06 September 2012

Reshaping Energy Sector in the Baltics: Towards energy independence

Developing an energy strategy is a key priority for the Baltics, says Andrius Simpkus.

An energy strategy is imperative

Energy security is ability of the State to choose how and under what conditions local consumers are to be provided with energy and energy resources. This ability is mainly determined by alternatives for usage of local energy sources, diversified imports, integrity of energy systems, and market-based formation of energy prices. Today the Baltic States – Lithuania, Latvia and Estonia – do not have such ability, being isolated from the energy community of the rest of EU, dependent on the sole supplier of natural gas, and possessing limited alternatives for internal energy production

Energy security and energy independence

Energy security is one of the main challenges of today’s global energy policy. Energy dependence on external factors does not only increase threats to national security, economic wealth, formation of internal policies, but also to daily social processes, which are highly influenced by increasing energy and consumption prices and decreasing purchasing power of consumers. Energy is one of the cornerstones of modern welfare State, based on common system and logics of political, technological, economic and regulatory decisions.

Even if technological and economic factors should be decisive in every discussion on energy security, as enabling for sound evaluation of the State’s selected energy policy guidelines, however, mostly due to the tendencies of geopolitical energy influence, the energy future is being shaped by political decisions and implementing regulatory mechanisms. And definitely this is not only a specificity of the Baltics.

For instance, decision to suspend development of nuclear energy and to renounce any use of nuclear power generation capacities by 2022, as it was made in Germany last year, was based solely on political causes without due attention to opposing opinions of energy and economy experts. Such decision resulted in significantly increased dependence on imported electricity produced in French nuclear power plants and Russian natural gas. In principle the analogous result was also reached in Lithuania after implementation of the EU accession requirement for decommissioning of the Ignalina nuclear power plant. Initial decision was taken hastily, without timely assurances for technological and financial alternatives. And at the end of the day Lithuania, and the entire Baltic region, faces energy deficit, energy isolation from the rest of EU, full dependence on energy imports and one-sided dictate of energy prices.

This is only a couple of examples how political and regulatory decisions do influence long-term impact to the energy system, as well as overall economic development of the State. Energy security is not only a topicality for the Baltics. The 2009 natural gas crisis in Ukraine perfectly revealed that Central Europe is also vulnerably dependent on natural gas imports from Russia. Energy independence from imports of fossil fuels is also one of the priorities of the presidential office of the USA. In fact most of energy sector decisions are inevitably related to regional or even international impacts.

Last few years in the Baltic region are very active in a sense of energy related processes: political and regulatory decisions are being taken to accelerate implementation of strategic energy infrastructure projects with a decisive influence for development of energy sector in the region during the upcoming decades. Strategic framework for such decisions is being drawn by national energy strategies targeted at long-term development of energy sector structured so as to eliminate current isolation from the rest of EU, dependence of energy imports from Russia, as well as to implement high-ranked objectives of competitive energy markets and sustainable energy development.

Energy trends in the Baltics: fight for diversified supply

Development of the energy sector constantly remains among the top strategic priorities of national policies in the Baltic States. Current realities of energy isolation from the rest of EU with no west-directed gas interconnections and single electricity cross-border connection between Estonia and Finland make the dependence on energy imports from Russia as a constant aspiration to establish effectively functioning alternatives for supply of energy and energy resources, to challenge excessive pricing of fossil fuels and to increase security and reliability of supply in a sustainable manner. All three Baltic States may be seen as facing different priorities for development of energy infrastructure, varying national strategies and political interests, however, the general issue of energy dependence is commonly at stake.

One of the major streamlines of the energy sector in the Baltics – establishment of capacities for diversified supply of energy and energy resources – leads towards development of local energy production capacities. As the Baltic region in general is not rich in conventional fossil fuels, development of alternative energy generation capacities is seen as the only option to decrease the role of energy imports. It must be noted, however, that Estonia is exceptional from other Baltic States and within entire Europe for its ability to ensure its energy independence with indigenous energy source – oil shale. At the same time it is a CO2 intensive fuel, thus the diversification of energy mix is also an important trend.

To ensure the base load electricity generation the Visaginas nuclear power plant is being developed in Lithuania together with Latvian, Estonian and Japanese investors. The new nuclear power plant is expected to be launched by 2020 thus getting the Baltic region out of the pit of electricity deficit that deepens increasingly after decommissioning of the Ignalina nuclear power plant at the end of 2009. Also enhanced investments into renewable energy, especially biomass and wind, is seen as a regional target not only to reach the EU-determined objectives of 20-20-20, but also to exploit local potential of non-fossil energy sources and to have a diversified variety of independent generation capacities. Support schemes based on the state subsidies increase the attractiveness of renewable energy sector in the Baltics both for local and international investors.

As for natural gas sector, the current Gazprom import monopoly and excessive price dictation forces to look for diversification of import sources and creating a substantial regulatory background for competitive natural gas market. Latvia and Estonia are rushing for the EU support among different regional LNG projects; Lithuania already started development of the LNG terminal in the Klaipeda sea port based on local investments. Feasibility of constructing the natural gas interconnections is being investigated as well. And finally, formation of national or even regional natural gas trading platforms, together with future alternative supply capacities and gas storage abilities, is expected to increase liquidity and competitiveness of the natural gas markets. Possible extent of the shale gas potential is intensively under investigation – shale gas exploitation tender in Lithuania is planned already this year and well-known international companies have already expressed their interest.

Another streamline, mainly pushed forward by implementing the EU third energy package, is liberalization of energy markets via unrestricted energy trading options and unbundling of vertically integrated electricity and natural gas monopolies. All three Baltic States took a different gear to progress with opening of energy markets, however, at least for electricity trading this year are planned as Nord Pool Spot’s final entrance into the Baltics thus integrating local power markets into the Nordic market. The Baltic Energy Market Interconnection Plan, approved by the European Commission and the Member States around the Baltic Sea, focuses on full EU integration of the Baltic energy markets by 2015.
Development of alternative power generation capacities, construction of new cross-border interconnections with Finland (from Estonia), Sweden and Poland (from Lithuania), investments into renewable energy sources, diversified supply of natural gas, as well as EU-directed integration of energy markets and systems are seen as the main trends shaping the regional energy market in the Baltics and defining the core standpoints to be reached at various levels of energy policy, infrastructure and regulatory background.

.Having in mind their overall dimension and profile, energy and infrastructure projects do remain one of the top priority targets for our law firm. It is not only a professional challenge to be at the cutting edge of rapidly developing energy law and business practices, but also a social responsibility to share our knowledge and expertise in making right decisions under appropriate circumstances. Energy independence of the Baltic region is still a long way to go and thus any incentive requires for due understanding between and joint actions by public authorities, energy companies and lawyers.

Post scriptum

Impartial observer could hear continuous discussions in each of the Baltic States and at very different levels of society, knowledge and interests, whether the region has to be structured as based on nuclear energy, renewable energy sources or diversified natural gas supply. Very often these discussions lead to open opposition towards one or another source of energy or even escalation of the inborn evilness of certain energy projects in progress. Economic value of such projects, magnitude of commercial interests and geopolitical influences once again tend to strike the energy independence future in the Baltics.

However, such discussion leading to set-off against separate energy sources is very much perverse in itself; this is not a time for demarcation between different energy sectors, but for creating integral diversified systems of self-sufficient and flexible satisfaction of the consumer’s needs. The future belongs to energy based on alternatives, which should ensure the State’s ability to choose safe, reliable and economically sound ways for shaping its energy balance. The entirety of energy projects in the region and their intensity allows declaring general understanding of this strategic guideline, however, further efforts, regional integrity and international awareness is still needed to foster current incentives in the Baltics.

We live in a global world where conventional energy sources are expiring, new technologies are expensive, but the number of people and their needs are increasing tremendously. It could be hardly expected for the energy prices to decrease, but today’s political and regulatory decisions will determine whether the Baltic States would remain the EU-level energy player and would sustain sufficient abilities for choosing its energy future and thus – the course of their economic development.

Andrius Simpkus is a senior associate at law firm Lawin's Vilnius office


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