4. Electricity markets and energy security: investing in interconnections

4. Electricity markets and energy security: investing in interconnections


The following module
will address electricity policies. Electricity is becoming more and more
important in world energy demand. In the 1970s electricity demand
was only 10% among other fuels. Now this share has at least doubled. This also has repercussions on the
political importance of electricity. Likewise, those who are interested in
the issue of sustainable development need to look at electricity policies,
because electricity is the sector where non-carbon emitting
technology can be promoted. We have to have a look at the specificities
of the electricity sector. Firstly, we have to understand that
electricity generation is divided into base load, mid load
and peak load capacities. Base load capacity supplies up to
80% of the national economy. Lighting roads, making industries
work, providing transport and all other essential
means of energy demand. Base load capacity is usually
capital intensive in installation, but with lower operational costs. A perfect example
of base load is nuclear energy as well as large hydro energy. Mid load capacity provides the
residential sector with electricity, high capital costs
and varied operational costs And peak load serves to balance
electricity demand during its peak. You can imagine that
during some parts of the day, electricity demand
might be extremely high compared to for example early
in the morning or the afternoon. Peak capacities are low capital
intensive in terms of installation, but they represent
high operational costs. Renewable energies mostly
serve at the peak load capacity. Notably, base load capacity
is used quite significantly, so there is no big difference
between its highest capacity and what we generate — that’s
not the case with the peak load. Moreover,
in the case of renewable energies, the utilisation of the renewable
energy capacity can be about 30%, which is extremely low. That’s why a number of countries
promote renewable energies by stimulating the demand
of renewable energy in order to use these
installed capacities. The question of capacity leads
us to the following specificities: the electricity industry requires
a certain level of overcapacity. It means that we have a capacity
and we have a market but the question is who
will pay for unused capacity? That’s why there are various
mechanisms called capacity markets. A number of regulatory
issues emerge here. For example, how to integrate
future investments to the price? Or even more interestingly, how
to integrate cancelled investments? A company was planning to
create a new generation capacity, but then it was cancelled
— but some money was spent on it. How can it be transferred
to the population, can it? In some states, regulators fix
the maximum level of investments in order to avoid over-investments, so companies do not invest too much
and subsequently increase the price. In other countries
it’s the other way around, regulators take into account
the reasons for new investments and allow a price increase while
taking new investments into account. So, what is the consumer’s interest? Is it really to have a low price?
A low price ensures competitiveness, but it reduces
investment attractiveness, it reduces the level of
modernisation of the sector and a low price does not
stimulate new investments. In a situation where the
price of electricity is high, we can say that consumer interests, at least short time consumer
interests are clearly hindered and competitiveness
is weakened, but a high price
stimulates innovation. That’s the dilemma
of energy pricing. Electricity pricing remains
of most difficult policy areas. What are blackouts? Are blackouts part
of energy security? Of course. They are short-term
energy security issues which can harm either the
regional or national economy. They can be caused
by technical failures. For example, on the level
of electricity transmission. They can follow problems of adequacy
between supply and demand. For example,
not enough generation capacity. Or regulatory failures
related to the price. One of the most striking regulatory
failures is the California crisis. California liberalised its
electricity markets in 1998 and created a wholesale market
price, but set a fixed retail price for the final consumers
at the regulated level. In 2001 the wholesale
price started to increase while the retail market
remained regulated. At the end of the day,
market participants either decreased the generation level or
deviated the flow to other stares and that led to
a large-scale blackout in 2001. The California crisis
demonstrates that markets can create significant failures
if they are not properly regulated, if the market does not provide good
conditions for commercial operations. One can ask whether such
a situation is possible in Estonia. An isolated energy market is weakly
connected to the international level However, it happened historically, Estonia had a significant over-
capacity in electricity generation, mostly because of
the Narva Power Plant which was built under command
economy in the Soviet Union and was placed in the general
soviet economy’s context. Narva Power Plant aimed at
supplying electricity to Leningrad, the current Saint Petersburg. The Narva Power Plant has a very
interesting story in fuel supply. As you know, electricity can
be generated from various fuels and one of them is shale oil, which
is produced in northeaster Estonia. An industry representative from
Estonia will give their viewpoint and will give some highlights
about the general situation of the electricity sector in Estonia.

Leave a Reply

Your email address will not be published. Required fields are marked *