What's been happening in the energy sector lately?
Wk 39-40, 2021
I have nothing in my notebook for you this week. Nevertheless, we have a whole raft of government measures intended to stop the rise in electricity prices to discuss. Besides, Orlen is promising huge investments in Mažeikiai oil refinery, the electricity TSO Litgrid has set out an ambitious plan to be ready to connect large amounts of green electricity producers to the grid. Finally, a natural gas power plant project in Brazil, that Klaipėdos nafta is helping with, has started commercial operations. And then there is the nuclear forecast that missed.
Here’s all of that in more detail.
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Managing Price Growth
Natural gas and electricity prices are rising so fast that governments across Europe are considering or taking action to manage the impact of price increases. Lithuania is no exception. Here are the government’s and local authorities’ proposals that have emerged in the past couple of weeks.
The Ministry of Energy suggests we spread the increase in electricity and gas tariffs for household consumers over the next five years. Such a financial operation would be performed by the companies, they would borrow the necessary funds. Absolute majority of domestic electricity and gas consumers in Lithuania are supplied by Ignitis, a trading arm of the state owned Ignitis Group. The company will eventually be reimbursed by the DSO, as households will be charged an additional gas and electricity network fee.
Ministry also proposed postponing the deadline for selecting an independent electricity supplier. Lithuania is liberalising electricity market for consumers. It was meant to be done in three stages, largest consumers to smallest, we’re at stage 2. I suspect it is expected that the price peaks will pass during the winter and independent suppliers will have cheaper offers in the spring. Changing the dates won’t help clarify the process that is already poorly communicated and difficult to understand for many.
The Ministry of Social Affairs and Labour will increase benefits for the socially vulnerable.
Given all that the price of regulated electricity for 2022 will be up by 21%, and the price of gas for heating will be up 30% (YoY, instead of 83%). I see no reason why all this would not be approved by the Government and the Parliament and become law by mid-October.
There have been stranger suggestions. The municipality of Vilnius, the country's biggest heat consumer, has announced that it is "freezing the heating price increases at 35% YoY". In contrast to electricity or gas, heat has not become particularly expensive in Vilnius or elsewhere in the country. In September, for example, it was cheaper than at the same time in 2018.
Why it matters:
Politicians are finding it hard to find costs to be shaven. Thus, the regulator and the ministry have shifted from trying to pick the state enterprises’ pockets to straight up demanding credit. When companies start complaining about the prospect of unsustainable indebtedness, it is time to stop and rethink what You are doing.
I would speculate that there is a hitherto scientifically unrecognised but fundamental and mighty force acting upon every politician to always use all the tools available – and if need be, inventing new ones – to show they are doing all they can to reduce the electricity, gas, or heat bill for their constituencies.
PKN Orlen’s Investment
Lithuanian president Gitanas Nausėda visited the Orlen Lietuva oil refinery in Mažeikiai, where he met with the head of the refinery, the head of PKN Orlen, Daniel Obajtek, as well as the Polish Deputy Prime Minister Jacek Sasin. The visit was also attended by the Lithuanian Minister of Energy and the Polish Ambassador to Lithuania.
During the visit, the company presented its strategy for the next five years and the approved €641m "investment project", which would allow the company to produce more refined petroleum products "from the same amount of oil". According to D. Obajtek, the investment project is to be implemented by 2024.
Orlen has been promising investments in Mažeikiai for some time now. It was mentioned in the declaration of cooperation between the governments signed at the beginning of 2018. By the end of that year investments were to be completed in 2022. The Polish Prime Minister Mateusz Morawiecki promised investments in Mažeikiai during his 2019 visit. This year, the plans were also presented to the Lithuanian Prime Minister.
Why it matters:
Mažeikiai refinery is the only oil refinery in the Baltics. With a throughput of 15m tonnes of oil per year and a turnover of €2,4bn (2020) it is one of the largest companies in Lithuania and one of the largest taxpayers. Same goes for carbon taxes.
Oil companies are looking for scenarios to adapt to a net zero economy. PKN Orlen's strategy is similar to some others – emphasis falls on petrochemicals and investment in renewable energy. The refinery in Mažeikiai appears to be in the former category.
3.5 GW Onshore by 2030
The Board of Litgrid, Lithuania's electricity transmission system operator, approved its strategy for up to 2030. It contains, naturally, a lot of things, but I'll highlight a few aspects related to renewable energy here
By 2030 the company plans to be ready to connect 3.5 GW of onshore renewable generation to the system. In addition, the system operator should also be set to connect two offshore wind farms, each with a capacity of 700 MW. The first windfarm is expected to be operational as early as 2028. To put this in to perspective, the total generation currently connected to the grid is 3.8 GW.
A notable leap in capacity - the possibility to connect an additional 960 MW in the west of the country - is expected after 2025. Until then the plan is to "ensure the possibility of the electricity transmission network to become one of the five European operators with the largest share of solar and wind electricity in the final energy consumption balance".
Why it matters:
The strategy for 2030 allows us to forsee or at least speculate what the development of power generation in the country could look like by the end of the decade.
Being ready to connect generators is not the same as having installed generation. For that a broader range of institutions needs to be involved.
Exotic Countries
Brazil's first gas-fired power plant at the Port of Acu started commercial operations. With it - a liquefied natural gas (LNG) import terminal. "Klaipėdos Nafta” (KN), a Lithuanian state-owned oil and LNG terminal operator, is responsible for thetechnical and logistical operation of the quay and the facilities on it, as well as the gas pipeline and gas metering stations. The contract is signed for a period of 13 years, with an option to extend.
The entire complex consists of two gas-fired power plants in the port, an FSRU terminal and the onshore infrastructure in between. The project is being implemented by Gas Natural Acu (GNA), a joint venture between Prumo Logistica, BP and Siemens.
Here are some technical details: the combined heat and power plants have a total capacity of 3 GW (2 x 1.5 GW). LNG is supplied by BP, via BW LNG's FSRU BW Magna. That’s a purpose-built vessel, that is similar to Independence in Klaipėda in size, but its regasification capacity is 2.8 times faster (173,400 m3 LNG capacity, 28m m3/d regas capacity).
This is not the first LNG project in the region for KN. In 2015, the company advised the developers of a project in the port of Cartagena, Colombia. KN assisted the project developers with technical specifications for port and terminal operations, risk and safety management, and specialist training.
Why it matters:
Klaipėdos Nafta sees LNG projects as one of the ways to diversify its activities. The company aims to become an operator of at least 5 LNG terminals and a shareholder in 4 terminals by 2030.
The Brazilian project is "conventional": the LNG infrastructure is dedicated to a specific gas consumer (a power plant). Independence is unconventional in that it does not provide services to a specific customer, but to all of them on the open market.
What’s Next
Here are a few things we may be paying attention to in the future:
What is definitely not next is that the Ostrovets NPP has come back online, despite earlier predictions in Vilnius that repairs would take a few more months. This most likely illustrates the information barriers that are in place between Lithuania and Belarus. However, Vilnius is satisfied with the current situation - the Energy Minister is "110%" sure that unwanted electricity is no longer flowing into Lithuania. I don't think it ever did and even if I am wrong, the new trade regime does not protect against it any more reliably.
Enefit Green's initial public offering closes on 14 October, the results of which will be announced on ~15 October, and trading on the Nasdaq Tallinn stock exchange will start on ~21 October. It will be the second energy company after Ignitis Group to float a sizeable number of shares on the Baltic exchanges.
The proposals to mitigate price increases are likely to be adopted by the Seimas as a matter of urgency, possibly before you even open this newsletter.
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