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Atomic Lithuania - To Be Or Not To Be?

By Aistija Zubaviciute
Posted: 14th November 2013 14:47
Over the last 20 years, Lithuania has faced a challenging time in regards to central planning and the market economy.  Energy is the blood of the economy.  Three years have passed since the exploitation of the last 1500 MW block of Ignalina Nuclear Power Plant (NPP) was stopped.  The largest and cheapest generator in the region, it was producing 80% of the country‘s electricity and was considered the ‘ticket’ to the European Union.  Now the debate asks if Lithuania should become an atomic country again. 
Over the last decade the Lithuanian electricity sector has undergone a process of restructuring and privatisation.  In 2010, soon after Ignalina NPP ended their operations, new conditions for the electricity market were created.  Starting in 2013, electricity tariffs are no longer regulated for commercial customers, and similar conditions will apply to households from 2015.  The latter customer group consumes about 1/3 of total electricity consumption and make up 92% of 1.6 million customers in Lithuania.  Currently the real market opening is for about 32% customers.  The market opening for the commercial customers, depending on their demand, ranges from 41% to 92% of all such consumers’ objects.  In 2012 there were 27 active independent suppliers out of 65 licensed ones, and two of these independent suppliers were for households.
The restructuring of the electric power sector (according to the 3rd EU Energy Package) was finalised in August 2013 by the ownership unbundling of transmission system operator LITGRID AB, and in September creating the energy company group LIETUVOS ENERGIJA UAB.  It comprises the generation company LIETUVOS ENERGIJOS GAMYBA AB, the electricity distribution network operator/public supply company LESTO AB and the new Visaginas nuclear power plant project company VAE SPB.
According to the newspaper Business News (11/09/2013) the mentioned companies can be described in the following way:
- LIETUVOS ENERGIJOS GAMYBA AB – a monopoly of activity, with the perspective of higher dividends and reduced debt levels, the results for the last quarter were considered good.  It can be considered as dividend shares and in the future it can contribute to the strategic projects in Lithuania.  Investors' forgotten position.
- LITGRID AB – the good last quarter results, the big dividends paid recently, but liquidity does not gratify.  Relatively inexpensive shares.  Taking into account the fact that the company will have to pay for the power cable connection to Sweden from 2015, the investments of company will be very high, so the dividends are also likely to be just like last year.
- LESTO AB – the loss replaced by profit finally, the utility paying the dividends, attractive to institutional investors.  It pays to be considered as a dividend position.  True, the company‘s  shares has already went up quite a bit due to a lot better results this year.
It can be also added that in Lithuania the electricity generation and supply sectors are not regulated, except if they do not have a big influence in the market.  Then the energy regulator, after the research, has a right to obligate these entities to serve at the reasonable price levels with the fair return on investments, to set a price cap or to apply the cost accounting systems according to the Law on Electricity.  The transmission and distribution network companies are regulated by the incentive regulation method, and the price caps of such services are set for five years.  The current pre-tax WACC is 6.13%.  The electricity consumption is increasing and reaching the level before the last crisis – 9.66 TWh.  At the moment the regulatory asset base (RAB) is revised by the long-run average incremental cost (LRAIC) method.  It is foreseen to apply a new RAB value for the electricity transmission and distribution services since 2015.
It is possible to say that the Lithuanian power companies are under-estimated and there is a potential for growth and challenges.  Transmission system operator LITGRID AB will have a major role changing the "island" power system status into an integrated one.  Currently three strategic projects are developed:

·         NordBalt connection between Lithuania-Sweden (700 MW) by December 2015.  This link is a prerequisite for the common Baltic-Nordic electricity market;

·         LitPol Linkconnection between Lithuania-Poland (2x500 MW) the first stage by the end of 2015, and the second – by 2022.  Itwill connect the Baltic States' power infrastructure with that of the Western Europe for the first time;

·         Synchronisation with the European Continental Network (ECN)till 2020.  The goal is the independent operation of the national power system at the frequency and times of the ECN. 
TEN-E Financial Assistance Committee approved the funding of the study on the three Baltic States' integration into the EU internal electricity market.  EUR 950,000 was allotted for this purpose, with LITGRID AB, AS AUGSTSPRIEGUMA TĪKLS and ELERING AS acting as beneficiaries.  In June 2012, the Seimas (Parliament) of the Republic of Lithuania adopted the Law on Integration of the Power System into European Continental Network. 
So, the integration into the European power systems includes the strategic energy projects implemented by LITGRID AB: the LitPol Link and NordBalt power links and the synchronisation with the ECN.  All investments, including new possible NPP, should reach about 4 billion EUR and financed from various sources (prices, loans, EU funds and other international support) till 2020.  About 900 million EUR should be for the transmission infrastructure investments.
The fourth strategic project can be mentioned, although it has yet to properly see the light.  It is needed to fill the generation gap after the decommissioning of Ignalina NPP (3000 MW).  The changed power flows in the region caused the congestion on the Estonian-Latvian cross border interconnection.  So, the doubled electricity purchase price after the closure of Ignalina NPP is gradually increasing.  In Lithuania the power exchange, administered by NORD POOL SPOT AS (NPS), was opened in June 2012.  The risk of higher prices became evident after the start of NPS in Latvia from 3rd June 2013.  So, the electricity price in the Lithuanian, also Latvian, bidding zone is constantly the highest comparing to the rest NPS bidding zones.  In Lithuania the average electricity purchase price during 2003-2013 has increased three times: from 16 to 47 EUR/MWh.  Is there a need for more signals to build a new base-load power plant?
Since 2010 the Lithuanian power system imports about 70% of electricity from the Russian Federation (EUR 300 million per year).  The neighbouring Latvian power system is also an importing one.  Only the Estonian market may enjoy the local primary energy resources and the exporting position.  The Baltic electricity market may artificially play the competition game, but in reality there are only few market players.  The situation may change, when the mentioned interconnections with Sweden and Poland are built in 2015, but the Lithuanian power system will remain dependent on the imported electricity.  It is obvious that there is a need of generation capacity in the region.  The intention to build nuclear power plants in Byelorussia and Kaliningrad (Russian Federation) close to the Lithuanian border shows the seriousness of the situation.  The lack of one major point in the BRELL (Byelorussia, Russian Federation, Estonia, Latvia and Lithuania) high voltage power ring requires the decision, which should replace the closed Ignalina NPP.
In 2011 the Law on Renewable Energy Sources (RES) was passed.  It created extremely favourable conditions for RES development, seeking to reach 20% of final electricity consumption in 2020.  RES investors may enjoy such law provisions: fixed tariff for 12 years, connection fee rebate, priority for connection and usage of network, and no balance responsibility.  All costs are included in the electricity tariff, the public service obligation (PSO) component.  RES part is about 23% of PSO price, and this part increased 12 times since 2007.  This burden for customers would have been higher, if not the recent measures to reduce the feed-in tariff for RES, especially for the solar energy.  In general, it was a good incentive to diversify the energy portfolio, but it is clear that RES boom will not replace the base-load electricity generation. 
The further implementation of the Baltic Energy Market Interconnection Plan, which was signed by eight Baltic Sea Member States and European Commission (EC) representatives in 2009, and the EC set goal to have European internal energy market by 2014, shows the ambition steps towards changing the situation in the energy sector.  It will not be implemented without the big investments not only in the transmission system, but also in the new power plants.  Recently the latter issue was left for the market, but it seems it won‘t be solved without State intervention.  There are talks on the need of various measures to foster the investments in the electricity generation sector.  The capacity mechanism can be the same incentive as the Power Exchange price, i. e. more customer payments, but no new installed generation capacity.
According to the Energy Independence Strategy Lithuania has chosen HITACHI Company as the partner for implementing the new NPP project, but there is a need of political decision.  The project cost are too high for one country, despite that the partners could be the power companies of the rest Baltic countries.  In 2012 the organised public referendum on Visaginas NPP project was not encouraging.  So, the final decision is constantly postponed and there are no results so far. 
True, the new former LIETUVOS ENERGIJA AB thermal block of 455 MW were finished in 2012, but it‘s electricity is uncompetitive due to the very high natural gas price.  The Liquified Natural Gas (LNG) terminal in Klaipeda should be built by the end of 2014 and may possibly ease the situation.
It can be concluded that the current state of customers is poor.  In Lithuania the industrial consumer pay more than the EU average electricity price for such customers group.  The households are in the better position, but to compare according to the power purchase parity, it would not look so good.  So, the dramatic electricity price of the last years has forced some large industry companies to build their own generation.  It has the negative aspects however, such as the disconnection of large customers from the power system causes more cost for the rest consumers.  The majority of medium and small consumers cannot build their own power plants, unless the State or the private investor will procure the electricity at a reasonable price. 
Aistija Zubaviciute is the advisor of Electricity Department in the National Control Commission for Prices and Energy of Lithuania.  16 years experience in the Energy Regulator‘s Institution.  She deals mainly with the electricity pricing methodologies, tariff setting, market supervision and other related issues.  She has worked creating the Baltic regional electricity market, and had been involved in the various USAID and PHARE projects. 
Since 1999 she has participated in the Energy Regulators Regional Association (ERRA) activity.  She is also a member of various working groups of the Agency for thr Cooperation of Energy Regulators (ACER, former ERGEG), the Council of European Energy Regulators (CEER). 
In 1998 she graduated with MA in electrical engineering, and in 2010 - PhD at the Kaunas University of Technology.  

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