Competitiveness report: Developmental differences between the Baltics deepening
To boost Estonia's competitiveness, an expert panel recommends adjusting electricity taxes for businesses, limiting non-dispatchable renewables and investing in controllable power.
The competitiveness expert panel, convened by the Riigikogu Economic Affairs Committee, has produced a report on Estonia's economic prospects, opportunities and challenges, along with forward-looking policy recommendations. The group analyzed key areas including the electricity market, telecommunications, agriculture and business financing and issued related proposals.
On the electricity market, the panel recommends setting the share of non-dispatchable renewable energy in Estonia between 60 and 80 percent of total consumption, taking into account the costs and benefits for consumers, producers and the energy system.
The report explains that while shifting to solar and wind power brings lower market and consumer prices, consumer prices stagnate once the share of non-dispatchable energy reaches 80 percent.
As solar and wind penetration grows and market prices fall, net revenues for both the electricity system and the state decline. Lower market prices push out controllable generation capacity and reduce tax revenues collected from electricity consumption.
"Considering the costs to system reliability and the state's lost tax revenue from electricity turnover, depending on CO₂ quota prices, natural gas prices and other market drivers, the economic gains from solar and wind could begin to shrink once the share of non-dispatchable, non-storable solar and wind in consumption exceeds 60 percent," wrote Kadri Männasoo and Einari Kisel of Tallinn University of Technology (TalTech) in the report's electricity chapter.
They also recommend considering differentiated electricity excise duties and charges to reduce end-user prices in business segments where unit electricity costs exceed those of competitor firms in neighboring countries.
The panel further suggests conducting a comprehensive meteorological study to map long-term wind speed deviations across different parts of Estonia or, ideally, across all three Baltic states.
Energy experts also urge greater attention to research and development and investment in efficient, controllable electricity generation with low CO₂ emissions and/or optimal use of existing infrastructure and resources.
Proposed solutions include combined heat and power plants, biogas-fueled gas plants, pumped hydro storage, hydrogen fuel cells and thermal storage facilities linked to district heating boiler houses.
"Developing nuclear energy in Estonia also requires separate consideration. Until these solutions can provide sufficient reserve capacity, oil shale power plants must be kept operational," the electricity market chapter states.
Differences in development between Baltic states only deepening
Estonian experts note in the competitiveness report that although Estonia outpaces the other Baltic states in spending on research and development, the gap with the Nordics remains large.
The report also points out concerns that Estonian companies invest less in machinery and equipment compared with their Baltic peers, while directing more funds into real estate. Overall, business sector investment relative to GDP is nearly equal across the three Baltic states.
"Estonia's economy and exports are more advanced in complexity than those of Latvia and Lithuania today, but differences in Baltic development have deepened in recent years. For example, Lithuania's economy is now more diversified compared with Estonia and Latvia," said Uku Varblane, a member of the competitiveness panel and head of research at the Foresight Center.
The report also addresses business financing, noting that Estonian companies rely mainly on bank loans to meet funding needs. However, for innovative yet riskier projects, equity markets — particularly venture capital and private equity — would be more suitable. The panel recommends that the Estonian state act as a key anchor investor to promote cross-border fund-of-funds initiatives involving not only the Baltics but also the Nordics.
As for risks to the Baltic and European economies, experts highlight changes in international trade policy, including tariffs imposed by President Donald Trump and the global uncertainty that comes with them.
The competitiveness panel was convened by the Riigikogu Economic Affairs Committee at the end of 2023 to assess Estonia's economic competitiveness and outlook and to propose ideas for strengthening them.
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Editor: Mirjam Mäekivi, Marcus Turovski
