What's been happening in the energy sector lately?
Wk 37-38, 2021
Lithuanian Energy Regulator (VERT) has been in the headlines more than usual, both in the context of Lithuanian DSO’s tariffs and in the context of the Baltic countries' dispute over Russian electricity imports. Also, record gas prices are starting to chew at its consumers in Europe and Lithuania.
It is not all gloomy, however. Litgrid, Lithuania's transmission system operator, connected a battery to its grid, first of its type in the region. Also, Enefit Green, Eesti Energia's green energy subsidiary has committed to going public on the Tallinn Stock Exchange where it will raise money to finance its renewable energy pipeline.
Here’s all of that in more detail.
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Notes: Developments in Electricity Trading
Negotiations between the three Baltic countries on the rules governing electricity trade with Belarus and Russia, the so-called third countries, have reached a resolution of sorts. After failing to find a common understanding, the Lithuanian regulator approved, and the transmission system operator implemented a set of unilaterally adopted rules on 15th of September.
In response, the Latvian and Estonian TSOs have started a procedure to modify the previously agreed trading rules, removing now excessive restrictions.
Lithuania's decision, in addition to the trade ban already in place, means a virtual reduction of the total transmission capacity (TTC) of the LT-BY power lines. Due to the way the BRELL energy system works, this decision means less capacity for electricity imports from Russia to Latvia.
Dainius Kreivys, Lithuanian Minister of Energy, is hoping that this will put an end to this matter and give way for other regional energy issues to be addressed. However, Latvia announced it did not see a technical reason for such restrictions and said it would raise the issue with the European Commission and the Agency for the Cooperation of Energy Regulators (ACER).
Lithuania is convinced that all the decisions it has taken are legal and within the framework of the BRELL Treaty. However, when the methodology was published for public consultation, market participants expressed concerns about possible distortions to fair competition. Lithuanians argue that lower imports will benefit domestic producers and will not increase electricity prices. The latter statement does not sound convincing.
So, what now? Lithuania's decision is changing the dynamics of wholesale electricity trade in the region. How exactly remains to be seen once various corners of the network are done with repairs. Estonians are worried about a possible Russian retaliation before the three Baltic countries are ready to operate outside the Russian IPS/UPS system and BRELL. Some see this Lithuanian position as an “ultimatum”, that should force a response. But I do not see much enthusiasm for further negotiations. We’ll come back to this when the EU institutions respond to the Latvians' grievances.
My 0,05€: this seems to mark the end of the trilateral approach to the Baltic electricity trade, i.e., there goes another regional energy policy dimension. At least until the Baltics join the Synchronous grid of Continental Europe by the end of 2025 (est.). Even if negotiations were to resume, it is unlikely that the parties would be able to agree on anything. At least that is what history teaches us. It should, however, be noted that, as an observer, I find Vilnius' position to be very strange.
It is rather difficult to explain it coherently, as the public statements are steeped in a chaotic vortex of misleading terms and concepts. The law in force in Lithuania does two things: prohibits the purchase of Belarusian electricity and disallows the Belarussian NPP to use Lithuanian infrastructure. However, I still haven’t figured out exactly which part of the law is being enforced with this decision.
As I understand it, there is a deeply held belief in Vilnius that the Latvians are deceiving us and secretly buying Belarusian electricity. Therefore, the fact that electricity imports to Latvia have fallen is already considered a success. However, as far as I know, there is no real evidence that Latvians are paying the Belarusians, rather than, as they themselves say, Russians.
Nor can the ministry explain what effect these measures will have on the Ostrovets NPP project, which, after all, is supposed to be the target.
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Here's what else has happened in the last couple of weeks.
Gas Demand Destruction
Europe saw no additional gas supplies in September. Thus, demand is starting to collapse. During the summer, gas-fired power plants gave way to coal. Now fertiliser producers are cutting production. In Lithuania, a fertilizer producer Achema, the largest gas consumer in the country by far, has shut down three production facilities, including one ammonia production line out of two. The plant management warns that with gas prices this high more units will have to be shut.
Lyda Lubienė, the main shareholder of Achema Group, has also spoken out. This time asking for a "swift and responsible political decisions" to rein in gas and electricity prices. As usual, the head of the fertilizer plant complained about the gas infrastructure charges and prices on carbon. I think it is safe to assume we will be hearing about the "heavy burden" of these taxes some more.
Looking ahead, some relief for the gas market should come in October with more gas coming in from Norway. Equinor has received permits to produce 1 bcm more from Oseberg and another 1 bcm from Troll fields in the coming gas year. Meanwhile, Gazprom is now fielding accusations of market manipulation from Brussels – the company denies them and assures it is fulfilling all its long-term gas supply contracts.
Why it matters:
L. Lubienė only speaks in public when the market situation is unfavourable for the plant. Achema is stingy with its financial data, making it is difficult to confirm whether the company is in financial trouble. So far this tactic has proven effective: the gas infrastructure charges were gradually shifted and now are significantly skewed in Achema's financial favour.
The factory workers look a bit like hostages here. The other bargaining chip may also be Achema's never-ending litigation with the state over anything and everything. This time, however, there is not much the government can give.
Gazprom says that the accusations of deliberately withholding gas from Western Europe to put pressure on Germany over Nord Stream 2 are "absurd". It is honouring all long-term contracts and will increase supplies "as soon as it has the opportunity". The Kremlin assured on the eve of the German elections that the company was ready to sign new contracts. And to solve the problem it has worked to exacerbate.
The First Battery in The Region
Litgrid, Lithuania's electricity transmission system operator, has connected the region's first battery of this type to the electricity grid. The 1 MW, 1 MWh device was installed at the Vilnius electricity substation. It was built by Fluence, a US-based joint venture between Germany's Siemens and American AES, at a cost of €1,4m. Litgrid says this will let the TSO to ascertain the potential of batteries in managing system frequency and ensuring stable grid operation.
TSO will also be better prepared to connect the larger battery project to the grid – it will consist of 200MW, 200MWh worth of batteries (4x50MW, 50MWh). This latter project is being carried out by Energy Cells, a sister company to the system operator. Both companies belonging to the EPSO-G group of companies, wholly owned by the Ministry of Energy. The ~€100m worth of energy storage units should be installed in the first half of 2022. The batteries will be installed in substations in Vilnius, Alytus, Šiauliai and Utena.
Why it matters:
This 1 MW battery project was supposed not only to help prepare for the connection of new batteries. It was also supposed to help prepare the technical specifications for the larger project. The new government requested that EPSO-G delivered the large batteries earlier, so procurement started before the end of the pilot project, which at the time was already under way.
Judging by the size of the project and the rhetoric of the Ministry, storage solutions are set to play a significant role in the Lithuanian energy system. 200 MW of batteries for our size is a lot, and the TSO will have to do its homework before connecting them.
These batteries are to provide the primary system reserve until the Baltics connect to the European energy system. Then these assets will be handed over to the private sector through a tender prepared by the Ministry.
Enefit Green IPO
Enefit Green has officially announced it will conduct an Initial Public Offering (IPO) on the Nasdaq Tallinn Stock Exchange. The prospectus is still being prepared for the Estonian regulator, so things like the exact date and the share of the company be listed are not yet known. So far it has been indicated that IPO will take place in H1 2022. It was previously announced that up to 49% of the company could be listed.
Until the prospectus is published, it is also not known how much money the company will try to raise or what the offered share price will be. However, the company said it has plans to invest around €600m in 600MW of power generation facilities in the Baltic States, Poland and Finland by 2023.
News about the future IPO were followed by an announcement that the company has made the financial investment decision on an €85m 75MW wind farm in the Telšiai district of Lithuania. The wind park will consist of 14 turbines, 5.3-5.5MW each, and will be the largest such object currently owned or constructed by the company. Generation is expected to start at the end of 2023.
Why it matters:
Enefit Green's decision to raise funds on the capital market to invest in renewable energy means that portfolio of green projects in the region is set to expand in the near future. In response, regulators - energy, environmental and others - should work to be effective overseers of the renewable generation projects rather than obstacles to them.
In Lithuania investments in wind farms w/o state support are becoming commonplace.
New DSO Regulation
Lithuania's energy regulator VERT has caused quite a stir with the publication of new draft rules for calculating the tariffs (and thus, revenues) of ESO, the Lithuanian electricity and gas distribution system operator (DSO). The regulator wants to "optimise the network" and hopes that the new methodology will “at least halt the increase” of the regulated part of the electricity tariff.
Reactions to this proposal have not been gentle - ESO is an important part of the Ignitis Group, a state-owned group of companies listed on stock exchanges in Vilnius and London. The regulator's decision could eat into what some estimate to be around a tenth of the group's overall operating result. It was also pointed out that the new regulation would mean rising debt for the company and that the implied retroactive change in the rules would damp the investment climate for a quite some time.
Concerns were also raised about the company's ability to pay the promised dividends. Investors rushed to sell. The group's share price fell by ~15% in Vilnius, while its GDRs in London dropped by ~18% in a handful of sessions. The regulator has until 15th of October at the latest to make a decision, but promises to do so before the October the 1st. The head of the regulator did not rule out the possibility that the final decision could differ from the draft submitted for public consultation.
Why it matters:
The worst-case scenario, Lithuania risks earning a reputation as a country with an unpredictable regulator. This would hamper the development of the underdeveloped local capital markets, with all its negative consequences.
At best, drastic decisions will not be made and a decent handful of institutions in Lithuania will carry on with their very expensive learn-by-doing education on how not to behave around internationally listed companies.
On the other hand, international institutional and retail investors seem to notably reinforce the barrier between state-owned assets and the short-term, opportunistic political whims of people holding political office.
What’s Next
Here are a few things we may be paying attention to in the future:
A test of synchronous operation of the Lithuanian and Polish electricity systems should take place in December, as announced by the countries' energy ministers after a meeting in Poland on 17th of September. This is a slightly later date than the previously mentioned “around November”.
The Ostrovets NPP, as rumour in Vilnius has it, is not expected to be commercially operational for a few more months. That is how long it will take to replace the components that failed mid-July and get the plant back on line.
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