Elering Continues Work to Approve Frequency Reserve Cost Allocation Model
At Elering's request, the consultancy firm THEMA has completed an impact analysis of potential cost allocation models for frequency reserves. Elering continues its efforts to identify the best solution for Estonia.
Last week, Elering presented the final results of the impact analysis prepared by THEMA to professional electricity market participants. The completed analysis and additional explanation on the cost allocation are available on Elering’s website. A public consultation was also recently concluded, during which market participants had the opportunity to provide feedback on the proposed cost allocation models.
Feedback was received from 11 market participants, including electricity producers, retailers, providers of flexibility services using batteries, balance responsible parties, and one large industrial consumer.
Elering will continue consultations with relevant stakeholders and plans to propose a preferred cost allocation model for frequency reserves in the coming weeks. In order to implement the new model, Elering must obtain approval for the methodology from the Competition Authority. The new cost allocation model is planned to take effect at the beginning of 2026. Until then, Elering will continue to finance the procurement of frequency reserve capacity using congestion revenue received from the power exchange operator. Use of congestion revenue in the second half of the year also requires approval from the Competition Authority.
"In February this year, the cost of frequency reserve capacity was slightly below previous forecasts, but in March and April, the costs exceeded expectations. Elering estimates that the higher costs in March and April are related to market launch-related bottlenecks. From 2026 onward, the annual cost is expected to remain around the previously estimated €60 million and may decrease further over time," said Erkki Sapp, Member of the Management Board at Elering. In February, frequency reserve costs in Estonia were €3 million, and in March €11 million.
The main point of discussion regarding frequency reserve costs has been how they should be distributed between producers and consumers. THEMA analyzed different options where consumers would bear either 100%, 75%, or 50% of the costs, and producers the remaining 0%, 25%, or 50%, respectively. A fourth option considered was partially covering the cost of reserve capacity procurement through imbalance charges levied on balance responsible parties. However, neither THEMA nor any market participants supported this solution.
"A smaller consumer component could encourage new industrial consumption in Estonia, while a relatively smaller cost burden on electricity producers—compared to other Baltic countries—could promote increased production capacity in Estonia, which may also have a positive effect on consumer electricity prices," Sapp noted.
When making its cost allocation proposal, Elering will take into account the impact on competition in Estonia’s retail and wholesale electricity markets, the competitiveness of Estonian producers in the Latvian and Lithuanian frequency reserve markets, as well as the effects on Estonian renewable energy producers and the practical feasibility of the selected solution.