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The 2021 Energy Exam

Krists Mertens, energouzņēmuma “Enefit” vadītājs

It comes as no shock that for many industries, last year's growth trends were directly affected by the spread of Covid-19 and the relentless struggle of dealing with the consequences of various restrictions. However, the global pandemic was but one of the many factors affecting the energy sector. The year would’ve certainly been eventful for the sector even without the pandemic, dripped with intrigue about how these developments will affect us all in 2021.

Last year saw a significant drop in prices, an increase in the volume of renewable energy power plants, new tariff projects for electricity and gas transmission, the struggle with electricity import from Belarus and constant quarrels over the mandatory component of procurement (OIK), and all of this accompanied by the painfully slow introduction of the National Energy and Climate Plan. The energy sector will continue to hear the echoes of the battle against Covid-19 this year as well, however, as the economy is starting to get back on its feet, energy consumption is bound to increase, too. Which means that 2021 will be a year of consequences – an exam, if you will, as the actual impact of last year's plans and developments becomes evident.

Insufficient balance of production capacity

Over the course of last year, we experienced a significant drop in energy prices thanks to renewable energy sources – water, wind and sun. The role of high-capacity renewable energy power plants is ever-increasing in the Baltic and Scandinavian region. This will continue to affect electricity prices and constant price fluctuations this year as well. For example, we can already observe a sharp drop in power prices when the wind is blowing.

At the same time, the slow progress with domestic renewable energy projects and the limited interconnection capacity mean that the Baltics are gradually becoming a region lacking efficient and competitive electricity generation capacity. The Scandinavians are developing renewable energy power plants, while we are becoming an import region where it is much more profitable to purchase energy rather than to produce it ourselves. Interconnection capacities, which are currently limited, also play an important role here. It means that cheap electricity produced by wind and hydroelectric power plants does not reach the Baltic States in the necessary amount, resulting in price differences between the Scandinavian and Baltic countries.

At the moment, we see that even Scandinavian cheap energy is not a lifeline in all situations when extreme weather conditions occur. Prices in Scandinavia are rising due to cold weather and the growing demand, and we are forced to operate our own inefficient sources of electricity production as energy demand peaks.

Creating a single Baltic market

In view of the decline in competitive energy production capacity and lack of clarity regarding electricity trade with third countries, the idea of establishing a single Baltic price area has become a relevant discussion subject. The electricity market of each of the Baltic States is in itself relatively low in activity and has various local characteristics that can lead to significant differences in prices. This could be solved by the establishment of a single wholesale market, in which market participants from all three Baltic States, both buyers and sellers, would work together. This, in turn, would result in higher liquidity and competition, reflecting objectively the market price across the region.

Currently, the main players in the Baltic electricity market have turned to national regulators with a proposal to create a single market area and an initial assessment is being carried out, and the results are expected to be available sometime later in the year. In general, it would be a logical step to develop the Baltic electricity market in a unified way to ensure price stability for customers in the future.

New tariffs with a dual effect

As of 1 January, the service provider Augstsprieguma tīkls (AST) has introduced new transmission tariffs, reducing the fee for the transmitted amount of energy while increasing the fixed price for connection capacity. However, this only affects companies connected to the transmission network and Sadales tīkls, which uses the transmission services. It may have a dual effect on entrepreneurs. This is good news for large manufacturing companies which will see lower tariffs and increased competitiveness. On the other hand, electricity producers are provided with a flat rate for the services provided by AST, which may reduce their competitiveness and increase the price of electricity in situations where it would mostly be produced in Latvian power plants.

Small and medium-sized enterprises, as well as households, will not feel the impact of these changes, at least not immediately. It should be noted that the Sadales tīkls cannot optimise these costs by reducing its connection capacity. This could lead to Sadales tīkls reviewing its tariffs to offset new costs in the future.

In the natural gas market, the GASO project introducing changes in distribution service tariffs, which envisages increasing the fixed tariff component, as most of the operator's costs are also fixed, is still being evaluated. While it is a logical step, it holds negative impact on consumers, especially those who do not use their connection capacity efficiently. Large companies can optimise capacity; however, small businesses and households may have no other choice than to pay more.

Development of ‘green’ solutions driven by the society

Last year brought a rapid increase in interest among entrepreneurs and households in environmentally friendly and efficient energy solutions such as electric cars, solar energy systems for producing energy for own consumption, energy efficiency and various smart tools for the improvement thereof. Apparently, the challenges posed to the economy by the global pandemic have been a good motivator for people to uptake smart solutions that improve the everyday life and help optimise costs.

This year, we will continue to experience the rise of microgeneration, transforming more and more consumers into producers. Energy efficiency solutions are also being sought as a logical step to reduce daily expenses, while increasing the competitiveness of companies and promoting a greener lifestyle in households, as well as enhancing the value of properties. This gives the impression that the attitude of the society is much more serious and determined than that of the state, which has developed an ambitious National Energy and Climate Plan but without a logical approach to its implementation in practice. Movement is sporadic rather than purposeful, and lacks a common strategy for uptake of green and effective solutions.

At present, a situation is emerging in which the society and companies are taking the lead in meeting the goals for environmental impact reduction and energy efficiency. Energy traders have already started developing closer relationships with their customers, offering new services which deviate in ways from the business aspect of selling electricity. Instead, the focus is shifting to supporting businesses and households in reducing consumption and mastering energy production.

The year 2021 might turn out to be an exam of sorts regarding decisions previously made as well as issues that have been left without attention. We can already see that some parts of this idiomatic exam will be passed with ease, although most of the credit goes to the students rather than the teacher. Regardless, more important are the conclusions that we will be able to draw from the result, and whether we are ready and willing to improve it.