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Jaanus Tiisvend: The quality and price of the power network service are a matter of social agreement

17.12.2018

The power network service usually goes unnoticed to people and becomes visible in two cases - when the power goes out, or when a person notices the line “network service”, which we don’t think about much in our daily lives, on their electricity bill. Even if we are announcing good news about a reduction in network service fees as of next year and the savings of approximately 20 million euros, then there is still a considerable number of people who don’t understand why they have to pay for the transportation of goods, while the basic part of the network is completed, even if they do understand the price for electricity as a commodity. Therefore, the pricing of the network service deserves explanation, as well as the fact that delivery of electricity by means of our extensive distributed network is not a usual transport service like any other.


“Lots of network, low consumption” means great pressure on the price

The power network service in Estonia, as in the rest of the world, is organised as a natural monopoly. This avoids social wasting - we could not imagine competing parallel lines and substations, the establishment of which costs millions of euros and which take up a significant part of our physical environment. Not to mention the fact that the creation of a capital-intensive network in sparsely populated areas would not be enough for companies to have voluntary interest when counting purely on competitive market rules. Therefore, the vital network service is organised in a way that only one network operator can operate in each region. There are over 30 of them in Estonia, whereas Elektrilevi is the largest of them, indeed. Regardless of whether the network companies operate in private or public ownership, they are subject to state supervision as monopoly service providers by the Competition Authority. The Authority verifies that the network service price is in accordance with the cost of upgrading and maintaining the network, that the network is maintained and designed in a prudent and efficient manner, and that the network operator does not earn more profit than the methodology based on international practices sees fair.

While the average total cost of electricity for all customers is about one third of the electricity bill, one third goes for network fees and one third for the state taxes and fees collected by the network operator, then the share of network fees for domestic customers actually reaches to approximately 40% of the bill. It is formed on a completely different basis than the price of electricity - the price of electricity is formed on the stock exchange, the network fee depends on the size of the sustained network, the costs for its maintenance and development, and the number of consumers contributing to it. Therefore - the more compact the network, the more efficient and intelligent the management, and the more network usage or service consumption, the more optimal the costs are and the lower the price is for the customer.

The challenge of low density areas: How could a truck become a van?

If you draw parallels between the logistics field and the network service, then, given the network of "sparse traffic" in Estonia, we are literally transporting a couple of bags on a fairly large truck. As much as 60 percent of Elektrilevi’s network is up so that only 5 percent of the electricity consumed in the network could pass through. Estonia with its sparsely populated countryside is, of course, not very distinct from its many neighbouring countries - Finland, Sweden, Latvia and Lithuania. However, we are almost in the "forefront" in Europe with almost the smallest amount of electricity per one kilometre of line moving in our power grid. This also means less network fees counted for a kilowatt hour, which results in less resource for network upgrades and maintenance.

How to design a compact and efficient network service in conditions where there is a lot of network capacity (60,000 kilometres of lines for Elektrilevi, or 1.5 times around the Earth), but low consumption and little consumers? One scenario would be to increase the number of consumers of network services and the volume of consumption - for example, by bringing major industrial consumers to Estonia. Figuratively speaking, to put more cargo on the "truck", which will make transportation cost per unit cheaper. However, next to the power of the network operator, this depends a lot on economic policy. It’s possible to create a more attractive environment for manufacturing companies with the best possible network management, smaller costs and therefore a cheaper price, and this is exactly what Elektrilevi is trying to accomplish with the price-cut becoming effective next year. However, the vigorous growth of consumption volumes cannot be directly affected, and it is by no means the only way possible.

The possibility that is more dependent of the "host" of the network is to develop the “means of transportation”, or in this case, the power network to be as economical as possible, that is, to ensure the preservation or improvement of reliability at optimal cost. Here, Elektrilevi has a number of job victories to show - we have saved on operating costs, organised our activities more and more flexibly and efficiently, and this way succeeded in making the network service in real prices more than a quarter cheaper over a decade.

However, the network operator itself can search for efficiency to a certain extent. We need to include our customers for a fully functional solution. A couple of years ago, in every tenth point of consumption in our network, electricity consumption was zero or close to zero. This means several thousand kilometres of lines for which maintenance and safety the household, for whom the line is sustained, does not contribute to, but others do it. In places, we also keep overly large capacities on stand-by, which were once agreed in contracts with customers but which are not needed in practice, and keeping them stand-by didn’t mostly mean any additional costs for the specific point of consumption. Again using the vehicle comparison, for historic reasons, customers had "just in case" ordered a truck with larger gauges than they needed to transport the goods. It was paid by everyone else and the customer itself had no motivation to avoid ordering the truck instead of a van. Let there be larger capacity, just in case - who knows, I might need it.

The customers are not “guilty” in all of it, but rather the pricing, which didn’t motivate to reconsider the actual need for the service. Pricing has to work for the efficiency of the system and provide signals on how it would be most sensible to behave in the public benefit view. All in all, the same customers will benefit from it in turn. If pricing directs each consumer to reconsider their actual power needs, we will get the most optimal "means of transport", which will save all costs both today and in the future.

The pricing method, which leads to the most rational decisions in the overall public benefit perspective, is the fixed fee applied in network service pricing all over Europe. The share of it varies from country to country, starting with Hungary, Greece or Austria, where the fixed component reaches up to 10%, and ending with Sweden, Spain or the Netherlands, where the fixed fee amounts to 80-100% of the total network fee. The fixed fee is based on a valid contract for network connection, regardless of whether the electricity is consumed or not. The rate depends on the amount of sustained network capacity, or the size of the main circuit breaker for household customers. The justification for the fee is the fixed cost, the covering of which includes the specific household sustaining the resource, besides other customers. There is a logical explanation to why Europe is moving towards a network service with a steadily higher share of fixed fees: the power network does not wear out like a car tire, that the more kilometres you drive, the faster their life ends. The power network has a relatively independent lifetime regardless of whether 100 or 1,000 kWh of electricity run through. Since the cost of network service is primarily the maintenance and repair of a particular connection, then the fixed-fee-based pricing is much more logical than a consumption-based one.

In 2017, we started using more fixed fees in Estonia as well. The results are tangible - close to 2,000 unused network connections have been discarded by now, and the stand-by capacities have been reduced by 3%. The increased efficiency of the network plays a role in the fact that Elektrilevi will be able to reduce the network fee by 8% on average next year. In order to keep network fees as reasonable as possible in the future, prices must be designed in such a way as to help ensure an efficient system. In other words, it would help us design the "vehicle" in a way that it would match the actual needs of the consumers, and not the "just in case" ones.

Balanced movement or Finland’s more radical model?

An important aspect that the network fee depends on is, of course, the expected quality of the network service. There is a difference in costs, whether we agree to drive an old van, which stops on the road from time to time and needs to be repaired, or we want the ride to pass smoothly and without interruptions. Of course, it can be argued that the maintenance and repair of an old vehicle are more expensive than maintaining a brand new machine, but in the context of the network, the costs of building a new network are, however, substantially higher than the elimination of failures. A more reliable network requires more money than a continuous search for fault locations and dealing with the consequences, but, of course, social damage from a malfunctioning network is much more than just the money spent for the elimination of power outages. The day-to-day functioning of the society and economy are more and more dependent on electricity, and with it, the expectation on the quality of service is increasing. But where is a reasonable price / quality balance?

Looking at our northern neighbours for comparison, we see that there was a goal set some years ago for a substantial rise in the quality of the network service. In 2013, changes to the Finnish Electricity Market Act entered into force, according to which, the network should be managed in such a way that the failure of the network in the event of a storm would not cause more than a 6-hour outage in a densely populated area, and more than a 36-hour outage elsewhere. The fulfilment of the requirement must cover at least half of the customers by the end of 2019, and everyone by the end of 2028. If the network operator does not ensure the quality prescribed, it will result in rather crisp compensations to service users. On the one hand, it sounds tempting to the consumer, but of course, it has its own price - much more investments must be made in the network over at least a decade, which will have an impact on network fees. For example, in 2016, the network operator Caruna, which is quite similar to Elektrilevi in both the number of customers and the volume of the network, increased the network fee by 30%, and the price increase continued by an average of 6.5% this summer. In Estonia, the legislator has not considered it appropriate or possible to burden the consumer with such strict quality requirements, and so we strive to provide ever-increasing quality while keeping the price as low as possible.

Of course, finding the right balance between a reasonable price and a satisfactory quality is quite difficult. If previously, the main goal was to reduce the number of failures, then now we are facing new challenges. Industrial digitalisation sets high standards for power supply quality: voltage fluctuations that meet today's standards do not satisfy manufacturing companies, as smaller and standardized disturbances of the network can interrupt modern and sensitive production lines. One-way energy traffic has become two-way with the growth of distributed energy, and it needs a different kind of a network. The development of electrical transport is expected to accelerate, which directly affects the planning and management of the power network.

Therefore, expectations on the quality of the network service will grow, which means additional investments, of course. The upward movement of the price will definitely have its positive effects, which, for example in Finland, have been considered much more important as compared to the price increase. But the law and price changes of our northern neighbours also had a broad social response, as there are different opinions. A broader discussion on the surface of what kind of quality we expect from the power network and what is the price we are willing to pay for it would help to make choices and clarify the situation in Estonia as well. Do we prefer the Finnish model or will we continue with the more balanced movement we have chosen today - there are advantages to both options. But it’s certain that the increasingly more efficient network, which has been our target for years, is surely the right direction.