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The National Audit Office: The price of electricity forms in the market based on marginal costs

EWPA's blog - eteap October 3, 2012

Elektritootmisallikate kasutamise järjekord Põhjamaade elektribörsil. Allikas: Riigikontroll, NordPoolThe review of the National Audit Office about the options for electricity production came out the same week as the topic of increasing electricity prices in the opening electricity market captured Estonia. These issues are however quite related to each other because the first producers who get to sell their electricity in an open market are the ones who have the lowest marginal costs. But in Estonia 85% of the electricity is still produced from oil shale whose marginal costs will never be able to compete with hydro and wind power where there are no fuel, waste and pollution costs. Therefore the report found that construction of new oil shale power plants with state support does not ensure Estonia’s security of supply nor an affordable electricity price for consumers in the open energy market.

Usually the first ones who have access to the power market are electricity producers who use hydro and wind power that has no fuel consumption nor the need to pay pollution charges and purchase CO2 allowances. When the dispatched hydro and wind power is not sufficient to cover the demand the next bid will be taken as long as the demand will be covered. Power companies, whose marginal costs were higher than the equilibrium point of the stock price, are not able to sell their electricity in this particular trading hour, writes the National Audit Office’s report.

Following the complete opening of the electricity market the market price will form in competition with other generators and therefore the current reason for the direct or indirect support of oil shale electricity generation will cease to exist. According to the National Audit Office, the state has annually supported the generation of oil shale with, on average, 148 million euros, while supported the generation of electricity from renewable sources, on average, 34 million euros per annum.

Tarmo Olgo, the Director of Audit of the Performance Audit Department in the National Audit Office said that Estonia is no longer an isolated island and the market capacity is available to us if we have a sufficient electricity connection with other nations in the region. He also added that it is reasonable to create in Estonia such production capacities whose construction and maintenance are economically profitable and do not put excessive pressure on the consumer’s wallet and the environment and ensure competitiveness in the open market.

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