ICIS Power Perspective: Estonia will close 619MW of oil shale generation in 2019

07 September 2018 10:23 Source:ICIS

This story has originally been published for ICIS Power Perspective subscribers on 04 September 2018 18:14 CET.

The largest Estonian electricity producer, Eesti Energia, will close four blocks of oil shale generation units, with a combined capacity of 619MW, in 2019. The impact of capacity closure may go both ways in the mid-term because of the price of carbon emission allowances. Although Eesti Energia receives a certain share of carbon allowances (EUAs) free of charge, earlier closure of the polluting units may soften the bullish impact on power prices by 2023-2024.

Background

  • On 23 August the Chairman of state-owned Eesti Energia, Hando Sutter, announced the company will close “at least three older and less efficient power plant blocks of 600MW” oil shale capacity by 2019 (link to the press release)
  • Eesti Energia confirmed to ICIS Analytics that four blocks in the Balti and Eesti power plants, totalling 619MW of capacity, “will be closed down most probably next year when the allowed working hours has passed” (marked grey in the table below)
  • The “working hours” refers to the 17,500 operating hours limit imposed by the EU Industrial Emissions Directive whereby combustion plants that opted for ‘limited lifetime derogation’ and do not make necessary upgrades must cease operation after the hours have passed or in 2023, whichever date comes first
  • Based on the correspondence from Eesti Energia we believe the 17,500 hours for the older units will be passed in 2019
  • Previously in its National Energy Strategy, adopted in late 2017, Estonia planned to gradually decommission 501MW of capacity in older energy blocks that no longer conform to environmental requirements by 2023 (link)
  • The announced closure also comes as a response to a wider “PÕXIT” concept to reduce reliance on oil shale
    • In Estonia, since 2012-2013 there has been a social movement that pushes the country to phase out oil shale - “PÕXIT” - oil shale in Estonian is “põlevkivi”
    • The Eesti Energia CEO claimed in the same press release that “PÕXIT” will happen “naturally”, when current oil shale generating units become old and get shut-down – and then replaced by new more efficient units

New investment plan

  • The closures may be replaced by future investments, but no further details have been given at this point
    • Sutter added that the company was preparing another investment plan that would be presented to the Estonian government early next year
    • He emphasised that the focus of the energy company will be on renewables and electricity co-generation, and through employment of a the newly developed Enefit280 technology to process oil shale into oil and gas, generating electricity as a by-product
    • Estonia’s Chamber of Commerce admitted  the recently opened Auvere power was "probably the last station of its kind in Estonian electricity production history"

Role of oil shale in the electricity mix

  • Oil shale is the main fuel for around 85% of Estonia’s electricity production and generated around 9TWh out of 10.5TWh electricity in 2017, based on the ENTSO-E data
    • Around 2GW of installed power capacity uses oil shale as the main fuel
      • Oil shale is used in three old Estonian power plants: Eesti Thermal Power Plant, Balti Thermal Power Plant and Sillamäe Thermal Power Plant, and in the new plan, Auvere (see the table below)
      • The recently completed Auvere Power Plant can utilise both oil shale and biomass (up to 50% of fuel volume)
    • Oil shale is unique to Estonia and its use has led to the country becoming a net power exporter
  • Onshore wind is the second largest source with close to 500MW of installed capacity, followed by biomass with around 100MW
  • According to the national statistics agency, Estonia exported a total 5.6TWh of electricity in 2016, the majority to the Latvian direction (4.7TWh)

Analysis

From net exporter to net importer

  • Based on data from Statistics Estonia, since 2010, Estonia has been a net exporter of electricity (see Graph 1 below)
  • Assuming 52.3% capacity factor for Estonian oil shale generation, derived from ENTSO-E data, 619MW units would generate around 2.8TWh electricity per annum, which is more than net exports in 2015 and 2016 (see below chart)
  • The closure of oil shale units could therefore see Estonia switch to a net importer

Graph 1: Estonian electricity production, exports, imports and estimated annual generation by 619MW oil shale capacity

Impact on wholesale prices

  • The impact of capacity closures may be both bullish and bearish in the medium-term (by 2023-2024) because of the price of carbon emission allowances:

Bullish risks

  • The immediate impact may be bullish because oil shale is the main power generation source in Estonia and 619MW makes up around 30% of total existing oil shale generation capacity

Bearish risks

  • Less power generation from oil shale will mean fewer carbon allowances are needed for the period 2019 to 2023 than previously expected. If the cost of carbon allowances fed through to power prices, then the removal of costs could see power prices soften for this period (see Graph 2 below)
  • This could take place even though Eesti Energia received its carbon allowances for ‘free':
    • Unlike their western counterparts, Eesti Energia power plants have been receiving free emission allowances that covered a part of their emissions in form of so called “derogation volume”
    • Eesti energia recognises carbon allowances received from the state free of charge at zero cost in its books
    • However, the company acknowledges that expenses on carbon emissions increased last year and that it results in higher electricity production costs despite the volumes received for free
  • Therefore, oil shale closure earlier than the originally planned 2023 may reduce the exposure of wholesale power prices to the price of carbon, which is predicted to peak in 2023-2024 according to ICIS Analytics
  • The ICIS carbon model foresees EUA prices to stay around the €20/tCO2e level by the end of 2018, and to reach €40/tCO2e in 2023 and 2024 – this would likely be reflected in climbing power prices

Graph 2: Historical emissions of Estonian oil shale plants compared EUAs received free of charge

Vija Pakalkaite is Analyst - EU Carbon & Power Markets at ICIS. She can be reached at Vija.Pakalkaite@icis.com

Tasmin Chowdhary is Market Reporter at ICIS. She can be reached at Tasmin.Chowdhary@icis.com

Interested in seeing what impact this and other developments could have on the power price? ICIS is launching Power Horizon, a pan European Power price forecast on 17 September. Register now for a free trial right after release by writing Justin Banrey (Justin.Banrey@icis.com).

By Staff Reporter