Abandoning the deal was Mart Laar's last act as prime minister and one which denied his successor the kudos that dropping the unpopular deal would have brought. He resigned later the same day.
Under the privatization agreement NRG Energy was expected to borrow 285 million euros ($254.91 million) for renovation of the two Soviet-era oil-shale fired plants in Narva, which are the largest in the world, account for 90 percent of electricity production in Estonia and have been rubbished by environmentalists on account of their poisonous fumes.
The government refused to wait any longer and called off negotiations.
"If this tool does not work, new opportunities have to be found," said Kersti Kaljulaid, adviser on economic affairs to the prime minister.
"The members of the syndicate of banks requested additional guarantees which the Estonian party could not accept, including for example a state guarantee to cover losses in the event of terror attacks."
The banks involved in the deal were worried about the unstable state of the world's financial markets and the worsening of NRG Energy's financial situation, she added. The collapse of the deal is the second setback in as many months to NRG's Eastern European ambitions.
In December the company pulled out of bidding for CEZ, the Czech power producer, citing market volatility following the collapse of Enron, the world's largest energy trader.
In a press statement NRG Energy expressed surprise at the decision.
"NRG has fulfilled all its responsibilities and is ready to conclude the deal," said Hillar Lauri, NRG Energy representative in Estonia.
"We've repeatedly expressed our readiness to the Estonian government and to Eesti Energia. Our primary plan is to wait for the final text of the decision, study it and consider further actions."
The deal's cancellation had long been demanded by former Estonian President Lennart Meri, Estonian scientists, environmental organizations and the opposition Center Party.
In the view of Peeter Kreitzberg, deputy chairman of the Center Party, NRG Energy went to unacceptable lengths to secure the deal, its president Dave Peterson at least twice telling the government that backing down would jeopardize the country's NATO and EU membership bids.
"It does not," Kreitzberg commented.Laar had himself linked the privatization to NATO membership in a speech to Parliament last August.
"Securing the NRG deal couldn't lead us to NATO, but thwarting it could badly shatter U.S. support for our aspirations," he said at the time.
The U.S. government expressed disappointment on Jan. 9 that the deal had not been concluded during the term of the current Estonian government.
"We believe that NRG's investment is a great opportunity for Estonia's economy, and we continue to support NRG's efforts to find a mutually beneficial way forward," read a news release from the United States Embassy in Tallinn.
Under the deal, the U.S. firm would have acquired a 49 percent stake in Narva Elektrijamaad, a subsidiary of Eesti Energia which owns the two Narva power plants, for $70 million.
It would also have got a 51 percent stake in the Estonian oil shale mining company Eesti Polevkivi.
Together with the renovation expenses the deal would have cost NRG 4.5 billion kroons ($256.56 million).
The state proposed guaranteeing to buy the station's output for 15 years and guaranteeing NRG Energy a return on its investments of 12 percent annually.
The Estonian government does not have to compensate NRG's losses because the agreement had expired without any contract being signed.
The country's Economy Ministry now has three months in which to come up with alternative ways of financing the renovation of the plants.
"We should not forget that preparations for the renovation work have started, and it is not wise to waste any more time until Eesti Energia becomes insolvent," said Kaljulaid.
The state spent around 50 million kroons preparing the NRG deal, money which members of the negotiating committee said had not been wasted since most of it went on research and development.
Several politicians including the prime minister believed an electricity price hike planned by NRG Energy for April could be averted, but Eesti Energia has now decided to go ahead with the new tariffs in order to improve the company's borrowing capacity.
"In the long-run the price hike could be smaller than planned by NRG," said Erki Peegel, spokesman for Eesti Energia.
Juri Kao, chairman of the council of Eesti Energia, acknowledged that Estonia's oil shale-based energy is expensive and uncompetitive, but nevertheless insisted it was a pillar of the country's foreign trade balance and economy.