Investments in large-scale energy infrastructure projects in Estonia will not materialize without the participation of foreign investors. Estonian companies lack both the necessary expertise and the financial capacity to build a nuclear power plant with a budget in the billions of euros, a 520 MW pumped-storage facility extending 700 meters underground or offshore wind farms.

At the same time, the need for new domestic capacity is clear: Estonia currently imports more than one-third of its electricity consumption, the closure of oil shale power plants will increase the shortfall in dispatchable capacity and dependence on subsea cables makes the country vulnerable. With the electrification of the economy, electricity demand is expected to grow.

At the end of last year, the Ministry of Climate began developing a loan guarantee or a similar financial instrument to support financing for large energy infrastructure projects — a nuclear power plant, a pumped-storage facility and offshore wind farms. We encountered this issue from different angles (Anne Sulling assessed the feasibility of financing the Paldiski 520 MW pumped-storage project as a consultant, while Erkki Raasuke, as chairman of the supervisory board of the Estonian Business and Innovation Agency, was responsible for developing the loan guarantee).

In both cases, the key question was the same: under what conditions would foreign investors be willing to invest in large energy infrastructure projects in Estonia? We decided to explore this together by interviewing both state-owned energy giants and major investment funds. Those who shared their views with us included Statkraft, Vattenfall, Fortum, Equinor, Copenhagen Infrastructure Partners, AIP, Taaleri, RWE, Meridiam and Marubeni Corporation. We share our observations below.

First, Estonia is not currently on the investment plans of most of these players. Investments tend to be made in countries where investors already have an established customer base and synergies with their other activities. The decision to invest is made only when there is a realistic prospect of achieving the desired return on capital at an acceptable level of risk.

Without exception, all interviewed investors said that the main obstacle is not access to capital or debt financing, but revenue certainty — that is, a sufficiently predictable cash flow that ensures returns not only for servicing debt but also for equity investors. The current market design does not provide this certainty and an appropriate support scheme is needed.

Second, investors want to see that the state has a clearly articulated plan for Estonia's future energy portfolio. This means the government must have solved the optimization problem and concluded which components and in what volumes will ensure the optimal balance of price, security of supply and environmental impact over the long term.

The future energy portfolio directly affects investment viability. For example, large volumes of wind energy may make it difficult for a nuclear power plant, which requires stable operating conditions, to function during windy hours, while additional gas plants and batteries may reduce the utilization hours of a pumped-storage facility and thus its profitability.

For this reason, it is important for investors to understand the state's vision for the development of the energy system in order to assess the long-term viability of investments — especially for assets with long lifespans, such as nuclear plants or pumped-storage facilities, which can operate for more than 60 years.

As a positive example, several investors highlighted the United Kingdom's strategy over the past decade to secure investment in new capacity. The strategic plan "Clean Power 2030" explains, by generation technology, why and how many gigawatts are needed in the energy portfolio and specifies what is required to install these capacities, including the framework for support schemes where necessary to ensure projects move forward.

Investors need this kind of specificity, clarity and predictability in order to commit capital.

Estonia's approach so far has been to let the market decide. The Energy Sector Development Plan (ENMAK 2035) is general and indicative, lacking concrete, binding targets for building different types of generation capacity, storage, and interconnections.

There is also no timeline for procurement of different types of generation capacity that would allow sufficient time to agree on investments and complete construction. This means that, by international standards, Estonia's current energy plan is not investable and does not provide investors with predictability or confidence.

Third, it is necessary to be realistic about which investments will materialize under market conditions and which will not. In energy, there is no classical free market: producers enter the market based on variable costs, without accounting for capital costs. This favors renewables with low variable costs but not dispatchable capacity, which is needed when the sun is not shining and the wind is not blowing.

If it is clear that capacities necessary for an optimal energy portfolio will not emerge from the market alone, the state must take an active role rather than remain an observer and create appropriate support mechanisms.

The companies interviewed were unanimous that a 520 MW pumped-storage facility, a nuclear power plant and offshore wind farms are not projects that can be financed purely under market conditions. The risks associated with their construction are very high and both construction times and lifespans are so long that future predictability — and thus revenue certainty — is insufficient.

As one board member of a Scandinavian energy company put it:

"In energy, operating purely on a free-market basis does not always deliver what you need. If the state does not know what it wants, then letting the market decide makes sense. But if it knows exactly what is required, it should hire the best people, focus on the likelihood of project completion rather than the lowest price and choose the cheapest way for society to finance the infrastructure. This is typically ensured by a regulated asset base (RAB) model or a similar mechanism where investors are allowed to earn a regulator-defined return on the value of invested assets.

Based on the discussion taking place in Estonia, it seems there is a belief that nuclear energy is a commercial investment. In Sweden, everyone knows that it is not. The same applies to pumped storage — it can only be done on market terms if it uses existing infrastructure, meaning it is an extension rather than a greenfield project. Companies are profit-driven and therefore obliged to undertake commercially viable projects, but nuclear energy clearly is not. That is why the state must make the business model investable. In the case of nuclear energy, the need for the state to assume risks is extremely high. Attempting to carry out such a project purely under market conditions would make the cost of capital so high that the project would destroy itself. It simply would not happen."

Fourth, not a single investor interviewed is willing to invest against a loan guarantee or a similar financial instrument that ensures revenue stability for debt repayment but pushes returns on equity into a distant and uncertain future.

Therefore, the Ministry of Climate's loan guarantee initiative to support large energy infrastructure investments is not viable. Offshore wind farms, pumped-storage facilities and nuclear power plants also have such different risk profiles that a single universal support scheme cannot work for all of them.

For offshore wind farms, the main issue is electricity price volatility, which is why price guarantees — typically a two-sided CfD (contract for difference) scheme — are used: if the market price falls below the agreed level, the state compensates the difference and if the price is higher, the producer pays back the surplus. This provides investors with a predictable revenue base and makes projects bankable.

For large-scale energy storage, revenue depends not on the level of electricity prices but on price volatility and system services markets. Therefore, cap-and-floor schemes are more commonly used, stabilizing total project revenue and ensuring a minimum income level.

For nuclear power plants, the main issue is their high capital costs and construction and regulatory risks. Therefore, nuclear projects typically rely on either a regulated asset base (RAB) model or long-term price guarantees (CfDs), as well as state-provided loans.

Fifth, several energy companies emphasized that, in many cases, professional and trustworthy communication with the state has been a decisive factor in choosing markets. Given that cooperation on large energy infrastructure projects often lasts for decades and inevitably involves overcoming obstacles, a functional, long-term and reliable relationship with institutions shaping energy policy is essential from an investor's perspective.

According to several investors, a startup developing a nuclear plant or a pumped-storage facility is not a sufficiently credible counterparty and the project's credibility would be significantly enhanced by state participation, for example through Eesti Energia. This would also help reduce political risk — the likelihood that the state may change policies or contracts in ways that undermine investment returns.

Political risk has materialized in several countries, making investors cautious. Spain was cited as a cautionary example where the government prematurely terminated wind energy support schemes during the economic crisis, causing major losses for developers.

Sixth, according to several investors, the construction time and lifespan of nuclear plants and pumped-storage facilities are so long that investment in them is best suited to entities that are, figuratively speaking, present forever, in order to benefit from higher returns on depreciated assets in the distant future.

Both nuclear plants and pumped-storage facilities are modeled with a 60-year lifespan, but in practice they are likely to operate for up to 100 years. In Finland, such long-term investors include state-owned and municipal energy companies, as well as large forestry companies.

In Estonia, perhaps only Eesti Energia fits this category. Therefore, only the Estonian state, through Eesti Energia, can realistically take on the long-term perspective required for pumped storage and nuclear energy. At present, Eesti Energia's role in developing Estonia's energy sector is unclear. Its most recent strategy was published in 2022 and is now largely outdated.

Seventh, experienced investors recommend selecting a lead investor not merely based on financial capacity but on extensive sector-specific experience and the ability to manage highly complex projects. Ideally, such a partner should also be willing to remain involved for decades, rather than optimizing for an exit immediately after project completion.

Investor selection is also influenced by return expectations. Investment funds that raise capital from their own investors naturally have higher expectations than state-owned energy companies. While state-owned companies may accept returns of 8–10 percent, investment funds typically expect 12–17 percent. The design of revenue-certainty mechanisms, which is directly linked to risk, also affects return expectations. On investments of hundreds of millions of euros, even a few percentage points represent a very large sum.

In summary

The interviews clearly refuted the assumption prevalent in Estonian politics that a nuclear power plant or a pumped-storage facility could operate under a purely market-based business model, supported merely by a state guarantee covering a longer loan period. Consequently, it is also clear that loan guarantees — whose apparent appeal lies in not creating ongoing costs for the state — will not attract investment into large energy projects.

It is important to acknowledge that CfD or cap-and-floor support schemes, which are essential to bring large energy infrastructure projects to market, require substantial funding from taxpayers or electricity consumers. Therefore, it is crucial that society supports these choices over the long term.

Given limited resources, it is not possible to do everything. The state must carefully determine which energy infrastructure projects are the highest priority and on what timeline they should be implemented to ensure security of supply and the lowest possible electricity prices and associated costs for Estonian consumers.

The Ministry of Climate must begin with analysis and electricity market modeling to identify Estonia's optimal future energy portfolio. Elering has already begun developing a model to support this, which is expected to be completed in the second half of 2027. The model, along with its assumptions, calculations and conclusions, should be made publicly available and open to debate.

Based on the model, the desired generation capacities must be specified and decided. Revenue-certainty and cost-of-capital-reducing measures must be designed for each group of generation assets in cooperation with potential investors. Measures to mitigate political risk must also be implemented.

The state must also decide in which strategic projects it will participate directly, for example through Eesti Energia. A timeline for bringing the desired capacities to market must be established, along with a procurement schedule. Without such a clear division of roles, a timeline and risk-sharing, investments worth billions of euros will inevitably fail to materialize in Estonia, leaving the country's electricity security and pricing shaped by chance and the decisions of others rather than its own choices.

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