9. ENERGY EFFICIENCY
The green investment schemes that are funded from the sale of CO2 allowances are the largest financing source for energy efficiency improvements (MEAC, 2017b). EU structural funds and government funding complement the funding sources of SA KredEx. The State Budget Strategy for the period 2013-30 defines the priority measures to be funded through the green investment schemes. One of these measures is the promotion of energy efficiency and the use of renewable energy in public sector buildings. Within this measure, 54% of the allocated CO2 auction revenues is provided to local governments and 46% to the central government (MEAC, 2017b). The investments primarily target the building sector, renovation of the district heating systems and of street lighting, the creation of co-generation plants, and the development of public transport. Estonia also benefits from the EU cohesion policy funds to support crosscutting energy efficiency measures.
District heating
Estonia has a large district heating (DH) sector, supplying 60% of the residential sector with heat. DH accounts for around one-third of total energy consumption in the residential and commercial sectors. Biomass is the largest energy source for DH production, accounting for nearly half of total DH generation (Figure 9.11). Natural gas accounts for 25% and oil shale-related fuels for 19% of total DH generation. Around half of DH is produced in combined heat and power (CHP) plants, often using biofuels and waste or oil shale. The share of CHP generated heat has increased in recent years (see Chapters 6 and 8 for a more detailed discussion on the fuel mix).
Figure 9.11 District heating generation by fuel, 2017
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4% |
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7% |
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Biomass |
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Natural gas |
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10% |
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48% |
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Oil shale |
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4.5 TWh |
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Oil shale gas |
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Shale oil |
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Peat |
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25% |
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Other |
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IEA 2019. All rights reserved.
Nearly half of district heating in Estonia is generated from biomass, the rest is a mix of different fossil fuels including natural gas, oil shale and peat.
Source: Country submission.
District heating market and regulation
Estonia has 230 district heating systems, the majority of which is operated by private companies at the municipal level. The DH market is regulated through the District Heating Act, which requires that all municipalities that use DH prepare a local heating infrastructure development plan. The plan not only focuses on investment needs in energy production and distribution, but must also assess the energy efficiency measures implemented in buildings connected to the DH. If the annual volume of a DH system is
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9. ENERGY EFFICIENCY
greater than 50 000 MWh, the municipality is authorised to take decisions concerning investment proposals in the sector (MEAC, 2017a).
The DH Act allows local governments in areas that have DH systems, or that plan to establish DH systems, to give a monopoly status to the DH operator under certain conditions (MEAC, 2017a). While the granting of monopoly status makes investments in DH more attractive, it might result in suboptimal solutions from an energy perspective and prevent the installation of more efficient and renewable heating solutions. In recognition of this risk, the government is encouraging the creation of local heating solutions using biomass and other locally available fuels where possible, instead of the rehabilitation of inefficient district heating solutions.
The Estonian Competition Authority regulates DH prices on a cost-plus basis. This means that the maximum price of heat should reflect the operating costs including production, distribution and necessary infrastructure investments, while environmental targets and quality and safety requirements are met. The cost-plus regulation also allows a justified profit for the company. In April 2017, the price of DH varied from EUR 35.33 MWh to EUR 86.96 MWh, excluding taxes. The weighted average DH price in 2017 was EUR 50.58 MWh excluding taxes. Prices are typically higher in smaller network regions with an annual sales volume below 10 GWh.
District heating energy efficiency potential and barriers
Estonia’s DH systems are rather old and have substantial potential to improve efficiency. The NDPES 2030 sets a target to preserve DH in areas where they are sustainable and capable of providing consumers with reasonably priced energy solutions in line with longterm environmental and energy targets.
A study undertaken by the Estonia Development Fund revealed that losses along the heating pipelines average 21%. The complete renovation of the heating pipelines could result in energy savings of up to 542 GWh in the period 2014-20 (MEAC, 2017a). Most of the functioning boilers are rather old and their renovation and replacement could also result in substantial energy savings, estimated at around 23 GWh (MEAC, 2017a). Older boilers using shale oil are replaced with more affordable biomass.
As per the NEAAP, Estonia is promoting the implementation of high efficiency CHP and nine new plants are already operating with more under construction. These efficient plants reduce the price of heat. However, this also means that energy efficiency investments at the consumer end become less attractive as lower consumer prices result in longer payback periods for energy efficiency improvements in the building stock.
The current price regulation for DH is one of the key factors limiting investments in energy efficiency improvements and the implementation of other cost-effective DH solutions for internal efficiency improvements. All benefits from the investments made have to be transferred to customers and do not improve the financial results of the investing companies. DH companies have also expressed concern that the regulatory environment is not sufficiently stable to promote long-term investments; the price regulation criteria change frequently.
DH operators in certain regions are also concerned about the long-term sustainability of their business model and hesitant to embark on substantial investments in improving efficiency, which they may not be able to recover. The government plans as set out in the NDPES 2030 to facilitate competition in heat supply, and allow local heat production infrastructure, reduce the long-term viability and efficiency of parts of the district heating
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ENERGY SYSTEM TRANSFORMATION