Three Baltic countries are often viewed as a unified region, forming a single market. Even though Estonia, Latvia, and Lithuania are not as similar as they are believed to be, at least the energy markets of the three countries are slowly but steadily becoming united. Energy is a strategic sector for the Baltic countries, which are exploring ways to integrate their energy networks with European networks to increase their energy independence and security and to create alternative energy supplies.
Despite the common history and geographical proximity of the Baltic countries, their energy markets and policies are different. While Estonia is a net exporter of electricity due to oil-shale power plants, Latvia and Lithuania are dependent on importing electricity. The recently built Klaipeda Liquid Natural Gas (LNG) terminal has provided Lithuania with an alternative to buying gas from Gazprom. Although Latvia still remains dependent on gas imported from the Russian Federation, the Incukalns gas storage facility in Latvia stores enough gas to ensure short-term energy independence. Estonia, by contrast, is dependent on importing gas from other neighboring countries, including Russia. All of the three countries are importers of liquid fuel, but Lithuania has the only oil refinery in the Baltics. While Estonia and Lithuania have by now fully implemented the Third Energy Package, Latvia is still in the process of doing so – although the electricity market is fully liberalized, Latvia was granted a derogation from the Third Energy Package as an emergent gas market, thus the gas market in Latvia will not be opened before April 2017.
Nevertheless, the countries face similar struggles. Baltic countries were closely tied to the Russian energy infrastructure, lacking connections to Europe infrastructure. This has made the three Baltic countries essentially an energy island in the European Union. The countries have decided to cooperate as much as possible to solve the problem. As the most prominent effort, the countries have signed the Energy Security of Supply Declaration, committing to improve the interconnections amongst themselves and with the Scandinavian countries to make the region a part of the European energy area. This is a dominant trend in changing the Baltic energy markets.
The process of building these interconnections is slowly unifying the Baltic energy markets. The Klaipeda LNG terminal and the Gas Interconnection Poland-Lithuania (defined below) are projects that will change the value chain of the natural gas industry in the Baltic region from a concentrated market dependent only on a single gas source due to technical limitations to a fully integrated gas market, allowing greater choice. Estonia has historically been dependent on imported gas from Gazprom. However, after the completion of the Klaipeda LNG terminal in Lithuania, the reliance on Russian gas is decreasing. In April 2015, only a few months after the completion of the LNG terminal, approximately 27% of gas consumed in Estonia was imported from Lithuania. Latvia also benefits from importing gas through Lithuania. In addition, the Klaipeda LNG terminal is planning to launch a small-scale LNG activity, which will provide access to LNG even to users that are not connected to the natural transmission and/or supply system. This project will allow reloading LNG in a small scale on vessels or vehicles and delivering it to users not connected to the grid. Moreover, this project – known as the Gas Interconnection Poland-Lithuania – will diversify the gas supply to Lithuania and enable the integration of the Baltic States into the EU gas market. Together with the Klaipeda LNG terminal, it will create a competitive gas market in the Baltic region, which should result in consumer friendly prices.
Interconnections also lead to lower prices. Following the completion of Estlink 2, a power cable between Estonia and Finland, electricity prices in the two countries are essentially equal. The positive effect of the cable was ironically proven in the beginning of May 2015, when, during an 18–day period in which the cable was broken, the prices in Estonia and Finland differed, resulting in approximately EUR 3.6 million in losses for Estonian consumers. Latvia and Lithuania are also members of the Nord Pool Spot market, but neither of them is interconnected with the Nordic market. If the countries had better connections to the Nordics, their consumers would enjoy similarly lowered prices.
There are currently no bottlenecks between Latvia and Lithuania. However, the interconnector between Latvia and Estonia is regularly congested. In order to eliminate the shortage of electricity transmission capacity on the border between Estonia and Latvia, the countries have agreed to build a 330 kV overhead line from Sindi in Estonia to Riga in Latvia.
The Baltics will have even better links with the Nordic electricity markets in a few years time. As part of the NordBalt project, the interconnector between Lithuania and Sweden is in progress and the transmission networks in Latvia and Lithuania have been reinforced, improving the supply reliability in the region.
Likewise, the LitPol Link is a strategic cross-border electricity link between the Lithuanian transmission system and the Polish transmission system. The NordBalt and LitPol Link interconnections are projects of vital importance not only for Lithuania but also for Latvia and Estonia.
The ongoing electricity and gas interconnector projects are prerequisites for the common Baltic–Nordic and Baltic–Western Europe electricity markets. The interconnections will provide an alternative channel for electricity import and export in the Baltic countries.
Vilius Bernatonis, Partner and Head of Pan-Baltic and Lithuanian Energy Practice, Linda Strause, Partner and Head of Latvian Energy Practice, Aare Tark, Senior Partner and Head of Estonian Energy Practice and Eugenijus Filonovas, Senior Associate, Tark Grunte Sutkiene
This Article was originally published in Issue 2.3. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
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