Dear Reader,
On your screen you see the inaugural #EnergyDigest, a biweekly newsletter on the energy matters in the Baltic region. Few things to know:
#EnergyDigest is written by me, Naglis Navakas, a journalist in Vilnius, Lithuania. It means there is a geographical bias. There is plenty to talk about though.
To be completely fair, the newsletter is inaugural in English (not my native tongue, please be patient). I have been writing a weekly newsletter on energy matters for a few years now - in Lithuanian. Now it’s bilingual, but biweekly.
My professional beat shifted away from energy, where I did spend a few happy years. This is my way of moonlighting as an energy correspondent.
The newsletter will consist of 4-6 pieces of news. The first edition might have gotten a bit bloated. I’ll try to be somewhat more concise in the future.
The "Notes" (a broader discussion of a selected topic) and "What's Next" (a heads-up on upcoming events) columns will be featured only if I have something for You.
You can subscribe and find other options here or find the link at the bottom after you are done reading.
Without further ado:
Here's what happened in our energy sector over the past two weeks (wk. 35-36, 2021).
The coming winter season in Europe will be more stressful than ever: Gazprom has stopped pretending to be a "reliable gas supplier to Europe" and has resorted to as-close-as-makes-no-difference blackmail over Nord Stream 2. The silver lining here is that the Baltic countries are better prepared than Europe on average. Talking of silver linings, the Ostrovets NPP is shut for repairs w/o a clear restart date.
In other news, the tender to find a replacement for Lithuania’s LNG FSRU vessel ended with no bids. It seems likely we will keep the existing unit (use the buy-out option), although the company has not commented on what comes next. And the Lithuanian electricity DSO has once again rescheduled the smart meter roll-out for the later date.
Here’s all of that in more detail.
Notes: The Baltic Gas Island
European gas prices climbed above €50/MWh this September beating decades old winter price records. Multiple reasons led to this, including Asian LNG demand, outages in the US due to severe weather, maintenance in and around Norwegian oil and gas fields. However, Gazprom is playing the leading role here, reportedly refusing additional gas supplies to its clients in Europe.
European storage facilities, emptied during the long winter, have started to fall far behind filling schedules. With the heating season just weeks away, it is increasingly clear: the depth of the gas crisis this winter will depend on the weather and on Gazprom's good graces. The latter promises supplies only via the recently completed Nord Stream 2 pipeline, but not via Ukraine or Poland. The company says it could start deliveries in October, but the date will depend on the decision by the German regulator.
The Baltic region was not spared the price hikes. However, prices at the regional GET Baltic gas market remain lower than at the European gas hubs. Baltic and Finnish gas price index BGSI stood at €45,46/MWh on the 7th of September, vs. €52,07/MWh in Europe (TTF). Baltics seem more prepared in terms of storage, too.
The region gained access to alternative gas supplies in 2014 (an FSRU in LT). However, the regional (LT-LV-EE-FI) gas system still lacks a direct onshore link to European gas network. This should be resolved with the completion of the gas pipeline from Lithuania to Poland (GIPL) by the start of 2021, if all goes to plan. Until then the climate in the local gas market is maintained by the FSRU and Inčukalns gas storage facility. The latter is the main supply buffer.
The facility is filling up nicely this summer. By the 1st of September it was 72,83% full, vs 67,61% European average. Data shows that recently it was better stocked only last year (86,15%). Also notable are gas flows from Lithuania to Latvia, i.e. LNG market to storage. This summer they were smallest since the unbundling of the gas sector in Latvia (Dec. 2016).
This leads me to believe that Baltic countries and Finland need not fear major gas supply disruptions during this upcoming winter. That only speaks to security of supply, however. Gas contracts are mostly indexed to European gas hubs, therefore gas prices will inevitably be high. It also stands to reason that Gazprom this year will grab a larger share of the market than usual.
My €0,05: Gazprom seems to have ditched its favourite “reliable gas supplier for Europe” schtick since NS2 heard an unfavourable court decision in Germany. The uncharacteristic bit is that Kremlin seems to be “punishing” its most profitable clients in Western Europe, rather than the usual picking on insubordinate Ukrainians.
I wish I could say with confidence that, come spring, European capitals will be discussing European reliance on Russian gas with a renewed vigour. Something tells me, however, that, just like the French champagne incident, Germans will not know how to react to such behaviour and will pretend nothing ever happened.
Also, winter outlook reports by ENTSOG and others will be out some time around October. This time they might just make a more interesting read than usual.
***
Here's what else has happened in the last couple of weeks:
Independence Stays in Klaipėda
Oil and gas terminal operator Klaipėdos Nafta (KN) has not received any bids for an FSRU-type gas import terminal other than the currently leased ship Independence. KN announced that companies found it difficult to compete with the buy-out option in the lease agreement with Höegh LNG. KN offered no comments about further course of action. It will have to present a decision to the Norwegians by December 2022 at the latest.
A brief look around the market suggests such an outcome was to be expected. The buy-out price was fixed in March 2012 when the lease was signed. The recent surge in commodity prices has pushed beyond that price level. The S&P GSCI Industrial Metals Index, which tracks industrial metals, is currently ~22% higher than it was in March 2012.
Golar LNG executives (a competitor to Höegh) noted the price increase on an investor call in August. Steel prices and reduced shipyard availability started reflecting on ship newbuild quotations. A newbuilt LNG carrier was quoted at around $210m this year, 17% up from $180m a year ago. Upward trend in prices was noted to be spilling over into the secondary market.
Why it matters:
KN is a state-owned company and the loans to acquire the terminal are guaranteed by state assets. In that sense, its spending is important to every taxpayer.
Gazprom is helpfully showing that Kremlin still considers gas to be a weapon. Access to the LNG market helps neutralize it.
If heat producers in Lithuania are almost off gas and electricity generation sees the contours of the end of that era, the industry still has no clear strategy to get itself off this fossil fuel.
Several Latvian and Estonian gas import infrastructure projects also seemed to depend on the fate of the Klaipėda LNG terminal. I haven’t heard anything about them in a while, however.
Postponed again
The smart metering project rollout in Lithuania has been delayed (again). As ESO, Lithuanian DSO explained, some of the rollout tasks that were planned to be done in parallel will now be carried out in sequence to ensure “the highest level of cyber security”. Thus, rollout will begin in H1 2022 and be completed in 2025. Previously planned dates: Q4 2021 to end of 2023.
The promise is to cover at least 80% of all electricity transmitted by ESO with smart meters by the end of 2023. Currently, about 62% of it is metered by so-called automated metering, i. e. smart meters deployed by businesses and some households.
The idea of the smart meter rollout has been around for a decade. It was held back for some time by a 2012 EY study which found no financial benefits for it. A pilot project was planned in 2015 and ran in 2016. 3,000 smart meters were installed, and consumers saw 6-7% savings.
Expecting to install 1.76m electricity and 108,000 gas meters by 2019, at a cost of €219m, ESO sought the regulator's approval at the end of 2017. After almost two years of back and forth, 1.2m meters for €150m have been agreed for 2019. The public procurement procedure, which got tied up in the courts for a while, ended in February this year.
Why it matters:
It is the digitalization of the low voltage electricity network, which will allow for more targeted network maintenance, save money and time for the DSO and its customers, and enable the development of new services.
The project will bring Internet of Things (IoT) connectivity to a large proportion of households. However, small, or frugal electricity users have been excluded out of the rollout by the regulator.
Cybersecurity is indeed crucial here: 1.2m smart devices in the hands of consumers who are not necessarily proficient in their use is a significant risk/challenge.
An unrelated fact: the Suez Canal connecting the Red Sea and the Mediterranean was started in 1858 and officially opened in 1869, 11 years later.
A Monster Out of Order
On 9th of September Alexei Likhachev, Head of Rosatom, met with Roman Golovchenko, Prime Minister of Belarus. There was much to discuss: the Belarus NPP’s first reactor, which shut down on 12th of July due to a generator failure, is still not up and running. It was previously announced that it would be back online in mid-August, now no date is given. The maintenance is being performed “by the manufacturer”.
In addition, at the end of July, Rosatom received the license to start hot functional testing, i.e. testing w/ nuclear fuel, at the second reactor of the Ostrovets NPP. The Russians plan to "hand over the reactor to the customer" in mid-2022. It is still unclear what Minsk intends to do with the electricity the NPP generates.
It was planned to be exported to undersupplied Lithuania. Even before the plant's launch, Belarusian experts were more concerned about the Lithuanian decision not to allow the NPP to use the Kruonis Pumped Storage Hydroelectric Plant than about the electricity embargo. The latter was seen as temporary - the Lithuanians would supposedly change their minds if the electricity was cheap enough.
To the best of my knowledge, until now room in the Belarusian system for Unit 1 was found by shutting down some of the gas-fired power plants. The second unit will make the situation doubly difficult.
Why it matters:
In theory, if a nuclear power plant on the Lithuanian border is not in operation, a nuclear accident cannot happen. However, the build quality of the plant has always raised suspicions on the Lithuanian side. Such shutdowns after the commercial operation has begun are not encouraging.
The Ostrovets NPP is the first plant with VVER-1200 Rosatom reactors built abroad. So far, it is not clear if the design of the reactor is to blame, as the plant's tests were carried out with an eye to the schedule, and not the results.
What’s Next
Here are a few things we may be paying attention to in the future:
New rules on electricity trade with Russia and Belarus come into force in Lithuania on 15th of September. It should reduce Latvia's ability to import electricity from Russia. Among other things, the 0 MW for commercial electricity exchange with Belarus will be set on the LT-BY border – again. I suspect it will be presented as 'now we have really banned it, as opposed to the previous government'.
A test of synchronous operation between Lithuania and Poland is planned "around November", after the ongoing tests on the LitPol Link interconnector are completed. This will test whether the Lithuanian electricity system can operate with Polish help in the event of an emergency. To the best of my knowledge, it is seen as an insurance policy against being disconnected prematurely from the Russian-controlled IPS/UPS system.
The agenda for the autumn session of the Lithuanian Parliament includes some energy-related issues.
The law on the offshore wind project will be submitted to the Seimas – it will still set the project at 700 MW, the only change is that the connecting cable will not be laid by the TSO (Litgrid), but by the developer. The tender is expected in 2023.
Amendments to a part of the Nuclear Energy Act are due to be proposed in November: the law should be adapted to some international agreements amending or supplementing the Vienna Convention on Civil Liability for Nuclear Damage, that are planned to be ratified.
There are also plans to enact several EU Directives to national law, to enshrine the provisions of the National Energy Strategy in law, etc.