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Energy Cooperation in the Baltic States

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Baltic Energy Forum for Students 2012

Cooperation of the Baltic companies to get along with regulations of the EU

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Prepared by Vytautas Magnus University students:
Povilas Brilius Žygintas Dovydėnas Karolina Mališauskaitė

Table of contents

Introduction 3 Key aspects of the Baltic States’ energy companies 3 Common situation 5 Context of the European Union 7 Conclusions and recommendations 8 References 9

Introduction Recent events in global and local spheres are important to Baltic States’ energy economics. Among those are a) late collaboration initiatives between Baltic States’ governments to endorse regional projects in order to get connected into the EU energy network b) new EU regulatory frameworks, in particular applying to Baltic States energy markets situation c) the declining EU position in terms of energy sector competitiveness. These facts require deeper and more thorough investigation into Baltic energy market players and their abilities to meet demands of changing environment. Authors of this short paper seek to discuss and propose ways for Baltic States’ energy companies to retain and increase competitiveness in the changing economical and political situation. Firstly, authors discuss key aspects of Baltic States’ energy companies. Secondly, local political and economic context is investigated. Thirdly, EU context (and regulations) is investigated. Finally, conclusions and propositions for enterprises are deployed.

Key aspects of the Baltic States’ energy companies
In this section an outlook will be performed unveiling and summarizing key aspects of Baltic States’ (Lithuania, Latvia and Estonia) energy companies. As many authors notice (Janeliūnas, 2008; Arengu, 2009), although three Baltic States underwent huge structural reforms in energy sector since the collapse of the Soviet Union ,the main structure of some energy sectors (e.g. electricity supply) changed insignificantly (SEITC, 2008). It must also noticed that although three countries are “energy islands” (Janeliunas, 2008), their energy sectors structures differ and it could create positive diversity (SEITC, 2008).
Estonia. According to Arengu (2009), the Estonian power sector is characterized by considerable concentration in power and gas, and is in the state of substantial development. Eesti Energia AS is the main electricity provider and distributor in Estonia. It controls power generation company Narva Elektrijaamad AS (AS Narva PP) which, in turn, operates the largest oil shale power plants in the world (SEITC, 2008). Oil shale plants adapted new technology in 2001 which significantly improved efficiency and reduced hazardous emissions (SEITC, 2008). Eesti Energia also controls OÜ Jaotusvõrk, the owner of 87% of electricity distribution networks. Electricity transmission grid is controlled by state since 2010.
Estonian Energy Ltd has in the past years been actively looking for new power generation possibilities in the country and in the wider Baltic Sea region. In line with the foreign expansion strategy, the company has also been working towards getting a stake in the construction of the new nuclear power plants and reactors in Visaginas, Lithuania and Olkiluoto, Finland. In addition, Estonian Energy has started looking for options of constructing an NPP of 400-800 MW in Estonia in the next 15 years (Arengu, 2009).
The largest gas company in Estonia is Estonian Gas, co-owned by several international gas companies. Estonian Gas owns EG Võrguteenus AS (EG Network Service Ltd), the owner of the gas transmission grid and the largest distribution network in Estonia. Similarly to the electrical power market, the number of gas distributors totals a high of 27, but the distribution market is actually very concentrated as EG Network Service holds 92% market share.
Latvia. SEITC (2008) states, that the specific feature of the Latvian energy sector is production of electricity from hydro energy. The main source of hydro energy – the river of Daugva – has been already used by three cascades of hydro plants. Among local resources, wood is used the most. The dominating company in the electricity generation and supply is Latvenergo, a state owned vertically integrated Joint Stock Company (JSC) that generates more than 90% of all electricity and ensures import of electricity, distribution and supply to consumers. Beside of it there exist around 180 small electricity producers and 15 certified electricity distribution and sale companies. The JSC Sadales tikls is a former unit of JSC Latvenergo, and its main activity is providing electric power distribution services. Sadales tikls provides electric power supply to more than one million electric power users, and its service covers more than 99 percent of the territory of Latvia (Plivca, 2009).
At present, JSC Latvijas Gaze is the only merchant in the natural gasmarket in Latvia. In compliance with licenses issued by the Public Utilities Commission, Latvijas Gazecarries out transmission, distribution, storage and sale of natural gas, whereas approximately 70 companies compete in supply of liquefied petroleum gas. Latvijas Gaze supplies natural gas to industrial clients through its centralized gas supply network, also carrying out and financing parts of engineering and installation works for the establishment of new connections. Latvia is as well luckily endowed with the unique natural resource — the Gas Reservoir, which is the largest natural gas storage in Europe with a capacity of approximately 4.4 billion m3. As a result, the country is in a very favorable position in terms of gas supply costs, also providing gas storage for the two other Baltic States and the most western part of the Russian Federation.
Lithuania. According to SEITC (2008), Lithuania is a very dependent country in terms of energy resources. Domestic and renewable sources meet only 11.2 percent of the demand (Janeliūnas, 2008). Lietuvos Energija is the main power company in Lithuania. It owns (through 95.54% stake in company Lietuvos Elektrinė) the largest power plant in Lithuania Elektrėnai Power Plant and directly owns two largest hydroelectric plants in the country (Kruonis Pumped Storage Plant and Kaunas Hydroelectric Power Plant) (The Baltic Course, 2010). It has also stake in the Klaipėda Geothermal Demonstration Plant (Baltic Business News, 2007).With the aim to reduce the vulnerability of the energy sector the Lithuanian Government has initiated several regional projects, among which the most important ones are the new Nuclear Power Plant in Lithuania and energy links to Poland and Sweden.
Lithuania possesses the only oil refinery in the Baltic States Mazeikiu nafta, which has tremendous influence on Lithuania’s economy (Janeliūnas, 2008). Its revenues reached 14,4 B LTL (4,17 B EUR) in 2008. Mazeikiu nafta operates in Cooperation with Butinge Oil terminal. The third major constituent of Lithuanian oil sector is Klaipedos Naſta, which owns the Klaipeda oil terminal. It operates light and heavy oil product storage tank farms and railway trestles. Oil products from Mazeikiu naſta, Russian and Belarusian oil refineries, as well as Russian and Kazakhstan crude oil are exported via this terminal.
Lithuania does not participate in gas transit and acts only as a consumer of Russian Gazprom gas. The gas import is mainly operated by three enterprises: AB Lietuvos dujos, UAB Dujotekana and AB Achema.
As one can see from these descriptions, the Baltic States’ energy sector enterprises are mostly natural monopolists, regulated by the states. However, the Baltic States’ energy policy requires them to unite efforts to achieve common goals (become connected to EU energy net). Recommendations for collaboration are presented in the following sections.

Common situation
All together the Baltic States are in the relatively similar situation. Common history (inclusion into the Soviet Union, memberships of the European Union and a lot of other associations), geographical location to the east of the Baltic Sea, comparable size, etc. cause similar long term objectives. The energy sector is one of the spheres where they should be sought. Lithuanian, Latvian and Estonian governments and all of the institutions of this sector are supposed to work together to reach common energy goals, including the goal of renewable energy, which is being strongly promoted by the European Union.
The common current situation in the energy sector of the Baltic States can be described as dependency on Russia. It is the only source of natural gas for the countries. Natural gas is being mainly used for electricity and heat production. The dependency on a single supplier (Gazprom RAB), which is caused by the isolated gas transportation system, is the reason of the dysfunctional gas market in the Baltic States. The situation in the electricity sector is slightly better. Estonia mainly uses its oil shales for producing electricity, Latvia has relatively strong system of renewable hydropower system, although it imports 30-40% of the electricity of final consumption. The worst situation is in Lithuania, which after the shutdown of Ignalina Nuclear Power Plant had to import 61% of the total electricity national demand in 2010.
The cooperation can be seen in solving these problems. The key precondition to solve the issue of gas isolation is supply source diversification. The Baltic countries have decided to implement strategically important infrastructure investment projects: interconnection of Lithuanian and Polish natural gas systems, finding a solution of the issue of Latvian gas system capacities and the use of Inčukalnis underground natural gas storage facility in Latvia and construction of a liquefied gas terminal in Lithuania.
As for the electricity sector, there are also common strategic projects being processed. 1. The interconnection line with Poland (500 MW up to 2016, extra 500 MW or 1000 MW up to 2020); 2. The interconnection line NordBalt with Sweden (700 MW up to 2016); 3. Synchronized operations with the Continental European power systems (up to 2020); 4. An additional cable interconnecting Estonia and Finland (650 MW up to 2014), complementing the existent Estlink 1 submersible cable (350 MW).
As a part of integrating the Baltic States into the Scandinavian electricity market there are also Power Markets being created in the Baltic States. The current legislation of the countries is being amended as well in order to speed it up. But these markets are still too separate and need to be better integrated (Tropp & Arukaevu, 2011). Based on the Baltic Electricity Market Interconnection Plan (BEMIP) integration into the Scandinavian electricity market is the key task for the upcoming years.
Even though in the Baltic Sustainable Energy Strategy of 2008 as one of the goals there was mentioned phasing out the current generation of nuclear power and banning construction of new reactors, in the Energetic Strategy of Lithuania 2011 there is a contradictory goal of constructing the Visaginas Nuclear Power Plant. This goal in this paper is mentioned as more important compared to promoting renewable energy sources. Therefore, it is not clear if the governments are really willing to make decisions towards renewable energy.
Despite the existence of lots of official documents concerning renewable energy sources development in the Baltic region, the greatest concern is being seen in connecting countries with deficient pipelines of gas and building electricity connections. The cooperation is more evident in these sectors than in renewable energy. There are mainly separate countries’ initiatives to develop the sector than cooperative actions (e.g. the increase in the volume of electricity produced from biogas by 30% in Latvia in 2010, which was caused by several new biogas and biogas cogeneration power plants; although the amount of produced electricity using biogas remains very small compared to other sources) . Nevertheless, the common objectives in renewable energy are proposed by the EU and remain the same for the countries of the region. The countries are in the same situation, so closer cooperation in reaching common goals would be necessary to facilitate the process.

Context of the European Union
The EU has the world’s largest regional energy market of 500 million people and accounts for one-fifth of world’s energy use. Due to the current situation of rising energy prices and increasing dependence on energy imports Europe faces energy security problems and downturn in competitiveness in worldwide energy markets (Günther H. Oettinger, 2010). It also starts losing its leader positions in energy technology markets. Despite the fact that the share of renewable energy in the EU energy mix has steadily risen from 9% to 11.7% in 2006-2009 respectively (Eurostat), the independent 2011 Renewable Energy Attractiveness Index revealed that in world renewable market China continues to lead the way and is still experiencing growth in its wind and solar markets. USA follows China and takes second place with an ambitious target of 80% clean electricity in 2035. While EU, which was the leader, now is the third competitor with its unequal levels of new renewable deployments varying among Member States (Europe 2020, 2010; RECAIT, 2010-2011).
Situation mentioned above determined that severe attention was paid to the energy policy and issues planning the Europe strategy for 2020. Green house emissions 20% lower than in 1990; 20% of energy from renewable sources and 20% increase in energy efficiency – are three main goals in EU’s energy policy to be reached by 2020. According to Schlegel and Kaphengst (2010) the new EU energy policy is based on three core objectives: sustainability (promotion of renewable energy sources and energy efficiency in order to combat climate change), competitiveness (creation of truly competitive internal market) and security of supply (better internal coordination of EU’s supply and demand for energy). According to The 7th Framework Programme there is no single solution to energy problems which EU faces at the moment, but investments in renewable energy technologies, low-carbon technologies, development of economically viable bio fuels for transport, new energy vectors, could lead to reaching the targets of new energy policy. Also it is important to be aware of market failures that could limit the use of renewable energy because learning effects imply that large deployment costs may be incurred before renewable energy technologies can become competitive. Network effects may lead to difficulties in displacing carbon-intensive technologies. It will take a lot of time until renewable energy will reach competitive prices and demand for it will grow (Lawson, 2010). However action on renewables and energy efficiency will secure energy supply, decrease EU’s dependence on imported energy and might create many high-quality jobs in Europe. As well it will help to maintain Europe’s technological leadership in global energy market (Green Paper, 2006).
Finally in order to reach 2020 targets huge financial investments will be needed. According to the data from Bloomberg energy finance, capital flowing into the asset-based and structured funding deals related to renewable energy in EU reached a peak of €35b in 2008, falling to €27b in 2009 and €17b in 2010. The study made by Ernst&Young’s reveals that meeting the 2020 targets will demand approximately €60b to €70b annual capital expenditure for new renewable energy installations. Also it will require strong political commitment from both governments and from the European Commission (RECAI, 2010).

Conclusions and recommendations
Analysis results presented in the essay reveal that the scope of energy cooperation in the Baltic States is little. Every State has its own energy market, which is more or less monopolistic and does not have a tendency to cooperate with external possible partners.
EU energy strategy for 2020 is basically based on promoting usage of renewable energy sources, investing into low-carbon technologies and developing internal market. Following the new strategy needs huge investments and cooperation among members. This is why companies and governments of the Baltic States should consider much closer and bigger cooperation in the energy sector. Possible cooperation areas are creation of common research centres, investments into renewables and development of new, more efficient technologies. These measures would help to improve Baltic region competitiveness among EU and would also bring its contribution to implementing EU goals for 2020.

References 1. Agency for the Cooperation of Energy Regulators (2011). Balticregion electricity regional initiative, work plan 2011-2014. p. 10. 2. Arengu L. (2009). Sector Report Energy Estonia. UK Trade & Investment. 3. Competition Authority (2011). Estonian electricity and gas market report 2010. 4. Ernst & Young (2011). Renewable energy country attractiveness indices. 2011November, issue 31. www.ey.com/publication/vwLUAssets/Renewable_energy_country_attractiveness_indices_-_Issue_31/$FILE/EY_RECAI_issue_31.pdf 5. Ernst & Young (2011). Renewable energy country attractiveness indices. 2011February, Issue 28. www.energy-base.og/fileadmin/media/sefi/docs/publications/EY_RECAI_issue_28.pdf 6. European Commission (2006). Green paper: A European strategy for sustainable, competitive and secure energy.CESifo Forum. 2006 February. 7. European Commission (2010). Europe 2020. 8. Eurostat, epp.eurostat.ec.europa.eu/tgm/table.do?tab=table%&init=1&plugin=1&language=en&pcode=t2020_31 9. Janeliūnas T. (2008). Lithuanian Energy Strategy and its Implications on Regional Cooperation. Pulling the Baltic Sea Region together or apart? (Eds. AndrisSprūds and Toms Rostoks), Riga: Zinatne, p.190-222. ISBN 978-9984-808-58-1 10. Lawson J. (2010). European energy policy and the transition to a low carbon economy. OECD Economics department papers no.779. 2010-06-08 11. LietuvosEnergija acquires LietuvosElektrine shares. The Baltic Course. 2010-10-13. 12. LietuvosEnergija to acquire Geoterma shares. Baltic Business News. 2007-12-27. 13. National Control Commission for Prices and Energy (2011). Annual Report on Electricity and Natural Gas Markets of the Republic of Lithuania to the European Commission. 14. Plivca S. (2009). Sector Report Energy Latvia. UK Trade & Investment. 15. Public Utilities Commission (2011). 2010 Annual Report of the Public Utilities Commission of the Republic of Latvia on the National Energy Sector, Prepared for the European Commission. 16. Stockholm Environment Institute Tallinn Centre (2008). Baltic sustainable energy strategy. Sustainable energy policy for the Baltic Sea region: non-fossil and non-nuclear opportunities[seminar]. 17. The Central Statistical Bureau (2011). On consumption of renewable energy resources in 2010. http://www.csb.gov.lv/en/notikumi/consumption-renewable-energy-resources-2010-32095.html 18. The government of Lthuana (2011). National energy (independence of energy) strategy.

--------------------------------------------
[ 2 ]. AB Mažeikiu naſta. Annual Report 2007. 2008, p. 66, http://www.naſta.lt/get_file.php?id=15
[ 3 ]. Baltic region electricity regional initiative work plan 2011-2014, 2011, p. 10
[ 4 ]. The Central Statistical Bureau of Latvia, 2011

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