Looking closely at the tariff projects submitted by Augstsprieguma tīkls (AST) and Sadales tīkls (ST) it becomes clear that the main cause behind the high increase of costs for both companies are the costs to compensate network losses.
Enefit LLC board chairman Krists Mertens outlined this factor, adding that he has a solution to help resolve this problem. According to him, the solution is adopting a new procurement strategy.
He explains: both operators still hope to procure electricity needed to compensate losses from Nord Pool at «spot prices» instead of fixating these costs. This would help reduce the planned growth of both companies’ costs by several dozen million euros.
Network losses appear when electricity is distributed via power lines to the end user. This is a natural process and an unavoidable one: for AST this amounts to 170 GWh a year, and for ST – approximately 255 GWh a year.
The losses of both operators put then at the top of Latvia’s biggest electricity consumers.
With loss of electricity and procurement costs stemming from technological self-consumption volumes are two of the biggest cost components listed in both operators’ submitted tariff projects.
AST estimates this will account for 66% or approximately EUR 46 million of its total costs. For ST this accounts for 20% of EUR 68 million from the total cost proportion in the new tariff project. The main reason for such a rapid cost increase is related to the rapid electricity price rise.
Implementation of the established procurement strategy, which provides for purchases of electricity needed to cover losses from Nord Pool at «spot prices» will cause companies to overpay, because Latvia also pays for the «spot» market uncertainty risk. In the current situation, when the spot price surges vary between several hundred to several thousand euros one question remains topical: is this an economically sound solution?
Compensation of network losses using variable spot prices is valid in accordance with tariff creation policy from previous years. There is an opinion that peacetime strategy does not work during a crisis. This is the prime example of this. It is important to keep in mind that the market situation has changed rapidly. This requires appropriate changes for companies’ employed strategy.
A review of the employed energy procurement strategy and partial or full procurement of electricity at fixed prices over a longer period of time would help reduce these costs by 50% or at least EUR 50 million in next year’s tariff period. Considering that it is the compensation of network loss that makes up the lion’s share of new tariffs, it would serve as an actual solution and help reduce the burden for both operators. All companies and households would benefit from it because it would reduce the charge for the use of network infrastructure. This would help preserve tariffs in Latvia on a competitive level.
Long term fixation of electricity loss prices at a specific level is a topic that is already on the table in Estonia. The experience Enefit [its parent company Eesti Energia JSC] has had with Latvia’s biggest electricity users in the past two years indicates that partial or full fixation of electricity prices in a long-term perspective as a procurement strategy is popular among energy-intensive companies. This means stable and predictable costs and protection against rapid price rise. This solution would benefit the state and all residents because it would bring an immediate solution without additional costs for the budget or the need to divert EU funding.
A solution exists, but it requires quick and decisive action, warns Krists Mertens.
Also read: Latvian PM suggests separating Sadales tīkls from Latvenergo
Enefit: we don’t need to raise tariff – we need to change the strategy
