#EnergyDigest (40/22): The Price Of The Energy Crisis

What happened in energy this week?

Week 40 of 2022 (I. e. the week starting on the 3rd of October)

  • The government and the presidency squabbled (a bit like children) over who would go to the European meetings on energy. The haggling somewhat overshadowed the fact that the position both sides take is, to put it mildly, ill-considered.

  • Details are being drawn up for a tender to develop Lithuania’s first offshore wind farm. Documents suggest that the first electricity generated there will not reach the grid until at least 2030. That is at least 2 years later than promised.

  • In the face of the energy price crisis, the Lithuanian budget for next year includes €1.2bn in direct subsidies for households and businesses. That translates into around 1.7% of GDP.

Let us look at all that in detail.

Taunts On the Playground

European energy policy agenda was intense lately. On 6th of October, the inaugural meeting of the European Political Community – 44 countries in Europe and beyond – took place. Key energy suppliers for Europe were present. It is therefore understandable that the energy crisis was discussed on the fringes.

On the 7th of October, an informal meeting of the European Council took place. All this is seen as a preparation for the formal meeting of the EC on the 20-21st of October.

In Vilnius, all this did not go by without drama. An old dispute over who - the President or the Prime Minister - should represent Lithuania at the EC resurfaced. The Government had hoped to send the Prime Minister to the energy talks. Energy is not a matter of foreign policy, they argue, and the President is responsible for the latter.

However, it was the President who ended up going. European policy is his direct prerogative, so he does that himself. Unless he delegates someone. Before he left, he and the Minister of Foreign Affairs managed to have a public spat worthy of a children’s playground.

These disputes are of little factual significance because both institutions are more or less on the same page when it comes to actual policy. Lithuania is in favour of a price cap on all European natural gas imports. This camp is said to include some 17 EU member states. It is opposed by a smaller group, but with Germany and the Netherlands in the lead.

  • Why is this important? Well, these disputes really aren’t. Except that they may overshadow the fact that the policy position taken by Lithuania is, to put it mildly, not without its flaws.

    High gas prices in Europe are the reason why Europe is able to secure enough liquefied natural gas (LNG) to replace what is not being imported from Russia. If the price went lower, the gas would be shipped to where it pays better. Europe would end up facing a physical shortage of gas.

    A sort of price cap could work if the EU bought gas collectively. It is too late to do that for this winter, but a similar measure is already on the table for the next year, to fill the gas storages. That way, Europe would be throwing its purchasing power around, and Member states would not compete.

    In that case if anyone needs a price cap, it could be organized on the Single market, offsetting the loss from price differences incurred by the common buyer. This is not, however, politically feasible currently.

    Lithuania also opposes a smaller, Russian gas price cap. We do not import Russian gas, so it would not help us, and Russian gas buyers would gain a competitive advantage.

    However, such a price cap, intended to reduce Russian income from exports, could work. Unlike LNG, piped Russian gas has no alternative export market. Production on the Yamal Peninsula is physically piped only to consumers in Europe. The buyer could therefore set prices. Russia could cut off supplies altogether, but we must assume that Moscow will do that in any case.

    There is a catch: if Russia did not stop gas exports, a price cap would incentivize fence-sitters to start importing Russian gas again.

Further reading (in LT unless stated otherwise, Google/Deepl are your friends):

Offshore wind – in 2030 at the earliest

The power production at the Lithuania’s first offshore wind project is not expected until at least 2030. That is two years later than previously assumed. Such a timetable seems to be forming, judging by the documents submitted for public consultation by the energy regulator VERT, describing the procedure for the upcoming tender.

The documents state that the tender will last 180 calendar days. The victor will have 3 yrs from obtaining the development and operation permit to get a construction permit; and 6 yrs to obtain a production licence.

The specific date of the tender is not yet known. So far it was indicated for the second half or end of 2023. Some potential bidders have hinted at September. In this case the end of the tender is expected in the first half of 2024 and the wind farm is expected to be operational in 2030 at the earliest.

The Minister of Energy has already hinted that the wind farm will be operational in 2030. This is the date he gave residents of Palanga who are worried about the visual pollution. However, 2028 still appears in the official comms of the Ministry of Energy and of EPSO-G, a group of companies overseeing the tender.

  • Why is this important? Offshore wind farms are the megaprojects of the renewable age. Such wind farm could cost ~€1.2bn. The project is likely to require state support, so it is at least worth noting from the public interest point of view. Eventually it will generate the equivalent of up to 25% of the current country's electricity needs today. The demand will be higher at the time it starts. Nevertheless the project will substantially improve the current situation when local power generation is very much lacking.

    Ignitis Group, the Lithuanian majority state-owned energy giant (in local terms) has made a somewhat strange move. It has included a 700 MW offshore wind farm in its project timetable until 2030. The plan states that it should be completed in 2028. Now, even if the company manages to win the tender (with partners), it will at least have to redo the slides. Push the plans forward to 2030.

    If you ask me, I anticipate some disruptions and possible legal disputes along the way and thus would bet on the start date somewhat closer to 2035.

Further reading:

€1.2bn for Energy Subsidies

The Lithuanian Government has approved the state budget for next year. It will now be submitted to the Parliament where it is expected to be approved before the end of November. This would be a few weeks earlier than usual. The key figures are these: the budget deficit for 2023 is expected to reach 4.9% and the level of public debt will rise from 40.3% to 43% of GDP by the end of next year.

The budget includes provisions to help households and businesses with rising energy prices. More than €1.2bn will be made available to subsidize gas and power prices for citizens and businesses next year. To put this in perspective: assuming a GDP of around €70bn in 2023, this support represents around 1.7% of GDP.

€0.8bn will be used to directly subsidize household gas and electricity prices. Exactly how the subsidy will work remains to be seen. But the public electricity price (the market is only half liberalized) is proposed to be fixed at 0.28 €/kWh next year. I would assume that independent suppliers' customers will be compensated above this threshold.

For business, around €0.446bn is put aside to compensate the power prices throughout this heating season. Half of this amount is budgeted for next year. Businesses will be subsidized as follows: 50% of the power price above 0.24 €/kWh during the last quarter of this year and 50% of the price above 0.28 €/kWh in the first quarter of 2023.

Businesses will have other incentives, such as preferential loans and state support for solar power installation. In total, the business support package amounts to around €2.5bn, or 3.5% of GDP. Not all the programmes will fit into a single year though. So the support during 2023 will be somewhat closer to €1.3bn.

  • Why is this important? The support programmes to help with energy prices in national budgets are a decent direct indication of the cost Europe is paying for the dependence on Russian energy resources. And the cost of the chronic refusal to invest in alternative (i.e., other than gas) power generation.

    Next year's budgets are a headache for each EU country individually and all of them collectively. Therefore, I thought it might be useful to have these figures for comparison.

    For example, the controversial €200bn German support package represents about 5.1% of the country's GDP. However, it is not yet clear how this amount will be distributed.

Further reading:

What next?

  • The Mažeikiai oil refinery, owned by Orlen Lietuva, received 7 tankers or 0.673m t of oil in September. It has scheduled 8 cargoes or 0.74m t of oil in October. 4 tankers will bring Arab crude, 3 – North Sea crude, and one American. These types of oil have replaced Russian crudes since April this year. Up to 100 tankers a year arrive in Būtingė, the refinery’s oil terminal, yearly, bringing in up to 10m t of oil.

  • Klaipėdos Nafta has informed Norway's Hoegh LNG that it will exercise its option to acquire the Independence floating gas import terminal. The purchase will cost the company $153.5m. The deal is to be conluded no later than on the 6th of December 2024. It should be noted that if purchased today, Independence would cost Lithuania ~€20m more than expected, since euro has depreciated by 15% against the dollar this year.

  • Swedish investigators have carried out an initial survey of the Nord Stream pipelines in the Swedish EEZ. They confirmed that an explosion occurred near the pipelines, causing extensive damage. The initial survey reinforced suspicions of sabotage. Evidence has been collected at the scene and will now be examined. The Swedish prosecutors did not provide further details, however.