Outcome of price regulation
When assessing the effectiveness of price regulation, the dynamics of regulated prices in real terms are used as a measure – this eliminates independent effects (e.g., the price of fuel in the case of district heating or the price of electricity in the case of network service). These inputs are formed under free market conditions and cannot be changed by economic regulation. In addition, the Authority monitors the efficiency of energy use in electricity and district heating networks and in heat production, with the aim of reducing energy losses. For the above indicators, the indicator is the quality of energy supply, which is measured when providing the network service, for which the corresponding standards have been established by the SAIFI, SAIDI, CAIDI secondary legislation(1).
Estonian Competition Authority prepared a long-term analysis of the return on capital of the regulated companies, the dynamics of prices, the quality of the service sold to consumers and, in the context of these results, also the efficiency of energy use in the period of 2005–2020. Overall, price regulation in the years covered by the analysis can be deemed a success, as one of the main objectives of regulation – ensuring price stability for consumers and preventing monopolies from earning excessive profit – has been broadly met. The greatest progress has been made in energy savings. There have been significant reductions in both electricity losses and losses in district heating pipelines. In its methodological guidelines, the Estonian Competition Authority has set out technical requirements for line losses, aimed at motivating heat companies to invest in district heating lines to reduce line losses in order to protect consumers from inefficient heat distribution services.
In the case of electricity networks, the coordinated average prices in real terms have decreased in the years covered by the analysis. Although transmission charges have increased, the main reason for the increase is the construction of international interconnections, without which the main transmission system operator (Elering) would also have seen its network charges fall in real terms.
For district heating, the average coordinated heat price has increased by 1.7 times and the average woodchip price by 3.6 times over the 16-year period (2005–2020). However, the increase in the average price of heat in real terms, i.e. calculated on the basis of the consumer price index (CPI), has been much smaller, only 1.04 times. Gas and liquid fuel prices were sensitive to changes in the price of crude oil, which was much more volatile.
Prices for water and gas distribution network service have been examined over a shorter period (2013–2020 and 2016–2020 respectively). For water service, the average prices in real terms were below or close to the level of the beginning of the period. For gas distribution service (excluding the Elering component), the average prices in real terms were lower than at the beginning of the period.
The operational reliability of Estonia’s electricity networks has improved, but they are still dependent on the weather, and in extreme weather conditions their reliability suffers. It is important to note that there has never been a complete system shutdown in Estonia, which is a testament to the good work of Elering. For electricity distribution networks, increased operational reliability can be achieved through large-scale investments, but this would also entail a significant increase in network charges.
(1) Quality requirements for network services and conditions for the reduction of network charges in the event of violation of quality requirements (RT I, 28.09.2021, 10)