Why the Baltic States prevent cheap Russian electricity

The Baltic countries intend to impose an additional duty on Russian electricity. And all because of the fact that the low price of electricity from Russia is achieved through “unfair competition”. What exactly is this “dishonesty” and why in the fight against Russian electricity Baltic itself destroys its energy independence?

The very mechanism of imposing a duty on electricity imports from Russia demonstrates the degree of independence of Estonia in the sphere of economic policy. As explained portal ERR. its Vice-Chancellor of the Energy Department of the Ministry of the economy of Estonia Timo Tatar, to introduce direct custom protection will not work – such decisions are in the competence of the European Union and the European Commission.

Therefore, the Estonian authorities went to a workaround – agreed with neighboring Latvia on the introduction of a tariff for the use of infrastructure, that is, electricity transmission networks. Presumably, this will happen in the autumn – in parallel with the launch of the Belarusian nuclear power plant, after which Russian electricity will flow to the Baltic States through Latvia in connection with the ultimatum position of Lithuania in relation to the Belarusian-Russian nuclear project.

A few days before it became known about these plans, the Estonian energy holding Eesti Energia published reports for the first quarter. This document makes clear the true reasons for the decision to impose an additional duty on Russian electricity.

Despite the record sales revenue recorded by Eesti Energia for the three months of this year (282.6 million euros, plus 24% compared to the first quarter of last year), the net profit of the holding decreased by 77% to 9.5 million euros. For comparison, over the past year, the concern earned 106 million euros of net profit. The main factor that sharply reduced profits was the almost threefold increase in the price of carbon dioxide emission quotas. On average, the market price of a ton of CO2 was 22 euros for the quarter, which determines almost double the difference between the cost of electricity produced in Estonia and Russian electricity, not burdened with a “green” surcharge.

Last year, the average market price of electricity in Estonia jumped by 42% to 47.1 euros per megawatt-hour. “Due to the deregulation of the electricity market, it’s market price has never been so high in Estonia,” stated the Chairman of the Board of Directors of Eesti Energia, Hando Sutter. As a result, Eesti Energia’s electricity production decreased by 20% to 2.2 terawatt-hours per year, and in the first quarter of 2019, Estonia became the first electricity importer in decades. “For the Estonian state, this means structural changes in the economy: if earlier we earned on the sale of electricity for export, now we have to buy electricity ourselves,” Eesti Energia’s financial Director Andri Avila summed up the disappointing results of the first quarter. Compared to the first quarter of last year, the import of electricity from Russia to Estonia increased almost one and a half times.

It would seem that this is a clear example of free competition in the energy market. However, Estonia believes that competition with cheap Russian electricity is not free, but unfair. “This seriously jeopardizes the EU’s electricity production, because it is difficult to compete in one market with other electric producers, for whom the cost of electricity, due to non-payment for CO2 quotas, is about 20 euros per megawatt-hour lower,” said Andri Avila.

However, Estonians complain not only about Russia but also the European Union. Andri Avila complained that in Europe a large share of electricity is still produced from fossil fuels, despite the fact that the goal of EU policy is to support the production of energy from renewable sources. And as long as this situation persists, the increase in CO2 prices will have a significant impact on the growth of the market price of electricity.

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And here is a direct speech by Hando Sutter from the last annual report of Eesti Energia: “Paradoxically, in the Scandinavian and Baltic markets, the increase in the price of CO2 emissions created an unfair advantage for Russian electricity, which is produced without purchasing quotas. Over the years, this has been a problem that has not yet been solved. At the border, we have to work with two price systems: on the one hand, market players are fighting against climate change, and on the other – they are doing pragmatic business, which in no way complies with the rules stipulated within the European Union. We hope that the decision makers will soon eliminate this anomaly.”

This explains the logic of the Estonian authorities. Since Russia does not include in the cost of its electricity the European Union allowances for carbon dioxide emissions, it is possible to “twist” the price to the desired level on the territory of Estonia, shifting all additional costs to the end user.

At the same time, Estonia refers to the fact that such duties are already in force when importing Russian electricity to Finland. However, this is a very crafty argument, given, to put it mildly, the incomparable economic potential of the two countries and more than double the gap in GDP per capita (for 2017, according to the IMF, 46 thousand dollars in Finland and about 20 thousand dollars in Estonia).

And most importantly, no concern for “fair competition” cannot explain to the population why the cost of electricity is growing at such a pace, pulling up the remaining prices. Back in the middle of last year, Estonian economist Leonid Tsingisser in an interview with the portal Baltnews.ee he stated: “Prices have reached such a limit that they have nowhere else to grow.”

Shale out

This year, new challenges await the Estonian energy sector. As part of the implementation of the EU Directive on industrial emissions, in 2019, the oldest power units of Narva power plants, which are operated for about 50 years, expire. These stations (Baltic and Estonian) are still the world’s largest energy facilities operating on oil shale. It is thanks to these stations that Estonia is able to ensure its energy independence. At the same time, shales are the main source of environmental pollution, and therefore the abandonment of this energy source has long been discussed in Estonia.

The share of oil shale in Estonia’s energy balance is decreasing: whereas in the middle of the last decade Narva power plants produced about 95% of all electricity in the country, now the share of renewable and alternative energy sources has reached 25%. However, prior to the stated Eesti Energia’s strategic objective is to achieve by 2022 increased to 40% – still far, and a serious decline in shale capacity is already almost on the nose. As a result of the closure of the old blocks of Narva power plants, about 600 MW of power will disappear from the market. For comparison, at the beginning of this year, the total capacity of wind power plants in Estonia was 310 MW, and solar – only 107 MW. After the closure of the old blocks, the total capacity of the production facilities located near Narva will be about 1500 MW.

Partly the shortfall in volume is expected to offset the expense of the capacity of the new Auvere power plant (300 MW), which with great difficulty, completed last year. The station worth 610 million euros was launched jointly with the French company Alstom in 2011 and are able to use not only oil shale but also biomass, peat, and shale gas. However, Auvere, calculated for more than a quarter of Estonia’s annual energy consumption (2.2 terawatt-hours out of eight terawatt-hours), is likely to be the last project in its class – in the future, Eesti Energia plans to focus on renewable and alternative sources, as well as to expand the production of shale oil.

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In addition, in the shale segment of Estonian energy remain Narva power units with a total capacity of 425 MW, which have been upgraded in the past decade, and four old units of 760 MW, equipped with nitrogen and sulfur capture systems. Their fate was predetermined in 2011 when the new EU requirements for industrial emissions began to operate. According to the Directive, the old units are allowed to work until the end of 17,500 hours, or until 2023.

In other words, Estonia is moving at full speed in the direction opposite to the energy independence inherited from the USSR. Apart from the fact that Estonia will lose even the appearance of independent decisions in the field of energy, this will entail serious social problems. According to the estimates of Estonian trade unions, the complete shutdown of Narva power plants will hit 6,000 people associated with the industry.

Sawing off the branch on which you sit

Even more difficult is the situation in the energy sector of Latvia, which even in the presence of the Daugava HPP cascade, several thermal power plants, and “alternative” power plants are experiencing a chronic energy deficit. Here last year, consumers also faced a sharp jump in electricity prices.

Two years ago Latvia, together with Estonia and Lithuania, decided to withdraw from the BRELL energy ring, which, in addition to the three Baltic countries, includes Russia and Belarus. However, the decision to join the EU power system as soon as possible (the Baltic States ‘ exit from BALL is planned for 2025) only accentuated the existing problems.

Last summer, experts of the Latvian energy security Commission presented a report to President Raymond Vejonis with a disappointing conclusion: there is no long-term energy development strategy in Latvia. According to the Chairman of the Commission Juris Ozolins, Latvia is dependent on external electricity supply by at least 50%, while being an exporter of energy derived from renewable sources (RES). Back in 2013, the share of this segment in the final energy consumption reached 37% (only Sweden produces more electricity from RES in Europe), but it was not possible to solve the problem of energy deficit due to “green” sources.

Finally, for Lithuania, the issue of eliminating the energy deficit after the closure and dismantling of the Ignalina NPP looks unsolvable. Currently, Lithuania produces only about 20% of the electricity it needs, and no development of alternative sources of “hole” in its energy balance will not be able to compensate even in the very long term. As a result, Lithuania found itself in energy dependence on its neighbors, including the Scandinavian countries with their rich hydropower resources. Therefore, in the middle of last year, when the water level in the Scandinavian rivers fell due to the heat, electricity prices jumped sharply. From April to September, electricity in Lithuania rose by 47%, and at the end of last year by about 10%, with a new increase in prices was announced for 2019.

The obvious way out for Lithuania would be to buy electricity in Belarus, the benefit of the new nuclear power plant is a few kilometers from the Lithuanian border, but the position of the Lithuanian authorities on this issue is indisputable. On the eve of the Lithuanian President Dalia Grybauskaite announced her intention to abandon cooperation with Belarus in the form of joint institutions, because, according to her, it will be considered legitimation of the nuclear power plant.