Fixed-rate renewable energy support schemes

The economic profitability of power plants is primarily influenced by technological efficiency, fuel price, environmental taxes, and subsidies received. In general, fuels that pollute the environment more tend to be cheaper than cleaner energy sources (such as biomass and gas). However, renewable energy sources with low marginal costs, like wind and hydropower, can also influence the market situation and push prices down when produced in significant quantities.

Considering the specifics of electricity production in Estonia, where oil shale power plants dominated, alternative plants have not been profitable so far without additional subsidies.

To increase the share of renewable energy sources and to meet the objectives of the European Union, various support schemes were established in Estonia.

The aim of these measures is to increase investments in the production of electricity from renewable energy sources and in efficient combined heat and power generation, in order to ensure both primary energy savings and security of supply.

In December 2017, Estonia received a new state aid approval from the European Commission for its renewable energy support scheme. This approval has been published on the European Commission’s website, alongside the environmental and energy state aid guidelines for 2014–2020. According to the conditions of the granted state aid approval, Estonia may provide support to producers for electricity generated from renewable energy and efficient cogeneration using production equipment that began operating before the end of 2020.

Going forward, in accordance with European Union regulations, support for electricity production from renewable energy sources is primarily allowed in the form of reverse auctions.

As a result of the auctions, support is granted to those producers who are willing to generate electricity from renewable energy sources with the smallest amount of subsidy. By law, both the maximum level of support per megawatt-hour of electricity produced and the combined total of the support and the next day market price of electricity in Estonia’s price area are limited. Therefore, no subsidy is paid when the market price of electricity is high, as in such cases the producer receives the expected revenue from the electricity price itself.

The purpose of the auctions is thus to ensure that support is provided through a competitive procedure to overcome so-called market barriers, i.e., only to the minimum necessary extent. At the same time, when the state commissions new renewable energy projects through auctions, the fulfillment of Estonia’s renewable electricity targets should be guaranteed at the lowest possible cost to electricity consumers.