Ojārs Kehris Economist Association 2010 President Energy market and security of supply in the Baltics – Latvia, Lithuania, Estonia Reforming Infrastructure. Privatization, Regulation and Competition. Workshop co-hosted by The World Bank, Public Utilities Commission of Latvia. May 3, Riga, Latvia

I would like to rise two main challenges in the energy sector development: potential deficit in the Baltic energy market; potential deficit in the Baltic energy market; how to guarantee the security of supply in this market; how to guarantee the security of supply in this market; and discuss the role of regulation to solve these problems. and discuss the role of regulation to solve these problems.

FuelEstoniaLatviaLithuaniaNuclear Fossil fuel Hydro Total

Potential supply deficit in the Baltic energy market Main generating assets in Baltic area have fixed closing deadlines: Main generating assets in Baltic area have fixed closing deadlines: Two blocks of Ignalina, Lithuanian Nuclear Power Plant - Year 2005 and 2009, Two blocks of Ignalina, Lithuanian Nuclear Power Plant - Year 2005 and 2009, The old blocks of the Narva, Estonian Oil shale Power Plant - Year The old blocks of the Narva, Estonian Oil shale Power Plant - Year Electricity market in Baltics will have supply deficit due to reduced generating capacities and increasing energy demand, as a result of dynamic economic development. Electricity market in Baltics will have supply deficit due to reduced generating capacities and increasing energy demand, as a result of dynamic economic development.

The alternatives for new generating assets new block of the Nuclear Power Plant in Ignalina, new block of the Nuclear Power Plant in Ignalina, reconstructed Oil shale blocks in Narva Power Plant, reconstructed Oil shale blocks in Narva Power Plant, new Coal-fired Power Plants in the Baltic ports new Coal-fired Power Plants in the Baltic ports Natural gas-fired power plants, based on gas imported from Russia Natural gas-fired power plants, based on gas imported from Russia

The future competition in the Baltic energy market It is not the Baltic States that will compete with each other, but, the energy sources will compete. It is not the Baltic States that will compete with each other, but, the energy sources will compete. In long term the Baltic States should manage to coordinate their investment activities instead of praparing to compete with each other. In long term the Baltic States should manage to coordinate their investment activities instead of praparing to compete with each other. The main competition in the Baltic energy market will be between Russian origin gas, transported and sold by energy monopolist Gazprom, and all other energy sources. The main competition in the Baltic energy market will be between Russian origin gas, transported and sold by energy monopolist Gazprom, and all other energy sources.

The economic aspects of the electricity market liberalization In the current situation, regardless of the risk of the production deficit, it is not possible to develop economically viable projects in Baltic's energy market, because of energy and resource import from the Russian market, which has different from EU technical and ecological requirements and subsidized internal price structure for energy resources; In the current situation, regardless of the risk of the production deficit, it is not possible to develop economically viable projects in Baltic's energy market, because of energy and resource import from the Russian market, which has different from EU technical and ecological requirements and subsidized internal price structure for energy resources; Through subsidiaries in Baltic states Russian enterprises achieve position in the EU liberalized energy market, keeping monopoly position in the natural gas supply. Through subsidiaries in Baltic states Russian enterprises achieve position in the EU liberalized energy market, keeping monopoly position in the natural gas supply.

Steps to common Baltic (EU?) position Baltic states should take a joint and strategic view on the real objectives for energy industry within Baltic’s: Baltic states should take a joint and strategic view on the real objectives for energy industry within Baltic’s: what would be incentives for installation of new generation assets; what would be incentives for installation of new generation assets; what energy resources would be used for generation; what energy resources would be used for generation; is there a possibility to set up generation portfolio that is independent and would compete with natural gas fired generation, is there a possibility to set up generation portfolio that is independent and would compete with natural gas fired generation, how to cooperate and align individual country interests to secure supply in long term. how to cooperate and align individual country interests to secure supply in long term.

The first agreements - about the cooperation on the electric supply: multilatteral agreement (1992) – Latvia, Lithuania, Estonia, Russia, Belarus; – threlateral agreement (1997) – Latvia, Lithuania, Estonia;

The security of supply The electricity systems in Latvia, Lithuania and Estonia are too small to individually balance electricity production and demand. Even if this balancing could be technically possible, it would be very expensive and inefficient. Transmission network operators in Baltic countries are responsible for the security of electric supply in each country, but technically and operationally they remain interdependent with the operators in other countries within the common electric grid; The current legislation doesn’t provide for existence of the “supra-national” system operators;

The Pan-Baltic transmission system operator Baltic states should evaluate feasibility from economic and legal standpoints for a Pan-Baltic transmission system operator, that would be responsible for system security and certain auxiliary services in areas that are closely linked due to existing technical characteristics of networks and sizing limitations of each individual country. The impact should be analyzed, what interconnections between the Estonia and Finland, between Lithuania and Poland, as well as between Lithuania and Sweden will have on the Baltic energy market security.

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