“The reduction of the mandatory procurement component of electricity is essential both in terms of consumer solvency and energy poverty reduction and in terms of improving international competitiveness of companies, including exports. In recent years, there have been many discussions in different formats on the possibilities of arranging the MPC system starting from the strengthening of supervision of the power plants receiving the aid to the elimination of dishonest economic operators, and ending with different options for the reduction of MPC and to the complete cancellation of the MPC system,” notes the Minister of Economics Jānis Vitenbergs.
At the meeting of September 22 the Cabinet of Ministers examined the conceptual report prepared by the Ministry of Economics “Package measures to address the problem of the mandatory procurement component and the development of the electricity market”, which was prepared to address the current challenges in the electricity market by offering a number of scenarios to address the problem of the mandatory procurement component (hereinafter referred to as MPC) – the MPC growth scenarios, the MPC retention scenario at current level, the MPC reduction scenario, the MPC removal from consumer bills scenario and the MPC phase-out scenario.
“By looking at all the previously evaluated potential solutions, their benefits and risks, it is clear that we cannot terminate a legitimately established aid system without court proceedings costly for the state. However, we can reduce the amount of state aid in line with the solvency of the state, including the population and businesses, and look for other sources to cover aid costs. Today, when the situation and opportunities are the most appropriate, we consider covering of the state aid from the profits of AS “Latvenergo”, channelling tens of millions of euros for this purpose annually. This will, in turn, lead to a reduction of MPC payments of the population and businesses by an average of 23% in 2021 compared to the current fixed MPC rate,” emphasises the Minister of Economics.
In view of the economic situation in the country and the resulting budget revenue forecasts for the coming years, the government acknowledged the phase-out scenario as the optimal solution, which aims to redirect Latvenergo Group’s dividends to the phase-out of MPC over the coming years, as well as for financing of other government budget needs.
This scenario involves a reduction of MPC from the current fixed rate of 22,68 EUR/MWh to 17,51 EUR/MWh in 2021 and a further reduction in 2022 and 2023. The amount of funding for the reduction of MPC is projected to be at the level necessary to ensure that, according to the current forecasts on the costs of mandatory procurement (hereinafter referred to as MP) of electricity in 2024, no additional state budget grant is required and a further reduction of MPC is ensured.
At the same time, Latvenergo dividends will continue to cover the costs of the aid for protected users and energy-intensive companies, the state research programmes in energy, as well as the implementation of the National Energy and Climate Plan until 2023.
It is therefore planned that Latvenergo will pay no less than 89,640,000 EUR from profits of the reporting year 2020 in dividends in 2021, including corporate income tax, no less than 74,500,000 EUR in 2022 and no less than 74,500,000 EUR in 2023.
As it is known, the MP of electricity and the capacity payments for the electric power installed in the power plant are used as a support instrument for the promotion of the electricity production using renewable energy sources and high-efficiency co-generation.
At present, the costs resulting from the provision of the aid are covered by all end users of electricity in Latvia by paying MPC, which is included in the total price of electricity in addition to the price of electricity, the distribution/transmission and the value added tax.
As of 1 January 2018, the costs of all end users of electricity in Latvia related to the provision of aid to as part of MP and the guaranteed fee has included a fixed part, which depends on the guaranteed fee for the electrical capacity installed in cogeneration plants, and the variable part, depending on the costs of electricity purchased within MP. End users therefore cover the fixed costs according to the connection parameters, dividing the costs by voltage and consumption level groups proportionally to the fixed part of the revenue from the system services and variable costs – in proportion to electricity consumption.
MPC depends on the amount of electricity purchased under MP in the previous year and its purchase price. The amount of MPC is affected by the price of natural gas, the price of electricity on the stock exchange and electricity consumption. As the price of natural gas rises, MPC payments are growing as well. On the other hand, as the price of electricity on the stock exchange or electricity consumption increases, the MPC reduced. The amount of electricity purchased under MP and the costs of the aid in 2019 and the forecast for the following 4 years are summarised in the table.