‘Green’ subsidies too high

TALLLINN - The Estonian government agreed at its cabinet session last week to cut subsidies to production of “green” electricity; while the exact figures are not known yet, the talk is around at least 300-600 million kroons (38.4 million euros) a year, reports Postimees. Economy minister Juhan Parts said that the capital productivity of renewable energy companies is too high in places and they are excessively profitable in some cases.

Every KWh of electricity produced from wind, water or hacked timber gets a subsidy of 84 cents from the pocket of electricity consumers. Grid operator Elering says that around a billion kroons a year is needed for the subsidies.
Parts noted that the subsidies would have to be cut so much that capital productivity in producing green electricity was at a reasonable level. He estimated that 6-10 percent a year would be such a level. Postimees said that for wind energy firms it is currently 16-25 percent a year. Also, a renewable energy project gets subsidies for 12 years now, assuming that during this time the investment earns back its costs, while in some cases initial investments have been so small that the project has earned back its costs in just a couple of years.

Parts added that the subsidy system that was created in 2007, by the previous parliament, doesn’t take into account the electricity bourse that was launched at the beginning of this year, either. At the bourse, the price of electricity has increased by almost two times as compared to the price in the closed market.
“I believe that companies also support our wish to cut renewable energy support since negative public opinion interferes with stable business activities,” said Parts. “After cutting the subsidies, the investment environment cannot lose its credibility, but current over-profitability discredits our investment environment.”

Parts estimated that the law amendment that will soon go to the government will get sufficient support in the parliament.
The government’s motives to reduce subsidies for renewable energy producers also include cost cuts for consumers, reports Bloomberg. The Economy Ministry will prepare a bill on amendments within a month, Parts said in a phone interview in Tallinn. “The order of magnitude” for the reductions will be 50 percent, while cuts may differ across energy sources. Proposals will be based on a study by the country’s Competition Board, due to be presented “soon,” Parts said.
“This is about what is a reasonable level of return, and what is the actual price of electricity,” Parts said. “Our main goal is to avoid discrediting investment in renewable energy, which may be the result of too high profitability and too high subsidies granted by law.”

Estonia’s parliament in 2007 raised subsidies to renewable energy producers by 42 percent, to 115 senti (7.3 euro cents) per kilowatt hour of electricity for up to 12 years, with a purchase obligation of up to 200 gigawatt hours annually, while further support was established for sold electricity of as much as 400 gigawatt hours.
The cost of renewable energy for consumers, calculated each year based on expected subsidies, more than doubled this year to 0.81 euro cents per kilowatt hour plus VAT from a year earlier. “With this kind of infrastructure service, these kinds of unreasonable support levels are at odds with the justified expectations of consumers,” Parts said.

Applications by wind park developers to Elering to join Estonia’s energy system total about 4,000 megawatts of capacity, while Estonia’s peak consumption is about 1,500 megawatts, said Taavi Veskimagi, the chief executive officer of Elering, in June.
The parliament in January partly reduced subsidies for electricity and heat cogeneration from renewable energy sources, causing protests from Fortum Oyj, the second-largest Nordic utility. Fortum built a power and heat co-production plant in Tartu, southern Estonia, after such subsidies were introduced in 2007 and is finishing another plant in Parnu, southwestern Estonia.

Lawmakers in August approved a bill, proposed by Parts’s Isamaa ja Res Publica coalition party, aiming to limit profit at the country’s largest water and heating utilities, including Tallinna Vesi. The bill requires the biggest utilities to seek approval from the competition board for tariffs, which have to be based on “reasonable profitability.”