New Fee Charged from Producers of Electricity in Latvia – Capacity Reservation Charge

From the year 2023, a fee shall be charged from producers of electricity for reservation of the system’s capacity/standby which has been approved by the Latvian Public Utilities Commission (PUC) under a decision passed on the 12^th of January. The new fee will provide a clear picture as to which electricity production projects under development are the feasible ones

Production units and equipment of an electricity producer are part of the power system. This system is comprised of not only these production units but also of the transmission and distribution system and an electricity consumption equipment which are mutually connected and necessary for transporting of electricity from the producer to a user.

Transmission and distribution system’s networks and facilities are maintained by operators who are responsible for the flow of electricity in these systems. The operators must ensure the capacity of the system to transport the electricity according to a demand. In Latvia there is one transmission system operator (AS “Augstsprieguma tīkls”) and 10 distribution system operators (of which the biggest is AS “Sadales tīkls”) operating in Latvia.

A producer of electricity, depending on technical specifications, acts under a necessity to connect the production unit to the transmission or distribution system, so that the electricity generated could be supplied to the user. Before installation of such production unit (generation unit) and construction of the connection the producer needs to obtain a special permit, if it exceeds a certain level of capacity. Before amendments to the Electricity Market Law of the 14^th of July 2022 producers paid a security deposit along with an application for the permit which was refunded after a successful installation of the unit. The amount of the security deposit was dependent on the capacity of the unit to be installed. The maximum fee was established for units having capacity above 3.99 MW and formed EUR 356 + EUR 50 for each subsequent MW, which exceeded those 3.99 MW.

In 2022, the number of permits for installation of production units increased rapidly along with the volume of reserved system capacity. At the time when the amendments to the Electricity Market Law were adopted it was established that the producers plan to install units with a capacity that exceeded the actual electricity consumption of that time at least four times. If these units were installed in the volume contemplated, due to the insufficient capacity, the transmission and distribution system would not be able to ensure transporting of the electricity.

In the said circumstances Latvian legislator resolved to distinguish (a) those producers who are ready and able to implement projects and (b) those who reserve the capacities without consideration or without an objective to install new electricity generating units in a foreseeable future. For that purpose, it was resolved to implement the capacity reservation charge which should facilitate a faster installation of the production units. Additionally, it is expected to weed out non-prospective production projects and free the available system capacity for prospective projects.

The amendments stipulate the capacity reservation charge to be imposed on an electricity producer who plans to connect a new production unit to the transmission or distribution system such unit having a capacity higher than 50 kW.Consequently, PUC has developed a methodology for calculation of such charge, whereas the transmission system operator was entitled to calculate the charge for one capacity reservation unit on the basis of the said methodology once in five years.

On the 12^th of January 2022, PUC confirmed a charge of a specific amount – 21.63 EUR/kW. The capacity reservation charge significantly exceeds the amount of the security deposit imposed earlier. For example, if the producer wishes to install a production unit with a capacity of 1 MW, instead of the security deposit in the amount of EUR 178, the producer will have to pay the capacity reservation charge in the amount of EUR 21,630.

The capacity reservation charge shall be payable based on an invoice issued by the system operator which shall be issued by the latter to the producer along with the technical specifications (regulations) of the connection. To this end, the producer has an option to make the payment or submit a guarantee provided by a financial institution.

If the producer pays the capacity reservation charge, this charge shall be used to cover costs of installation of the connection. If the said costs are lower, the difference in the amount shall be refunded to the producer, whereas if they are higher – a relevant additional payment is to be made. Thus, the reservation charge acts as a security deposit and not as a statutory duty.

However, one must bear in mind that the producer is at risk to forfeit the deposited charge for reservation of capacity in cases, among other, when it delays installation of the connection or commits breaches. For example, if the producer and the system operator fail to enter into an agreement on implementation of the connection process within a certain period of time, or fail to fulfil provisions of such agreement or a connection contract.

The amendments to the Electricity Market Law of the 14^th of July 2022 affect not only new projects but also the ones already under development. The said applies to the producers who have already received the technical specifications (regulations) for the connection by 1^st of January 2023 while have not entered into the relevant agreement with the system operator. These producers will also have to pay the capacity reservation charge. It is estimated that the payments will have to be made no later than by the 1^st of April 2023.

PUC has publicly confirmed its readiness to monitor how dynamics of applications for production connection will change and how the timelines of implementation of production projects improve. Other modifications in the legal framework governing installation of connections and the capacity reservation charge cannot be excluded, if risks are established with regard to wholesome operation and development of the transmission and distribution systems.