1. Executive summary
Overview
This is the first In-depth Review of Estonia’s energy policies since it became the 29th member of the International Energy Agency (IEA) on 9 May 2014. Estonia’s energy supply is unique among IEA member countries, with its strong reliance on domestically produced oil shale, an energy-rich sedimentary rock that can be either burned for heat and power generation or used for producing liquid fuels. This provides Estonia with a strong degree of energy self-sufficiency, but it also results in the country having the highest carbon intensity of all IEA countries also due to Estonia’s position as a net electricity exporter. In 2018, oil shale accounted for 72% of Estonia’s total domestic energy production, 73% of total primary energy supply and 76% of electricity generation, which is a significant drop over the past 10 years.
Estonia has already achieved its mandatory emissions reduction and renewable energy targets for 2020. However, total final energy consumption started increasing again in 2016 and there is a possibility that Estonia might miss its 2020 efficiency target. In most IEA countries, energy consumption is decoupled from economic growth and population, but this is not yet the case for final energy consumption in Estonia.
The IEA In-depth Review (IDR) comes at a very interesting time for Estonia. Looking to 2030, for the first time Estonia is required to reduce its emissions instead of merely containing their growth. Domestic discussion about how to reach the 2030 targets has begun but no specific policy measures have been agreed upon yet.
Energy sector transformation
The 2017 “General Principles of Climate Policy until 2050” outline the vision of the government for transforming Estonia into a low-carbon economy and society. The 2017
National Development Plan of the Energy Sector until 2030 sets out the government’s policy objectives and framework to 2030 and its ambition to 2050. It commits Estonia to reduce greenhouse gas emissions (GHG) in the energy sector by at least 70% by 2030 and by over 80% by 2050, compared to the 1990 level, while maintaining final energy consumption in 2030 at the same level as in 2010 and increasing the share of renewable energy in final consumption to 50%. Reaching these targets will require determined and timely action to decarbonise the electricity and transport sectors.
Estonia is on the brink of a major energy transition that will see a substantial change in the role of oil shale in the future energy mix, moving towards extracting a higher value of oil shale resources. The future of the Estonian oil shale industry will largely depend on the cost of emitting CO2 in the power sector that is set to increase strongly in the period
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1. EXECUTIVE SUMMARY
after 2020. This will make liquefaction into shale oil more competitive than direct use for electricity generation. Balancing social, environmental, economic and energy security considerations will guide the gradual transformation of the Estonian oil shale industry in the coming decades.
Electricity production from oil shale is the most CO2-intensive among all combustion technologies, which is why Estonia’s power and heat production has the second-highest CO2 intensity of all IEA countries after Australia. The liquefaction of oil shale has a significantly smaller environmental footprint than electricity production as it emits less CO2 and uses almost double the energy content of the resource compared to electricity production. In addition, retort gas is a high-value by-product of the liquefaction of oil shale, creating additional value to the energy sector, increasing the efficiency of the primary resource use, and further improving the economics for liquefaction of oil shale.
Looking forward to 2030, Estonia has established goals for renewable energy shares of up to 50% in both gross final energy consumption and electricity generation, and renewable energy shares of 80% in heat production and 14% in transport. These goals appear to be attainable, but require the government to further develop strategic plans with clearly defined deployment pathways that address the challenges of an accelerated renewable energy deployment.
Biomass from domestic forestry continues to be the main source of renewable energy in Estonia, covering almost all renewable heat production. Biomass is also co-fired to produce electricity in combined heat and power plants. The anticipated growth of the biomass contribution raises concerns from some stakeholders and an environmental perspective, although in the last decade the annual use of forest resources has remained below the required regrowth of the forest resources. These concerns warrant an analysis to confirm what level of biomass supply is sustainable and clearly establish the role that biomass can play in least-cost renewable energy deployment.
Significant administrative barriers for wind power deployment have emerged since 2015. Wind power development is now in conflict with national defence concerns and environmental protection rules have started to constrain permitting of new projects. Wind power is likely the lowest cost technology for large-scale renewable energy projects in Estonia and a strong and sustained deployment of wind power projects could be necessary to achieve the 2030 targets. As such, there is need to quickly resolve the barriers to wind power deployment in a manner that clearly addresses all national security and environmental concerns.
As in most IEA countries, Estonia is struggling to increase the share of renewables in transport, which in 2017 remained essentially unchanged since the last IDR at around 0.5%. The government is addressing these issues with biofuel blending obligations and the promotion of indigenous production of biomethane as cost-effective means to increase the share of renewables in the transport sector. The government is positive that it will meet the 2020 target of 10% and reach a 14% share in 2030, as the share of renewables had already increased to 3.7% in 2018 as a result of the biofuel blending mandate.
However, these measures may not be enough to reach the targets and the government should consider increasing the electrification of transport as a complementary strategy. Until 2015, the government provided support to promote electric vehicles and investments in charging infrastructures, which now cover all of Estonia. However, since
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late 2015, the government has shifted its priorities and is now subsidising the introduction of biomethane instead.
Estonia still has a good chance to reach its 2020 target to limit total final consumption to the 2010 level despite a resurge of consumption since 2016. However, the 2030 energy efficiency targets will be harder to reach without further energy efficiency measures and funding. This is especially important in light of the future decrease of CO2 allowances in the power sector, the revenues of which are used for the green investment schemes.
The residential sector is the single largest energy-consuming sector in Estonia. Although the energy efficiency of buildings has improved in recent decades, the building stock is nevertheless old and inefficient. Renovating the housing stock can reduce heating demand of buildings by up to 50%, but complex renovation procedures are a barrier for energy efficiency improvements in the residential sector. Estonia is a small market and the traditional energy service company (ESCO) business model might not be sustainable on its own. However, with adequate support from the government, there is a large scope to make the ESCO concept attractive. A more targeted offer by ESCOs could help unlock the significant potential for energy savings throughout the economy and could also offer additional financing possibilities.
The vast majority of Estonia’s population is connected to a district heating (DH) system and DH accounts for one-third of total energy consumption in the residential and commercial sectors. At around 50%, biomass is the largest energy source for DH production. The DH systems are in need of substantial rehabilitations to reduce heat losses in transmission and in the boilers. However, the current price regulation requires that any efficiency savings be directly passed on to consumers. This limits the incentive for DH companies to invest in efficiency measures. Introducing a mechanism by which the potential savings of such efficiency measures could be shared between consumers and producers could lead to more energy efficiency investments.
Taxation
Estonia’s energy tax system is not designed to take into account the negative externalities of energy production and consumption. Excise duties are not linked to carbon content or emissions of particles, but are the result of political compromises. A flat rate – regardless of the source of energy – taxes electricity output. Estonia does not have a carbon tax on transport fuels and does not plan to introduce one in the near future. Similarly, there is also no vehicle registration tax, or any other tax based on carbon emissions of vehicles. The government should consider increasing the effective cost of CO2 emissions across the board, including in sectors where CO2 emissions are currently not priced, and regularly review the actual energy and emissions savings obtained by granting tax exemptions for energy efficiency investments.
Energy market reform
Since the last IDR, Estonia has made notable progress in opening up its electricity and gas markets to increase competition. The Estonian electricity retail market has been fully open to competition since 2013 and 16 electricity retailers were active in 2017. The stateowned incumbent supplier still has by far the largest market share at nearly 60%, down
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by over 20% since 2011. Switching rates are relatively low, typically around 3-5% per year, as cost savings from switching suppliers are not high enough to incentivise consumers, because retail market margins are among the lowest in Europe. A milestone achievement in the electricity sector is the installation of 100% smart metres completed on 1 January 2017. More accurate metre readings have resulted in significant improvement of network management, with cost savings of around 30% that are passed on to consumers through reduced network tariffs.
The natural gas market was fully liberalised in 2007, and at the time of the last IDR in 2013, a single vertically integrated company still dominated Estonia’s natural gas market. The 2012 amendment of the Natural Gas Act initiated the complete unbundling of the natural gas market, which was achieved in 2016. Ownership of the transmission system was transferred to Elering, the publicly owned transmission system operator. In 2017, 6 wholesalers and 27 retailers were operating in Estonia and the market share of the former incumbent is falling quickly, underlining the enhanced competitiveness of the natural gas sector.
Estonia is committed to an open market economy and is aware of the innovative strength of the private sector. Yet, government-owned companies still occupy strategic positions throughout the energy sector. The government could leverage this to actively guide the energy sector along its transition to a low-carbon economy in line with the targets set in the low-carbon strategy and the national development plan.
Energy security and regional integration
Estonia has habitually equated energy security with energy independence. While the concept of energy independency may have had its merit in the initial years after regaining independence in 1991, Estonia is now firmly established in the European energy markets. Instead of pursuing energy independence, together with its European Union neighbours, Estonia should prioritise the identification of market-based solutions to diversify supply and to enhance the security of supply.
Estonia has taken significant steps to integrate its electricity network with the Nordic region and Eastern Europe. The completion of the EstLink 2 interconnection with Finland in 2014 tripled the electricity transmission capacity between the Baltic and Nordic countries. The operationalisation of a third transmission line with Latvia in 2020 will further strengthen electricity interconnection. This allows Estonia to trade electricity and serve as a transit country for electricity. In 2017, Estonia’s interconnection level was 63%, substantially higher than the 10% target for all European Union countries. Estonia seeks to further increase its security of electricity supply by desynchronising from the Russian integrated electricity system, and synchronising with the continental Europe grid, by 2025.
At the time of the last IDR, the gas market of Estonia and its two Baltic neighbours was isolated from the European market and relied 100% on Russian gas. The commissioning of a liquefied natural gas terminal in Lithuania in late 2014 has changed the situation. Ongoing interconnection projects to develop a regional gas market will make Estonia an integral part of a gas transit corridor. The two most important projects are the Balticconnector between Estonia and Finland, due for commissioning in 2020, and the gas interconnection between Poland and Lithuania, due for completion in 2021, which
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