What does the cost of the network charge consist of and why does it increase (so often)?
Users of network services have started to ask questions such as how is the final price of the network charge for the customer formed, how does the electricity price affect the cost of the network service, why does the network operator increase the network fee justifying it with the high price of electricity, and why are there so many changes in the network charge this year?
It may seem difficult to understand, but electricity is also used to transmit electricity. The cost of electricity plays a significant role in the daily operations of a network operator. The principle applies that the electricity, which enters the power grid from electricity producers or other networks (e.g., Elering's transmission network) and is not measured as consumed by meters at customers' places of consumption (homes/businesses), is the electricity used by the network operator. When electricity is transmitted in the network, physical loss occurs – electricity is lost during energy conversion between voltages in transformers located in substations, and in power lines. In addition, the network operator uses electricity to ensure the operation of the power grid. The loss in the Elektrilevi network is less than 4%, which is very good in terms of efficiency.
How does Elektrilevi depend on the price of electricity?
Elektrilevi is one of the largest electricity consumers in Estonia. The company’s annual electricity need is nearly 290 GWh, which is more than the combined electricity consumption of all home and business customers located in Saaremaa and Hiiumaa. To get the best electricity price on the market and offer it to our customers, we have been a member of the power exchange since the opening of the electricity market and make all the necessary electricity purchases for the provision of network services directly from there.
In 2020, when electricity prices on the electricity market were unusually low due to the pandemic, Elektrilevi’s cost of purchasing electricity was 9.9 million euros, making up 5% of the costs of providing network services. In 2021, especially in the second half of the year, electricity prices increased significantly, and the purchase cost of electricity increased to 28 million euros. Although the average price of electricity in 2021 had risen to almost 90 €/MWh and in the last months of the year to over 200 €/MWh, the price of 42 €/MWh for electricity costs continued to be reflected in the network charges until March of this year.
How is the change in the price of electricity reflected in the network charge?
According to the nationally established network charge calculation methodology, the electricity prices of previous periods are included in the network charge, based on the average electricity price of the previous 12 months. Pursuant to the regulation, new and changed network charges take effect three months after they are approved by the Competition Authority and published. When also considering the time required to process the change of network charges, the minimum time for the change to take effect is four months.
From 1 March 2022, the price of electricity used for calculating network charges was 68 €/MWh, and from June to the end of September, electricity at the price of 101 €/MWh is reflected in the network charge. However, actual electricity prices have reached several times higher – more than 350 €/MWh in August. Even in the changes to network charges that will take effect from October and December, the price of electricity, which is 145 €/MWh, is more than two times lower than the market price. Due to the high price of electricity, we have had to find financial resources in the amount of almost 2 million euros per month, which are not covered by network charges. Elektrilevi has covered the price difference from its own resources. The estimated cost of electricity in 2022 will reach more than 70 million euros, meaning that the costs will be 7 times higher than in 2020, and, according to current forecasts, they will increase significantly more by spring. The weight of electricity costs in the network charge has increased from the previous 5–6% to 16% in the charges effective from December (presented in the figure as Loss), but the actual weight of electricity costs reaches nearly 25% of the costs of providing the network service.
To maintain network reliability, we are forced to make decisions on changing the network charge that affect us all. To cover the rapidly increasing cost of electricity from the network charge, there have been frequent changes in the price of the network service and considering the high electricity price forecasts for the near future and the possibilities of regulation, there may be further price changes for the network charges in this autumn-winter period. With a delay of several months, high electricity prices and increased electricity costs reach the network charge. In September, Elektrilevi requested to change the network charges, and the Competition Authority considered it justified to base the network charge on the electricity price of around €262/MWh, considering the electricity prices of the last months and their forecasts for the coming months. This results in a nearly 13% change in network charges from 1 January 2023.
However, both various forecasts and history indicate that this situation will not last forever. We must get through this difficult period together, and more conscious and economical electricity consumption will definitely help.
What is the difference between a network contract and an electricity contract?
Several people have contacted Elektrilevi with a request to receive information on or change their electricity contract. We remind you that the network service contract and the electricity contract are two different forms of contract. A network contract is needed in order to be able to consume electricity on a daily basis. This is where Elektrilevi plays an important role, supplying places of consumption with electricity and making sure that any breakdowns are properly dealt with.
Who is your electricity seller?