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Future Conditions for Integration of the Baltic Electricity Supply System

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Future Conditions for Integration of the Baltic Electricity Supply System 3£ 0007/58 SE0007158 Future conditions for integration of the Baltic Electricity Supply System ER 25:1999 tECEIVED APR 1 4 2000 Swedish National 32/ 15 Energy Administration PLEASE BE AWARE THAT ALL OF THE MISSING PAGES IN THIS DOCUMENT WERE ORIGINALLY BLANK DISCLAIMER Portions of this document may be illegible in electronic image products. Images are produced from the best available original document. M20041064 Future conditions for integration of the Baltic Electricity Supply System ER 25:1999 C Energimyndigheten Statens energimyndighet, Box 310, 631 04 Eskilstuna Besoksadress: Kungsgatan 43 Telefon: 016-544 20 00. Telefax: 016-544 20 99 Bocker och rapporter utgivna av Statens energimyndighet kan bestallas fran Forlaget. Orderfax: 016-544 2259. e-post: [email protected]. © Statens energimyndighet Upplaga: 200 ex ER 25:1999 ISSN 1403-1892 - ECON Centre for economic analysis - Future conditions for integration of the Baltic Electricity Supply System Table of contents: 1 EXECUTIVE SUMMARY 1 1.1 Background 1 1.2 Problem statement 1 1.3 Conclusions and recommendations 2 2 INTRODUCTION 3 3 THE ELECTRICITY SUPPLY INDUSTRY IN THE BALTIC STATES 5 3.1 Electricity supply and demand 6 3.2 The structure and operation of the electricity industry 8 3.2.1 Structural arrangements 8 3.2.2 System operation and transmission 9 3.2.3 Generation dispatch 11 3.3 The legislative and regulatory context 13 3.4 Environmental features of the electricity supply industry 13 3.5 Harmonisation/coordination of environmental standards and mechanisms 14 3.6 Key issues 16 4 FUTURE DEVELOPMENTS IN THE BALTIC ELECTRICITY INDUSTRY 17 4.1 Future electricity demand and supply 18 4.1.1 Electricity demand 18 4.1.2 Future supply 19 4.1.3 Plans for increasing interconnection capacity 21 4.2 Electricity market liberalisation 22 4.2.1 Industry structure and privatisation 22 4.2.2 Market structure and regulation 23 4.3 International agreements and integration initiatives 24 4.3.1 EU-level initiatives 24 4.3.2 Multi-lateral initiatives among Baltic States 25 4.3.3 Utility co-operation 25 5 CONDITIONS FOR INTEGRATION 26 5.1 Key constraints 26 5.2 Enabling factors 27 5.3 Conditions for market integration 28 5.3.1 Conditions for the creation of a common power market among the Baltic States 29 5.3.2 Conditions for integration with neighbouring Nordic and European markets 30 6 CONCLUSIONS 31 - ECON Centre for economic analysis - Future conditions for integration of the Baltic Electricity Supply System References 35 Appendix I: Energy profile for Estonia 37 Appendix II: Energy profile for Latvia 45 Appendix III: Energy profile for Lithuania 53 Appendix IV: International agreements and initiatives for integration 63 Appendix V: International Energy Programmes and Projects 69 ECON-memorandum 71/99 • Project no. 32450 • MDT/AGA/HBr, THa - ECON Centre for economic analysis - Future conditions for integration of the Baltic Electricity Supply System Executive summary 1.1 Background The economies of Estonia, Latvia and Lithuania developed in close association with the north-west region of the former Soviet Union. This is especially true for energy supply systems and electricity generation and transmission; the Baltic States depend on Russia for much of their primary energy needs, and export power to Russia and Belarus. In restructuring their electricity industries, the Baltic States hope to establish closer relationships and trade with Western Europe. The initial focus has been on changes to the legislative framework, industry restructuring and the establishment of new regulatory institutions. Vertically integrated utilities are in the process of being broken up into a number of separate generation, transmission and distribution companies. This restructuring is a prelude to privatisation. The states aim to establish a common power market among themselves, and hope to integrate' this market with neighbouring (Nordic and European) markets. Despite the target set by the Baltic authorities of a common market by 2001, there is little clarity, as yet, on the framework and guidelines for the structure and functioning of the market. This process is supported by other players in the region, and the EU has recently prioritised closer co-operation and harmonisation of power networks in the Baltic Sea region. The Swedish National Energy Administration has identified co- operation on energy and environmental issues in the Baltic Sea region as one of its priorities. Consequently, the Administration commissioned ECON to analyse the conditions for closer linkages between the Baltic and Nordic electricity systems. This report presents the findings of this analysis. 1.2 Problem statement Much of the existing infrastructure in the Baltic States is now ageing and in need of substantial rehabilitation. Existing generation capacity has a number of serious environmental problems, and would be uneconomic under European standards of safety and pollution control. While price reform has been initiated, additional need for structural changes in tariffs are required, and there is a need to improve the financial viability of the utilities. Perhaps most importantly, the close associations with Russia and Belarus mean that any changes, particularly towards a closer integration with Western Europe, require political agreement with Russia. We use the term "integrate" to indicate closer links between the Baltic States and Nordic countries at the level of investment and trade in electricity. In our use, the term does not necessarily imply the absorption of the Baltic States into the Nordic electricity market. - ECON Centre for economic analysis - Future conditions for integration of the Baltic Electricity Supply System Given these constraints, it is clear that the process of creating a Baltic electricity market, and integrating this with neighbouring European markets, is not straightforward. If progress towards both these goals is to be made, it is necessary to identify the key conditions that must be fulfilled before such progress can be made. The principle objective of this study is to identify these conditions. Our approach has entailed a three-step process: • Firstly, an overview was undertaken of the Baltic energy and electricity supply systems in terms of generation capacity, energy resources and cost and price developments. • As a second step, future developments in the electricity supply system for the Baltic States were analysed, focussing on supply and demand forecasts, institutional developments, and initiatives supporting the development of a Baltic power market and integration with neighbouring markets. • The third step of the study was to identify the conditions for integration, focussing on the Nordic market. Firstly, we examined the key constraints and enabling factors in the local and regional context. Thereafter, we identified the conditions for the establishment of a Baltic power market, and its integration with neighbouring markets. 1.3 Conclusions and recommendations The table below summarises the set of key conditions for the development and integration of the Baltic power market. Perhaps foremost among these is the need to ensure collaboration from the Russian authorities. We expect progress towards the establishment of a Baltic market and the integration with neighbouring markets in the region to be made simultaneously. Nevertheless, it is useful to present the condition for each of these objectives separately. The establishment of a competitive power market in the Baltics requires a renewed political commitment to the establishment of an agreed framework for such a market. In particular, guidelines and rules for power exchange, third-party access, network tariffs, customer choice and system balancing need to be established. The structure of the industry has to be compatible with competitive mechanisms, and it is essential that the transmission system operation be independent of generation interests. While regulatory and tax systems do not have to be the same across countries, they must be compatible with one another. - ECON Centre for economic analysis - Future conditions for integration of the Baltic Electricity Supply System Table 1.1: Summary of conditions for market integration Conditions for Conditions for integration with establishment of internal Baltic market neighbouring Nordic and European markets Ensuring co-ordination and consensus with Russia Renewed political commitment Acceptable environmental standards Agreement on framework for the market Agreement on CO2 emission & trade issues Suitable industry structure Pricing reforms Independent system operation Transparent pricing for network use System balancing & service protocols Utility viability Price deregulation Establishment of interconnections & compatible regulatory systems & acceptable technical standards for networks Integration of the Baltics into European systems will not be possible until environmental issues are resolved, particularly with regard to standards, the shut- down of Ignalina nuclear station and emissions from oil-shale combustion. Agreement also needs to be reached on the implementation of climate mechanisms compatible with an increased level of electricity trade with the Baltic States. Other conditions for integration relate to pricing reforms, particularly with regard to network access and tariffs; the financial viability of Baltic utilities, and, clearly, the establishment of interconnectors with sufficient capacity to conduct trade. Our recommendations relate both to the orientation of strategies to promote
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