Sandis Jansons: Insights, losses and gains of 2022

A difficult year has passed, which has brought the biggest upheaval of recent years - a large-scale war launched by Russia in Ukraine. It has left a lasting impact all over the world, also on the energy supply industry, including strengthening the understanding of the great importance of critical infrastructure and energy independence in the existence of any country. These harsh lessons became a reference point in the development of local renewable energy resources (RER) - this was a record year in the development of solar and wind generation in Latvia, and unfortunately also a record year in energy resource price jumps. Micro-generation or electricity production in households experienced the fastest development, thereby emphasising the importance of the electricity distribution system in the context of green production and energy self-sufficiency. Changes in the system, together with a general increase in prices brought by the geopolitical situation, also created the need to review the existing electricity transmission and distribution system service tariffs and the methodology of their creation. It is important that the tariff projects of the two electricity supply operators - AS Augstsprieguma tīkls (AST) and AS Sadales tīkls - are viewed in close interaction, which is of great importance when thinking about the further development and sustainability of the overall energy system of the country.

The number of self-generating electricity households could reach 20,000 by 2023

Russia's brutal war in Ukraine has encouraged waiving the use of gas and strengthening the transition to RER, not only because of green goals, but also to strengthen energy sufficiency. We also felt the impact in Latvia - during the year, the number of self-producing electricity households (micro-generators) grew from 2,000 at the end of last year to almost 12,000 in December of this year. The total capacity of the micro-generators connected to Sadales tīkls already reaches 94 megawatts (MW) - on a sunny summer day, it is possible to provide more than 10% of the total power generation capacity needed to cover consumption in Latvia.

So this year, almost 10,000 micro-generators, or almost 30 new micro-generators every day, are connected to “Sadales tīkls”. With such rates, in the second half of 2022, we already surpassed neighbouring Estonia regarding micro-generation. Such a large number of micro-generators was allowed to be accepted in the Sadales tīkls system by targeted investments made in previous years, reorganising the system for distributed generation, while the simplified, fully digital process of connecting the micro-generator made it possible to keep the pace. An additional motivational tool for the installation of micro-generators for residents was the availability of state support for the installation of solar panels.

The experience of other European countries allows us to predict that the number of micro-generators connected to the Sadales tīkls will continue to grow in 2023 as well. The increase is expected to be more moderate than we experienced in 2022, but still quite rapid. We predict that at the end of 2023, there could already be 20,000 self-producing households in Latvia with a total production capacity of close to 200 MW. 

Active “newcomers” in the system will also be power plants (systems with a production capacity above 11.1 kW) with the aim of producing for self-consumption and also for commercial purposes. The interest is so huge that more than 1000 MW of production capacity was reserved in the distribution system last year for the development of power plants. While a micro-generator can be connected to the system and start producing electricity immediately, the development of a power plant takes longer - it must be designed and built. However, this year also stood out in regard to the amount of power plants connected to the distribution system - if, for example, in 2021 a total of 32 solar power plants with a total capacity of 3.2 MW were connected to Sadales tīkls, then in 2022 - around 130 with a total capacity of 12.5 MW or four times more. Since some of the power plants were already in the design or construction stage this year, we can expect a noticeable increase in the share of solar generation in the summer of 2023. If currently the total generation capacity of solar power plants connected to the distribution system is almost 19 MW, then in the summer of 2023 it could already be around 180 MW. As shown by the volumes of reserved generation capacities, the development potential for solar energy is even five times greater.

Transformation of the energy system and general inflation are driving tariff changes

We are currently experiencing how the historical energy supply system is changing, by becoming decentralised. Namely, with the rapid increase in the number of energy producers connected to the power grid, energy enters the power grid from many points and flows in different directions, instead of as it was initially - in one direction - from the large producers (HPP, TPP), the number of which does not actually change, to the consumers. The electricity supply operators need to adapt the system to this new order by developing both infrastructure and digital solutions accordingly to be able to accommodate and manage these changing electricity flows in the network, thus ensuring the stable operation of the overall system.

The change in the operation of the system has already led to a discussion on whether the current methodology for calculating the service tariffs of the system corresponds to the new procedure. As a result of the rapid development of decentralised electricity production and general electrification, both the system itself and its users are changing - there are no longer only producers and consumers, but also active customers who both produce electricity themselves and also consume it. Along with these changes, several electricity supply operators and regulators in Europe have pushed for changes in tariff calculations as well, and this is currently happening in Latvia as well. 

The current procedure, when the electricity supply system service fee was mainly based on the amount of electricity consumed, no longer corresponds to the new reality. The primary function of the power grid is no longer only to deliver electricity from the producer to the consumer, but also to maintain the balance of the changing production and consumption capacities of the network in accordance with the needs of society. Simply put, the elements of the electrical network - wires, transformers, supports - must be maintained regardless of the amount of consumption; therefore, in the new tariff project Sadales tīkls plans to reduce the share of the variable component of the tariff (the part dependent on consumption) and accordingly increase the share of the fixed part, as it is more in line with the actual maintenance costs of the system. It is also essential for maintaining equal access to all system users. 

In relation to the comprehensive, operator-independent increase in costs, including the increase in the price of electricity, the electricity transmission tariff, the cost of electrical network materials, Sadales tīkls is forced to raise the tariff in 2023, after a period of seven years of tariff stability, as otherwise it will no longer be possible to ensure a stable and safe electricity supply service in the future. Essentially, these changes mean strengthening the sustainability of the electricity supply infrastructure; a measure we cannot postpone. The war in Ukraine has come as a harsh reminder to the whole world of the importance of investing in the quality, resilience and safety of critical infrastructure. The stable and safe operation of the network is especially important in the context of general electrification.

The distribution tariff was last raised in 2016, but in 2020 it was reduced by an average of 5.5%, and then, until today, it has not changed. In November 2022, a new tariff project was submitted to the Public Utilities Commission for evaluation, predicting an average increase of 75%. When preparing the tariff project, Sadales tīkls used all the growth reduction mechanisms available to the company, while being aware that additional solutions would be possible by evaluating both the planned transmission (AST) tariff and the distribution tariff, the amount of which directly depends on the amount of the transmission tariff. We already emphasised the importance of such an approach during the public discussion of the transmission tariff project.

Sadales tīkls welcomes the fact that the need for this approach has been heard and both tariffs are examined in depth in their mutual interaction during the public consultation stage, looking for non-standard regulatory solutions that would allow operators to mitigate the expected increase in tariffs. With support from the responsible ministries, it is possible to work on additional mechanisms for reducing the planned increase, where decision-making is not the responsibility of the company's board, but of shareholders or policy makers - for example, the possibility of fixing the price of electricity, harmonising the tariff periods of both operators, settling the issue of recovery of historical losses. I am convinced that already in the first quarter of 2023 we will jointly arrive at the most cost-effective tariff project possible under the current conditions.

The biggest future challenge in the energy sector is the diversification of the energy resource portfolio

In the future, the transition to RER will continue and the total electricity consumption will grow. In relation to the development of self-production, we may not always see it in the data collected by electricity supply operators, but electricity in general will become an increasingly important energy resource, and accordingly the importance of high-quality and sustainable electricity supply infrastructure will continue to grow. In 2023 and beyond, the main task of Sadales tīkls will remain the development and strengthening of the network. When it comes to green energy, Sadales tīkls as a priority should provide the opportunity to accept generation for self-consumption in the common network - this is one of the important steps for strengthening the energy sufficiency of the country as a whole. We already have the following solutions - for example, zero or limited export power connection, which allows customers to connect a power plant to the distribution network with the aim of producing for their own immediate self-consumption, without (or a limited amount of) transferring energy to the common network, even if the available generation capacity at the specific location at the given moment is reserved for existing or future power plant projects. Such services will make it possible to provide more opportunities for companies to produce electricity for their immediate self-consumption.

In 2022, a lot has been done for the development of solar and wind generation - in fact, the projects planned by the developers both at Sadales tīkls and at the transmission operator AS Augstsprieguma tīkls exceed the country's total maximum consumption load and the required amount of generation capacity several times. It is clear that we will not be able to base the entire national energy supply on solar and wind energy - we need alternatives for those periods when the sun does not shine and the wind does not blow. We should also be aware of the fact that electricity can be produced in an amount that corresponds to the amount of consumption at a particular moment. Therefore, a clear national strategy and coordinated actions for the creation of a balanced portfolio of electricity production capacities would be especially useful at the moment. This is also the time when the discussion on the development of aggregation services would be very appropriate, because the issue of capacity planning, adjustment of “peak” consumption hours has never been so relevant. Without diversification of the overall portfolio of energy resources and thoughtful coordination of generation-consumption capacity, we will not be able to achieve the energy independence of the country. These issues should become a priority when planning energy development in the country, and there is no doubt that they will be on the agenda of the newly established Ministry of Climate and Energy.

Summing up, the year 2022 has been difficult for people all over the world, but especially in Ukraine. Russia's aggressive invasion created challenges that no one had anticipated, and the energy price crisis, followed by the overall rise in cost of living, is the price that all of the inhabitants in Europe pay for a peaceful sky above their heads. It is not new for crises to mobilise action; also during this difficult year, tasks were completed that were not easy in previous years - for example, a significant breakthrough in the development of RER has been achieved in Latvia. If formulating the main task for the next year in one sentence, I would say - it is necessary to purposefully and thoughtfully continue the work started to increase the amount of green energy, not forgetting to ensure energy security and balancing capacities.

Author - Sandis Jansons, Chairman of The Board of JSC Sadales tīkls