The Baltic Course




Fair Game

Inese Gaiks

What Was the Creative Spark?

The idea to create an open and competitive electricity market in Europe has a 20-year history behind it. The European Commission directive on creation of a single electricity market came into force only in February 1999 when 15 Member States of the European Union were supposed to open no less than 15% of the power market. Two months later Pablo Benevides, Director General at the Energy Directorate of the European Commission, announced that large-scale consumers in EU member states can purchase electricity 30% cheaper than a year before.

When the Baltics understood that it would be impossible to enter the EU without fulfilling the demands of the directive, Ministers of Economy of Latvia, Lithuania and Estonia signed an agreement in 1998. Following the terms of the agreement, each of the three Baltic States are committed to coordinate their legislation taking into consideration the EU demands, and the requirement to work out a model of a single Baltic power market.

In April 1999, in Parnu, at the Energy Committee of the Council of Ministers of the Baltic States, Aleksandrs Oss, Jonas Kazlauskas, Heads of the Latvian and Lithuanian Energy Departments, and Arvi Hamburg, Deputy State Secretary at the Ministry of Economy of Estonia, signed a memorandum designating March 2001 for creation of a single Baltic Electricity Market, open for competition. In February 2000, the Prime Ministers of the three countries, Andris Skele (Latvia), Andrius Kubilius (Lithuania) and Mart Laar (Estonia) postponed the task. The Committee of Energy was asked to ensure functioning of the single market by the end of 2002.

«The Baltic market is not our final aim. This is a first step - a springboard for an open market. The second step - a common market with the Nordic countries, after that - the single market around the Baltic Sea. But the final aim - joining the European market till 2018» - Arvi Hamburg.

Factors: European and Russian

Vilnis Kreslins, Director of the Baltic Dispatchers Centre DC Baltija, thinks that deciding to open the power market is politically grounded: «Despite a big quantity of work to be done, I think that such a market is a necessity. It will allow for the optimisation of the process of power production, transmission and distribution».

«This is what the consumers wish, we are under Brussels' pressure, we see the success achieved by the Scandinavians; why should we protest» - asks Jurgis Vilemas, Director of the Energy Institute of Lithuania and the Chairman of the Council of Lietuvos Energija.

«We are going to win, if our producers will decrease the costs. Latvia wins, as it will buy cheaper electricity, than it would be able to produce in its own country. Estonia also has reserves to decrease the costs» - Jurgis Vilemas says.

In the opinion of Viktor Shevaldin, General Director of Ignalina Nuclear Power Plant, it is impossible to create a free power market in the Baltics. Plants with combined heat and power would need to continue their work following the principle of quotas because cities are always in need of heat. And if the Ignalina Nuclear Power Plant would force, for example, Narva Stations out from the market, the Estonian government would protest: we do not need such a market, as shale miners will become unemployed.

In the middle of April, the Estonian Energy and Mining Workers Trade Unions announced protest campaigns against the licencing of Narva Electricity Network to import electricity from Ignalina.

The local engineers do not deny that the main risk of the free market is Russia's cheap electricity. «Russia has an enormous power surplus, and they are going to sell their power at a 'dumping price'. Baltic countries will have to introduce restrictions, otherwise everything would be lost» - says Jurgis Vilemas.

Jonas Kazlauskas suggests introduction of the same quotas for export and import, in order to allow Russia to supply as much electricity as we supply to each consumer in Russia.

Vilnis Kreslins thinks that coming off the old energy system which involves Belarus and Russia that stand side by side with the Baltic States is a question of a distant perspective. «A market can exist within the old system. In order to widen it and establish connections with the European systems, huge investments are necessary, and it is hard to argue that they are economical and that they can be repaid.»

Until now, the Baltic States do not have a physically connected system with the European countries. However, there is a project aimed to elaborate such a system by building up transmission lines from Estonia to Finland, or from Lithuania to Poland. Already in 1998, Lietuvos Energija and Eesti Energija signed agreements with international consortiums, nevertheless, construction of the lines has not been started. Lithuania has broken its agreement with the German - American consortium Power Bridge.

In May 2000, the Ministry of Economy of Lithuania is planning to call for an international tender for the erection of high-voltage transmission lines to Poland. The project is worth 400 million USD and was discussed with the US company Duke Engineering and Services. Perhaps, the European Union would be asked for help, although the Minister of Economy Valentinas Milaknis has said that the European Bank for Reconstruction and Development is planning to participate in the project.

Jurgis Vilemas agrees that it is impossible to connect the transmission grids of Lithuania with Poland on a commercial basis: «If Brussels will support us financially, then the line is going to be built on a political basis. Since we are approaching the EU, it would be logical to connect our energy systems following such political reasoning».

Who Makes the Music?.

Till the end of this year, 5 working groups, set up under authorization of the Energy Committee, have to define the model of the common market, common tariff system, trade rules and technical cooperation.

A budget amounting to 1.6 million euro has been approved for the working groups in February. As the Baltics do not have that much at their disposal, the means will be collected from several donor organizations, namely the World Bank, USAID (an American programme), and SYNERGY (an EU programme). Following what Arvi Hamburg has stated, approximately 85% of the budget will be spent on salaries for experts, chosen by the financing side.

«Estonians, Latvians and Lithuanians can only dream of that money. We, employers of the ministries, have to ensure logistics for the work of the coordination group and pay their telephone bills» - says Arvi Hamburg. Furthermore, says Mr. Hamburg, «If it is likewise that the resources for the foreign specialists could be found, the question of financing the training of our staff, for example, in Norway or Sweden is not yet solved. «If the free market is our first priority, then it has to be up to us to spend the money.»

Basic Rules

The free power market stands on the three pillars: separate production, electricity transmission and distribution, free accessibility to transport networks and clear transmission tariffs. Vilnis Kreslins stresses that most important is to definitely separate power generation, its transmission and distribution in the accounting.

«Property relations are not as important as to have proper legal basis of the relations between customer and seller».

Creation of the transmission line operator is the vital step to be done in the coming 2 years by the Baltic States. «We recommend to open the market immediately without any transitional period, to create a power pool, where the large-scale consumer would be able to buy energy from the producer, and the aim of the transmission network would be to act as a railway for cargo transportation, but not as a single buyer.» So Jurgis Vilemas has underlined.

Jonas Kazlauskas told BC that the control over the transmission networks will remain at the disposal of the Lithuanian government. In Estonia, according to Arvi Hamburg, the current policy of the government presupposes creation of a separate enterprise for energy transmission, with 51% shares under government control. In Latvia, following the Law On Energy, high-voltage transmission lines will remain state-owned. The Latvian government will control the Hydro-Electric Power Plant (HPP), but 49% of shares of the Combined Heat and Power Plant-1 (CHP) and CHP-2 will be sold; this could also happen to the transmission lines following a special decision of the government.

In Estonia, 49% of Narva Power Plants' shares will be offered for privatization. The process of negotiations is under way with the American company NRG Energy. The TTP of Tallinn will remain within the Eesti Energia structure, as to the transmission networks, they can be fully privatized. At the moment, Estonia is the only Baltic country with two privatized energy distribution enterprises. Narva Elektrivork is controlled by the American Cinergy, but Laanemaa Elekrivork - by the Finnish IVO.

A consortium of consultants CIBC Wood Gundy is authorized to work out the reconstruction of Lietuvos Energija during the summer season. Most probably Mazeikiai, Elektrenai HPPs and distribution networks will be offered for privatization; but the Kruonis Pump-storage Power Plant and the Kaunas Power Plant will remain with Lietuvos Energija.

A law on closing Ignalina's NPP first reactor is currently under consideration in the Lithuanian Parliament. The law was drafted according to the Lithuanian Long-term Energy Strategy with a provision for its closing in 2005. The Lithuanian government hopes the law would be adopted in mid-June when a conference for potential donors of Ignalina NPP close down is planned. The conference will involve potential investors of G-24 states and the European Commission, and is aimed to attract up to 60 million USD. 96 million have already been granted on behalf of the EU.

Support was offered by Denmark, the first among other European countries during the visit of its Prime Minister, Poul Nyrup Rasmusen to Vilnius in February this year. Denmark is ready to grant 13,3 million USD for energy projects, mostly for the Ignalina's NPP closing. Another 7 million USD are awaited from the Swedish government as part of a project to increase nuclear security in eastern Europe.

Producers Need to Be Competitive

The main motive force of a competition within the free market is a producer. Till now, there has been no competition among the power plants in the Baltic States. However, a huge excess of power in the region advertises the potential for the competition. For the moment, the installed capacity of the energy systems of the Baltics is 10 639 megawatts. Consumption of electricity, for example, on the morning of 20 March was equal to 3 480 megawatts in the three Baltic States.

More than 50% of the generating capacity in the Baltic States lies un-used. Including the only working reactor of Ignalina NPP with a 1 351 megawatt capacity (just partly utilised) and the Elektrenai Plant (a 1 800 megawatt facility) which functions in a safe regime of 60 megawatts.

«Unfortunately, Ignalina's NPP cannot work at full capacity. It would need more resources for its funeral march, and a better orchestra, but there are no particular ways of selling electricity outside Lithuania» admits Vilnis Kreslins. «There are no profitable export offers for the coming 10 years to utilise the full generating capacity of Ignalina» according to Jurgis Vilemas.

Jonas Kazlauskas comments on the governmental decision to close down the first Ignalina's reactor: «There is three times more capacity than necessary. Up till 2010, when the time will come to close down the second block, there is enough generation capacity for ourselves and for export.» Jonas Kazlauskas accepts that Lithuania would be forced to ask the EU for the financial support in order to close down the first block of the NPP and to restructure other power plants, for example, installment of gas turbines at the Elektrenai Power Plant.

Jurgis Vilemas stresses the fact that Ignalina would have to compete with even cheaper Russian electricity in a free market economy; in such a case, it would be necessary to decrease the costs in order to remain involved in free market operations. «10 years have passed, but the number of personnel stays unchanged despite the fact that power generation has diminished to half the earlier amount. Is it acceptable that there are 5 500 workers employed at the Ignalina NPP which functions only at 1000 megawatts?»

Their Own Power Exchange in 2 Years?

Latvia is the only country in the Baltic's where according to the Law on the Energy «Grid Code» is worked out. The law's purpose is to regulate cooperation of power producers and consumers. It offers not only bilateral transactions but also a possibility to create a trade system which would be suitable for spot, short-term and long-term transactions. This spot market can be appropriate already in 2002, but the Grid Code has to be adopted already this summer by the Latvian Council for Power Supply Regulations to be de jure. Most probably, this law on the grid in Latvia will serve as a foundation for creation of the similar codes in Estonia and Lithuania. Alternately, a common code for the three Baltic States can be developed.

In August 1999, the process of code elaboration financed by Latvenergo started. Juris Ozolins, Head of a Project on the Grid Code at the Latvian Development Agency said that the project was progressing owing to the knowledge and intelligence of the local experts, moral support of the World Bank and the Finnish company Fin Grid consultations which happens to be financed by the German and Finnish governments. «We do not try to work at the average level or to follow someone. Our motto is to leave everyone behind» says Juris Ozolins.

Referring to the Grid Code of Latvia, the system operator fulfills several tasks including the offering of grid services and marketing. After development of the system operator and other infrastructure of the «market place,» the Baltics will be able to establish a power exchange. In Ozolins' opinion, such exchange could be organized in the Baltic States, or the countries will be able to join any other exchange in the region.

«The exchange has to exist, that would organise power purchase and sales bearing in mind the costs, not the place - Ignalina's NPP or Daugavpils' HPP» - says Arvi Hamburg. He stresses that the exchange would help to protect interests of small-scale consumers: «Medium and small-size consumers are not able to make the arrangements on their own, or to protect their rights and interests against such a dominant partner as a power plant».

The First Signs of a Choice

Large and qualified consumers are those who will first be able to feel the advantages of a free market. Following the Latvian legislation, already since 1 January 2000, enterprises that use more than 100 MW/h of electricity annually are allowed to strike bargains in Latvia and abroad. For the energy received they have to pay a transmission tariff amounting to 0,0059 LVL kW/h (without VAT) and a distribution tariff which varies according to the voltage alteration from 0,0126 to 0,0092 LVL kW/h.

The only consumer of that kind - Liepajas Metalurgs - has not used this right up till now, explaining its restraint due to the high distribution tariff. «Our negotiations with Lithuania and Russia went fine, but due to the high distribution expenses for the moment the situation is unfavorable» Kirov Lipman told BC.

Andris Cakuls, Acting Director of Latvenergo is sure - the main problem for large-scale consumers is purchase of power at the cost which is less then Latvenergo's price (average purchase price for the imported raw materials - 0.0124 kW/h). Currently, Liepajas Metalurgs buys the power at 0.023 kW/h which is the smallest tariff in the country. In other words, to make the import process cheaper, the maximum purchase price has to reach 0.008 LVL kW/h.

In Estonia there is a rule that enterprises which use no less than 40 megawatts annually can only choose an Estonian supplier. It is planned to decrease the amount down to 9 million kW/h. Until now the choice is rather theoretical since all the power plants are controlled by Eesti Energia. «A license is needed to buy power outside Estonia. Ultimate consumers are not able to obtain the license as they do not have the networks at their disposal» Arvi Hamburg explains. Being a constituent of Eesti Energia, the enterprise is unable to get the license.

One of the enterprises of that kind - Narva Elektrivork - became the first one in the Baltics that made a deal with a power producer from another country. Following the agreement between Narva Elektrivork and Lietuvos Energija, there will be 65 million kW/h or 20% of the total consumption imported as of August. «It was worth it to establish a precedent» claims Ahti Puur, Director of the Narvas' network enterprise. Mr. Puur stated that negotiations with the Lithuanian energists were held in autumn last year. Offers of Lenenergo and the United Energy Systems of Russia were also submitted for consideration, but appeared to be less tempting.

In Lithuania the creation of a market for large-scale consumers is planned for inclusion in the project of a new Law on Energy. Twenty Lithuanian enterprises would become qualified users with average consumption of 20 MW. The truth is that they will be able to make agreements only with the power plants of Lithuania. From 2002 till 2004, the market will be opened for the enterprises that use 9 MW, and the share of the free market will increase up to 47%. As Jonas Kazlauskas says, the problem of consumers who would be able to import the energy has to be considered separately.



Expert Advice

Norway, Sweden, Finland and Denmark have managed to set up the first international power exchange Nord Pool with the possible prospect to become a partner of the similar exchange in the Baltic's. Some advise to Baltic colleagues is kindly given by Anders Plejdrup Houmoller, Marketing Manager of Nord Pool.

- What are the advantages of the free market?

- One of the main reasons of establishing a competitive power market - the necessity to cease over-investing in the Electricity Supply Industry. In fact, most western European countries have an overflow of investment and manpower in this industry. Besides, it would be better for each ultimate consumer to choose a supplier of his own, and not to be attached to a monopolistic corporation.

- What are the main pre-conditions of the open market?

- There should be an independent local grid operator and an independent transmission system operator in each country. In this case, «independent» means that organizations have to have no commercial interests in the power market. It is advisable to introduce a computer and communication system (Computer & Communication Monster), that would measure and register the consumption level and therefore allow for balanced supplies.
It is preferable to set up a power exchange which will provide the wholesale market with the price transparency and the market itself with a neutral organization that would deal with bottlenecks that could develop in the grid.

- How to set up an energy trade without having a power exchange?

- In principle, it is reasonable to create a price index based on the trade of the wholesale market. Thus the wholesalers have to inform a neutral organization on the sales prices and volumes. This method is complicated and expensive; it is easier to set up a power exchange. Another way for participants of the wholesale market is to set on a voluntary basis a purchase/sale price for other market participants.
In Germany, this task if fulfilled by Preussen Elektra (see, but only temporarily, as the power exchange is going to start functioning in a few months (see

- Who controls the power market?

- A regulator, preferably a state institution, has to control carefully the Transmission System Operators and the local grid operators, as they remain monopolies after the liberalization of the power market. Commercial structures (producers and retailers) must be controlled by the traditional State Competition Council.