

Aas recalled that an amendment to the Electricity Market Act, Bill 156 SE, was in the legislative process of the Riigikogu that would create wider opportunities to replace the expensive fossil fuels with CO₂-free waste wood in Narva power stations. Likewise, at the beginning of next year, the spatial plan for the Estonian maritime areas will enter its final stage and it will be possible to begin to launch the development of wind farms in the sea.

In Aas’s words, the previous Estonian Government has been proven to have made the right decision to maintain and to have available at any time at least 1000 MW of managed production capacity in Estonia. He admitted that there were periods when that capacity was not needed, but the current year was showing clearly that there were periods when we could not manage with just renewable power plants dependent on the weather.

In his report, entrepreneur Allikson spoke of the market price of electricity. Allikson explained how the electricity markets functioned. He pointed out that the price on the stock exchange was determined by the marginal producer, that is, the last electric power plant that made it to the market, on the basis of its variable costs. About 20 per cent of the electricity production in Europe is based on natural gas. “When the prices rise to around 100–160 euro in the spot market, then this is the level with which it is possible to produce electricity in a gas power station today,” Allikson said. In his words, this contains the CO₂ cost, this contains the cost of fuel, and this contains the operating costs. If the price skyrockets, gas plants are the ones that determine the price.

He also pointed out that, in the Baltic states, there were particular additional reasons that had influenced the upward movement of the price. First he mentioned that supplies on the Russian-Belarusian borders would be reduced from November 2021 because Lithuania had not wished to buy nuclear energy from Astravyets. Second, our price is also affected by the fact that our connections with Latvia are larger than before. “In fact, Latvia and Lithuania have always been in a slightly higher price region and therefore the prices are converging. We are no longer in the same price range as Finland; our prices are slightly higher,” Allikson said. He admitted that Finland had been doing the right things looking into the future. “Next year, they will be launching a new nuclear power station, and significant new wind capacities will be added. So Finland will probably remain a region with a lower price also in the future.”

In his report, Allikson also touched on the longer-term projection. “Everything that rises in terms of price will probably fall eventually,” he said. He explained that, in the long-term perspective, it was presumed that more power links would be opened in the Nordic countries, prices would converge between different regions and, in the long term, the price level would be expected to remain low.

Allison noted that Estonia was not producing enough electricity – consumption was exceeding 1000 MW, while production remained at around above 900 MW. “This means that we have a shortage of electricity and we always need to buy electricity,” he stated. “If the electricity we buy has a higher price, then our price is higher, regardless of the price at which Narva Power Plants wish to sell.”

In Allikson’s words, it is impossible to separate the CO₂ trading system and the electricity market. “It cannot be said that we kind of are in the CO₂ market and remain outside the electricity market, or vice versa,” he pointed out the inevitability. He also thinks that it is not reasonable to change the current subsidies to renewable energy. “Because while Estonia needs renewable energy investments, this will not make Estonia more attractive to investors, but rather less attractive. After all, more investments are needed and not less investments,” he explained.

Allikson pointed out what the Riigikogu could do to influence the price of electricity. In his words, politicians can influence the administrative component of the price of electricity. “You can use the higher CO₂ auction revenues to compensate either the components of the electricity bill or a price increase, and the excise duty and value added tax can always be lowered,” he said.

In other aspects, the price of electricity is affected by weather. In Allikson’s words, a reduction in gas consumption might help reduce gas prices. In a longer-term perspective, however, in his words, new connections such as Estlink 3 will be needed. He also mentioned the speeding up of the renewable energy development, the development of storage technologies, energy efficiency, the flexibility of consumption, and the ascertaining of the possibilities of nuclear energy and hydrogen.

During the debate, Helir-Valdor Seeder (Isamaa), Dmitri Dmitrijev (Centre Party), Jevgeni Ossinovski (Social Democratic Party), Kristen Michal (Reform Party) and Henn Põlluaas (Estonian Conservative People’s Party) took the floor on behalf of their factions. Jürgen Ligi (Reform Party), Martin Helme (Estonian Conservative People’s Party), Peeter Ernits (Estonian Conservative People’s Party), Mart Helme (Estonian Conservative People’s Party and Tarmo Kruusimäe (Isamaa) also took the floor.

Source: Parliament of Estonia