1. PERSPECTIVES OF THE COMMON BALTIC ELECTRICITY MARKET Prof. Inna Steinbuka, Chair, Public Utilities Commission, Latvia The Institute of Economic Affairs 2 nd Annual Conference Utilities in Europe Amsterdam, October 20-21, 2003

2. 2 Outline Why common market? Consumption trends and production composition in Baltics Market structure Regulatory environment Import/export licensing as barrier for trade Tariffs as precondition for common market Eligible customers Recent developments towards common market Conclusions

3. 3 Why Common Market? Electricity markets of each Baltic country is too small for effective competition Technical interconnection capacity is sufficient for the market to develop European Union requirements will change existing generation patterns and role of Estonia and Lithuania as exporters of electricity In Lithuania – closure of Ignalina nuclear power plant in Estonia the restructuring of oil-shale- powered thermal power plants New investments should be encouraged

4. 4 Operating Principles The Common Baltic Electricity market (CBEM) can start developing from a voluntary bilateral contract market The new trading will be primarily between generators and eligible consumers in the three countries A competitive market should be allowed to expand gradually, as the size of market opening increases

5. 5 Electricity Consumption Trends The consumption of electricity in the Baltic States after the collapse of the Soviet Union has decreased, due to a massive restructuring of the national economies Source: Energy Information Administration / DOE (www.eia.doe.gov)

6. 6 Electricity Production Composition Source: US Department of Energy / Office of Fossile Energy (www.fe.doe.gov), data for year 2001

7. 7 Market structure: Lithuania There are two dominant companies State-owned Ignalina Nuclear Power Plant Partially private Lietuvos Energija, which owns transmission and distribution networks Since 1997 district heating sector is transferred from Lietuvos Energija to municipalities Since 2002 transmission and distribution companies operate as separate entities Challenge – replacing generation capacity after operation of Ignalina is phased out, which might require large investment

8. 8 Market structure: Estonia Eesti Energia is a fully state-owned joint stock company, in charge of generation, transmission, distribution, sales and exports of electricity There are also some privately owned generation and distribution companies Legal separation of grid operators planned from 2005 Challenge – restructuring of oil-shale power plants, which requires large investment

9. 9 Market structure: Latvia There is a vertically integrated state-owned electricity company Latvenergo, and many small generators The few privatization attempts failed, and in 2000, the parliament decided not to sell any parts of the company Government is seeking and discussing a proper model for legal separation Challenge – as imports from Lithuania and Estonia will decrease, alternative suppliers should be selected. Option: construction of additional local generating capacity, which requires investments

10. 10 Regulatory Environment All three countries have regulators, but the regulatory models are different Different coverage of regulated sectors: Estonia: energy and fuel, Latvia: electricity, gas, railway, telecom and postal services, Lithuania: electricity, gas, heating, cold water

11. 11 Regulatory Environment (II) Different level of independence: Estonia: government agency in Ministry of Economic Affairs, direct budget financing, Latvia: commissioners appointed by Parliament, financing by special duty on regulated enterprises, decisions can be challenged only by court Lithuania: commissioners appointed by President, direct budget financing, decisions on tariffs approved by the Government

12. 12 Import/Export Licensing as Barrier for Trade Estonia import/export license required from regulator duty to supply Estonian customers first Latvia no import/export license required Lithuania import/export license required from regulator energy flows should be balanced with counter-flows with respect to the country involved

13. 13 Tariffs as Precondition for CBEM: The Case of Latvia In January 2003 the Public Utilities Commission adopted new tariff calculation methodologies, based on the following principles: Separation of generation, transmission, distribution and sales Price cap Clear cost allocation Rate of return (7.6% for Latvenergo) Elimination of cross-subsidies Beneficial tariffs for eligible consumers

14. 14 Eligible Customers Estonia Threshold 40 GWh annual consumption 11 consumers eligible (market opening – 12% in 2002) Latvia Threshold 20 GWh annual consumption 20 consumers eligible (market opening – 18% in 2003) Lithuania Threshold 9 GWh annual consumption 25 consumers eligible (market opening – 26% in 2003; all consumers – in 2010)

15. 15 Recent Developments Towards Common Market The Prime Ministers of Lithuania, Latvia and Estonia on 26 June 2002 signed a resolution in Visaginas, Lithuania, emphasizing the importance of the establishment of the Common Baltic Electricity Market On November 4, 2002, the three regulators signed a memorandum concerning the Common Baltic Electricity Market Interconnection between Estonia and Finland is actively considered, involving operators of all three Baltic states

16. 16 Conclusions Challenges ahead require large investments In all three countries legislation is prepared for operation of CBEM Several obstacles (e.g. import/export licensing, existing production structures) should be removed to foster actual trading within CBEM Preparatory activities continue – regular consultations of regulators and transmission operators Development of CBEM will be important step towards integration in the European common electricity market