This paper “Estonia’s Energy Transition: Expanding Domestic Generation and Electricity Market Integration” published by International Monetary Fund examines Estonia’s energy transition, driven by the rapid decline of oil shale generation, faces a trilemma between security, affordability, and decarbonization. The paper concludes that expanding domestic electricity supply and market integration improves all three sides of the energy trilemma. It lowers long-term electricity prices by one-third and boosts GDP, reduces import dependence and energy expenditures, and helps offset the costs of broader EU mitigation policies while supporting long-term emissions reduction. Additional benefits of greater interconnectivity are expected from enhanced system flexibility and balancing capacity, which can help reduce Estonia’s relatively high electricity price volatility. Expanding domestic renewable generation emerges as a key policy priority, as it would lower electricity prices, boost GDP, and improve energy security. Realizing these benefits requires complementary actions: phasing out aging oil shale plants and removing regulatory barriers to new renewable projects.
Expanding battery storage could further support these efforts by reducing price volatility and providing increased system flexibility. Deeper regional electricity integration would further strengthen system flexibility and balancing capacity, complementing variable renewable generation and enhancing long-term affordability. Regional coordination is essential to realize the full gains from electricity integration. EU-level interconnector projects can lower long-run electricity prices, improve system flexibility, and reduce Estonia’s exposure to seasonal price volatility, but their benefits often extend beyond the countries that finance them. This makes coordinated planning and cost-sharing especially important for Baltic-Nordic links, including the planned interconnectors with Finland and Latvia and indirect links through Lithuania, Poland, and Sweden. Stronger regional collaboration would also help evaluate large-scale baseload options, such as nuclear generation, where investment costs are high but reliability and price-stability benefits may spill over to neighboring countries.
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