Lithuania pushes energy pawns against Russian chess master

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Lithuania aims at achieving energy independence by 2020 through the implementation of a series of projects that a high official compared to chess pieces in a match against Russia, its former Soviet master.

Arvydas Sekmokas, the Lithuanian energy minister, compared the various projects aimed at breaking Russia's monopoly over his country’s energy imports to pawns in a chess game played against a strong adversary.

The most important elements of Lithuania’s strategy include a new nuclear power plant, a liquefied natural gas terminal, establishing power interconnections with the EU, and cutting lose from the old Soviet grid.

In particular, Lithuania finds the price of its gas deliveries from Russia extremely high (see background).

Political 'coefficient K'

“There is a rather complicated formula for gas prices and in this formula, there is a political coefficient ‘K’," Sekmokas said. "And of course this is a coefficient which is agreed. If you increase the coefficient, prices go up. If you diminish it, prices go down. The coefficient is not related to any particular variable.”

On the other hand, he said that the fewer the number of possible suppliers, the higher the price of gas was. With a small customer like Lithuania, Russia’s position was: “Either you buy our gas or you we don’t sell it to you.”

With a big customer like Germany, Russia's state-owned Gazprom monopoly could not afford such a negotiating strategy.

Sekmokas said the most precious help Lithuania has received from the EU was the adoption of the third energy package to further liberalise the EU's market (see LinksDossier), which requires companies to separate energy production from distribution (so-called ‘ownership unbundling’).

Sekmokas described as “historic decisions” the vote in his country’s Parliament of EU energy directives. The texts on gas and electricity liberalisation were adopted in June 2011 and January 2012 respectively.

“This means we are moving to the rules of game of the European Union, and this is market game. In order to play the game, you need figures. These are strategic projects, like the power link to Sweden, the power link to Finland, it’s the LNG terminal, it’s our own generation, based on wind, on nuclear, on biomass for heating. These are the chess figures. And then you have the rules – so everything should be in place," he said.

Sekmokas referred to a resolution by EU energy ministers in February 2011 that there should be “no isolated energy islands left” by 2015. This largely refers to the three Baltic countries, which are still part of the Soviet grid.

“Politically the problem is resolved. It’s a minor thing left that we should implement it in practice,” he said smilingly.

The minister provided the following timetable for achieving the country’s goal of achieving energy independence by 2020:

  • Before the end of 2014: Ownership unbundling should be fully implemented in Lithuania.
  • By the end of 2014: Vilnius to oversee the building of a floating LNG terminal when the current long-term contract of Lithuania with Gazprom expires. An agreement was signed last week with the port authority of Klaipeda, and transmission pipelines should be operational by the end of 2013.
  • 2016: Synchronisation of the country’s transmission system with that of the Union’s ENTSO-E system. The European Commission has been given a mandate to negotiate with Russia and Belarus, and the country has adopted a law on achieving this synchronisation. The Russian enclave of Kaliningrad appears to be a problem, but if Russia wants to build a nuclear power plant there, it is also in its interest that the enclave is synchronised with the EU. Power links to Poland, Sweden and Finland are being built. The deadline of the power ling to Poland is 2016.
  • 2020-2022: A new nuclear power plant at Visaginas is expected to be completed. The parliament has passed all the necessary laws, the minister of finance has issued a positive opinion in regard the state obligations. Still outstanding is the participation of Poland in the project. Lithuania’s participation now is at 38%, Estonia’s at 22%, Latvia at 20% and Japan's Hitachi Ltd holding a 20% stake. The total estimated cost is of €5 billion. Construction expected to begin in 2015.
  • 2029: Target date for completing the decommissioning of the Ignalina nuclear power plant. But financing problems are anticipated.

Sekmokas said Russia needed to switch from Cold war rhetoric to a more economically-based reasoning.

“You can do business in two ways – by maintaining the monopoly, or by trying to be the best under market rules,” he said.

The weak figure

The weakest of the ‘chess figures’, however, appears to be the new nuclear plant at Visaginas. On the one hand, various analysts point out at the fact that it would prove economically unviable. The European Commission recently issued a favourable opinion for its construction.

A sentence in the Commission’s opinion, however, may prove problematic. The EU executive says that Visaginas should remain economically viable "even when there will be few new nuclear power plants in the region."

Belarus is reportedly planning to build a nuclear plant with Russian technology in Astraviec, some 50 km from Vilnius. Russia is ready to finance the construction of the plant to help its cash-strapped neighbour, according to press reports. In addition, Russia recently started to build a nuclear power plant in Kaliningrad, which also borders Lithuania.

Dr Ar?nas Molis, a political science professor at Vilnius University, pointed to another problem with regard to Visaginas. Lithuania is due to hold parliamentary elections on 14 October and the current centre-right majority faces a tough challenge from the Social Democrats.

“It seems that the Social Democrats have a different view on Visaginas,” Molis said, adding that it “wouldn’t be a big surprise” if they would stop the project.

The decommissioning of Ignalina also faces problems. Two MEPs from the centre-right European People's Party (EPP) who visited the plant last week issued a statement, blasting the slowness of the works and what they considered bad management (see Positions), threatening to request the Commission to withhold funding provided to the country to close the Soviet-era power station. 

Danila Bochkarev, a researcher at the Brussels office of the East-West Institute, a global think tank, said that he was optimistic with respect to an LNG terminal in Lithuania, but less so regarding the Visaginas nuclear power station.

“I am positive regarding Lithuania’s ability to build LNG terminal. It is not as expensive as a nuclear power plant, it is important as a matter of national security and it will go ahead in case the LNG it receives is the same price (or less) than Gazprom’s deliveries. Hardware (the floating re-gasification terminal in Klaipeda) was already booked in March 2012 and would be supplied by Norwegian company Höegh in the framework of a [€560 million], a 10-year deal. Preliminary supply agreements were signed with Spain’s Gas Natural Fenosa and US-based Cheniere Energy. Klaipedos Nafta is also in negotiations with Qatar regarding LNG supplies. There is also a political will – in June 2012 the Lithuanian Parliament adopted the law requesting local utilities to buy at least 25% of their gas via new LNG terminal.  The cost of LNG terminal is affordable for Lithuania - the only challenge is to find available (and guaranteed) LNG supplies at reasonable price.

“The situation is less rosy with nuclear – Visaginas plant is expected to cost €7 billion [or 20 % of GDP of Lithuania, 40 % of Estonia’s GDP or 32 % of Latvia’s GDP], a cost which is likely to increase during the construction, especially taking into account new safety requirements of post-Fukushima 'nuclear era'.  Furthermore, Visaginas is likely to face competition from the Baltic Nuclear Power Plant (NPP) in Russia which could have direct access to consumers in Estonia, Latvia and Lithuania (Russia’s electricity grid is synchronously interconnected with the Baltic countries). Though the Baltic NPP is likely to face similar challenges as Visaginas, the Russian project could count on more easy access to finance, for example via Russian state banks,” Bochkarev said.

Inge Gräßle and Petri Sarvamaa are two MEPs from the European People's Party (EPP) who went on a visit to the Visaginas site.

"We fully support the efforts of the European Commission to impel the Lithuanian authorities and the contractors of the Ignalina nuclear plant to reach an agreement until 15 July on a rapid continuation of the decommissioning effort. Should they fail to find an agreement, the European Commission must consider temporarily withholding EU funding for the project," the MEPs said in a statement.

"Project management should be significantly improved, and mechanisms of conflict-settling among the stakeholders should be installed", said Petri Sarvamaa. "In an era of economic and financial crisis, the efficiency and effectiveness of spending is of the utmost importance. Time is money, and each month of delay costs European taxpayers €600.000", he pointed out.

"Spending should be better targeted, focusing on the core tasks of decommissioning, such as the removal of the fuel from the reactor," Gräßle said. "Certain steps in the implementation of the project should not be taken as 'hostages' in order to obtain additional funding. … A clear distribution of responsibility among the participants in the process of decommissioning is necessary. What we need is a detailed long-term financial planning of the decommissioning project, and a clear description of how to accomplish these plans," she said.

Lithuania has relied on Russia for 80% of its energy since the closure of the Ignalina nuclear power plant in 2009. The former Soviet republic sees itself as vulnerable because of its dependence on Russia.

In 1992, at a G7 summit, it was decided that Ignalina in Lithuania, four units of the Kozloduy nuclear power plant in Bulgaria, and Bohunice in Slovakia had to be closed as they presented a high level of risk. All these nuclear units are now closed, the last to be shut down in December 2009 being the second unit of Ignalina.

The closing of the nuclear power stations was negotiated as part of the countries' EU accession treaties. As this early closure is a heavy financial burden for these countries, the European Union provides financial support.

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