During the last years energy has been a widely discussed and considered topic. Energy has become an important issue in Europe, Asia, US as well as in Russia. Energy is a modern topic.
Energy promotes economic development and security of countries, regions and unions. Energy comprises economic development, welfare, technology and environment.
Today I would like to highlight some energy related challenges faced by the Baltic countries.
This year, the Baltic countries celebrate the 16th anniversary of regaining their independence. During these years the Baltic countries have made a tremendous political and economic transformation. All three countries have become a part of the global economy, Member States of the European Union, NATO and the World Trade Organisation.
Today the economies of the Baltic countries are among of the most dynamic economies in the European Union, investors still have high interest in the region, and the national governments have always advocated liberal international trade policy.
During the last years, the GDP of the Baltic countries has increased by 9-11% every year. And it is no surprise that such a rapid economic development creates an increasing demand for energy resources for the industrial and private sectors.
Different studies indicate that in the Baltic countries internal consumption of electricity in the period till 2025 will increase by an average of 3.5% per year.
In order to characterise the potential development of electricity consumption of the Baltic countries, I would like to mention the following figures – today the inhabitants of Latvia consume on average 3 times, inhabitants of Lithuania – 2.5 times, but inhabitants of Estonia – 1.4 times less electricity than the EU.
Experts estimate that in the period till 2025 the demand for heat supply in Estonia will not increase, in Latvia it will increase by 17%, but in Lithuania – by 55%.
It is worth mentioning the development tendencies of the transport sector in the Baltic countries, which to a rather great extent affects the market and consumption of energy resources.
Here statistics speak for themself – for instance, the number of registered automobiles in Latvia after regaining of independence has doubled and retains sufficiently progressive development tendencies.
Until 2025, the consumption of energy resources in the Baltic countries will continue to increase as the result of development of their economics and the private sector.
Today I would like briefly reflect on energy-related issues as electricity production, gas and oil supplies and consumption, renewable energy, bioenergy, interconnections and possible energy-related investment projects in the Baltic countries.
Baltic energy market today
In spring 2004, two significant political processes were completed in the history of the European continent. Both, the European Union and NATO were enlarged and all three Baltic countries were involved in both enlargement processes creating a new political and economic reality in the region.
The enlargement was a process by which integration of the Baltic countries in the European Union and NATO was theoretically completed, but today we have to speak about energy sector where integration is still going on and will possibly continue for a rather long time. One of these sectors is energy.
Within the framework of the European Union, till 2006, the Baltic countries were like an energy island. Today we can speak about the ESTLINK connection between Finland and Estonia. It is a very important project but perhaps the political meaning of this project is much more significant because it physically connects the Baltic countries with the electricity supply networks of Scandinavia.
Although, the Baltic countries still speak about connections with Scandinavia and Central Europe as a desirable objective, the electricity systems of all three countries are still connected to the electricity networks of the CIS countries – directly to Russia and Belarus. A few years ago, the electricity systems of the Baltic countries were disconnected from the networks of CIS countries in order to test an independent functioning regime.
The following tendencies dominate in the electricity production sector. Latvia imports electricity deficit from Lithuania, Estonia or Russia – it depends on the price of available energy resources on the market. Lithuania produces and exports electricity to Latvia, Belarus and also to the Russian Federation (Kaliningrad Region). In case of Estonia, it produces the necessary amount of electricity from oil shale and exports it to Latvia.
To my mind, such a situation of mutual cooperation regime of the three Baltic countries is probably logical enough, but considerable corrections to this plan will be made in 2009, when in order to fulfil the conditions of the Accession Agreement to the EU, Lithuania will have to close the second block of Ignalina Nuclear Power Plant.
The year 2009 will bring considerable changes to the structure of the power industry of the Baltic countries. For instance, Lithuania will have to face rapid electricity price increase because it will need to use other electricity production equipment instead of Ignalina Nuclear Power Plant.
Probably, for Lithuania, it will be cheaper to import electricity than to produce it by other means after shutting down of Ignalina’s second block. We can automatically conclude that the amount of energy resources imported from Lithuania to Latvia will decrease significantly.
Moreover, no alternative power bridges with Poland or Scandinavia have been developed yet, which would ensure alternative electricity supplies after shutting down of Ignalina.
There are several alternative solutions for this problem.
The Prime Ministers of the Baltic countries and energy companies have agreed on the necessity to build a new block of the nuclear power plant in Ignalina that would compensate the decreased amount of energy production after shutting down of the old block.
In December last year political consultations were started on possible involvement of Poland in the construction of the new block of Ignalina nuclear power plant. I am an optimist and I do hope that all initial works will proceed successfully and in the period from 2015 to 2018 we will witness the opening of a new nuclear power plant in Lithuania.
But at the same time we should realise the potential high deficit of energy in the Baltic countries at the time of construction of the new Ignalina block – at least till 2015.
One of possibilities to reduce this electricity deficit would be building new links and connections. In my opinion, such connections should exist between Lithuania and Poland, and between Latvia and Sweden.
Moreover, it is necessary to increase the capacity of the existing cable between Estonia and Finland.
At present moment we look at such possible connections as ideas and probabilities. But this process requires decisions and dynamics. The projects will be expensive enough and will not be an option to completely solve the problem of electricity deficit in the Baltics.
Facing the above presented reality there is no doubt that we should also think about other alternatives for production of electricity. One alternative is the construction of new and powerful gas cogeneration stations in the region.
Taking into account the existing structure of the gas supply system in the Baltics, it seems logical that such stations should be built in Latvia.
In my opinion, construction of such stations can be dynamic enough and when the new block of Ignalina starts functioning mutual interaction of the nuclear power plant and gas cogeneration stations could be even desirable.
Another alternative to reduce the possible electricity deficit would be the construction of a coal station. No doubt this would increase independence in terms of energy supplies but we would face another significant problem – emissions. However, this alternative has significant advantages and for the purpose of increasing electricity supplies such station could be needed in the Baltics.
Some parts of the Baltic countries are in such geographical location which allows rather effective use of wind power.
Discussions on this alternative have been held and no doubt, wind power sector will continue its development in the Baltics.
At the same time two problems should be pointed out – first, power produced by the wind generators does not provide necessary amount of the base energy and automatically indicates the need for base power stations. Second, the prices of wind power are still comparatively higher in the Baltics.
Modern technologies – like small scale cogeneration stations - provide bases for local or even individual projects for electricity production. In the Baltics we should discuss the currently available energy production alternatives and ways in which these technologies should be promoted. No doubt, such projects would increase overall energy independence of the countries.
In the Baltic countries during next 15 years several important investment projects will be implemented along with the new Ignalina block. Such projects would comprise gas cogeneration stations, wind parks, as well as establishing different connections.
The Baltic countries stand before large energy production projects and significant investments.
Another important energy policy component is oil and oil products.
To my mind, there are diverse supply alternatives for oil product market of the Baltic countries. Some studies show that the Baltic market can be provided with oil from at least 30 different refineries which use oil of different origin in their production processes. The ports of the Baltic countries may ensure import and export of oil products.
Mazeikiu Crude Oil Refinery Factory operates successfully in the region and today to a large extent provides all three Baltic countries with oil products. Several well known Scandinavian and Russian oil product companies are also operating in the Baltic countries delivering oil products by ships, pipelines or railway.
Here I would like to mention that for quite a long time Latvia has been one of the main centres of reloading Russia’s oil products. But for already more than 4 years the ports of Latvia do not receive crude oil from Russia through pipelines, although Latvia’s transit gateway ensures the shortest and probably the cheapest delivery to the European and global markets.
Lithuania also has similar problems as already several months oil supply from Russia to Mazeikiu Crude Oil Refinery Factory has been interrupted.
During the last few years, several significant biodiesel and bioethanol production facilities have been built in the Baltic countries. Today high output percentage of those factories are exported mainly to Scandinavia and Germany as Baltic market is relatively small and relevant distribution networks still need to be developed in our countries. At the same time more work should be done to promote the use of biodiesel and bioethanol in Latvia and other Baltic countries.
When the relevant homework will be completed, the Baltic countries could significantly increase the use of these fuels in transport and other energy sectors. But market price of biodiesel and bioethanol will be the main factor to determine how quickly these fuels could increase their share in the market.
Now I would like to say a few words about issues related to production and supply of heating.
First of all it should be mentioned that For a rather long time the Baltic countries have lived in conditions in which heating was almost for free and the building sector had stipulated almost no requirements with regard to heating energy economy.
The Baltic countries have inherited the Soviet time infrastructure, as well as a huge housing fund which does not meet the basic energy efficiency standards.
Both, the old infrastructure and housing require large investments in order to reduce the amounts of heat losses. Such investments could guarantee a lower amount of fuels used for heating purposes and would potentially reduce the amount of the imported energy resources.
In the Baltic countries, different fuels are used for heat production. During the last years, the consumption of heavy fuel oils and coal for heat production has dramatically decreased, but at the same time the use of wood-pulp products has increased.
I am convinced that the development and application of modern technologies should be promoted in the Baltic countries in order to ensure more considerable use of national resources for local and individual heating purposes – wood-pulp, wood waist, wood pellets and peat.
For instance Baltic countries have natural recourses and technologies for production of impressive volumes of wood pellets, but 90% of the output of local production is exported.
Heating in large cities is mainly produced by gas. I am convinced that the governments should encourage renovation of heating power plants in order to secure their future operations also in cogeneration regime. It means that large heating power plants could become important source for heat as well as for electricity.
Once touching the issue of production of electricity and heating we have to talk about gas supply to the Baltic countries. Owing to the historical conditions the gas supply systems of the Baltic countries are connected to the gas systems of Russia and other CIS countries. All three Baltic countries today are 100% dependent on Russian gas supply.
Latvia has unique geological structures providing with opportunity to develop large natural gas storage facilities. One gas storage facility has been functioning in Latvia for already more than 30 years. Its active gas reserve amounts to 3 million m3. If this amount would be used only for Latvia, it would last for internal consumption for the whole year.
Inčukalns natural gas storage facility functions also as a distribution centre. At present Inčukalns natural gas storage facility supply gas not only to Estonia and Lithuania, but also western part of Russia, and several other countries have expressed their interest in establishing connections to Inčukalns natural gas storage facility.
It is worth mentioning, that Inčukalns natural gas storage facility also equalizes seasonal consumption. “Latvijas Gāze” has made a strategic decision to increase active capacity of Inčukalns natural gas storage facility in order to satisfy increasing demand for gas in the Baltic countries and Russia.
Geological researches of Latvia indicates that there exist technical opportunities for establishment of some more large capacity gas storage facilities. Would it be necessary?
Here we come to the EU energy policy. After several energy crises, the EU came to a very important conclusion – each country has to make strategic oil reserves that would amount to 90 days of internal consumption. I consider that it is time to think about strategic natural gas reserves at the EU level. Latvia can offer such opportunities.
There is no doubt that such projects are very large and expensive, but at the same time, for the sake of energy security such investments are really needed. Although Latvia will not be able to become a strategic natural gas storage facility of the whole Europe, it will be able to fulfil these functions at regional level.
During the last years many discussions have been held on the NordStream gas pipeline and its potential impact on energy of the Baltic countries. Theoretically, some of the Baltic countries could establish a connection with the NordStream even in case if such connection is unprofitable.
You would ask – why?
Because of only one reason – the branch would provide the Baltic countries with gas of the same origin but would ensure existence of two alternative supply routes. Moreover, I would not exclude the possible interest of Europe in development of a regional strategic gas storage facility which, theoretically, could be located in Latvia.
What are other alternatives for gas supply for the Baltic countries?
First alternative – a gas pipeline could be constructed in the Baltic Sea to connect Norway and some Baltic country or Poland.
Second alternative – construction of LNG terminal in the Baltic countries or Poland.
Last but not least – a theoretical alternative – construction of a new gas pipeline from the Black Sea through Ukraine and Belarus to the Baltic countries or Poland.
All these possible alternatives require significant analysis and participation of strategic partners of the Baltic countries, including Commission.
I do not believe there is a reason for pessimism. Strategic decisions should be made and projects implemented. No doubt all projects I mentioned today - if implemented - would have important impact on security, economic development and welfare of the Baltic countries for several decades.
And finally main conclusions:
Energy-related issues in the Baltic countries are probably much more important and complicated than in other EU and NATO member states.
There is a wider range of energy-related issues in the Baltic countries to be solved almost at the same time – starting with perspective solutions to electricity production, gas supply, interconnections, and potential increase in capacity of oil refining industry, renewal of infrastructure and introduction of new and modern technologies, as well as the increased use of all kind of renewable resources.
Some of these projects should be implemented at the same time. Others should be arranged according to the defined priorities. Implementation of any project requires strategic decisions and considerable investment. The energy sector of the Baltics should be viewed regionally and should be implemented in co-operation with strategic partners and within context of EU energy policy.
And finally I would like to thank the German Presidency promoting energy as one of the priorities and carefully listening to all EU Member States – big and small in order to establish a coherent view of the European Union.