The three Baltic States want to move out of the Russian-dominated IPS/UPS area power system and into the EU’s CE system. This will require billions of euros in investment not just in transmission networks but also in new baseload generating capacity. One way to reduce these costs, writes Professor Rudolf Dolzer, is for the Baltic countries to link up with the new nuclear power station currently being constructed in the Russian enclave Kaliningrad. To prevent Kaliningrad from becoming an energy island, the Russians might be open to such a proposal, Dolzer believes – even if it means that Kaliningrad will also have to link up with the CE system.
In order to promote a single energy market throughout Europe, the EU is keen to eliminate existing so-called energy islands by the end of 2015. This can be achieved by building bridges with isolated markets in order to connect them with the integrated EU energy system.
The three Baltic States, Estonia, Latvia and Lithuania, are an example of such an energy island in Europe, both for their supplies of electricity and natural gas. They are not completely isolated from the rest of Europe: two submarine high voltage direct current cables from Estonia to Finland with a total capacity of 1000MW bring the Baltic States together with the rest of the EU. Converter stations on both ends of the cable convert the direct current to alternate current synchronous with the power systems of the relevant country.
But the three Baltic countries meet most of their domestic energy needs by imports from Russia, which supplies 100% of their gas and much of their electricity imports. In 2012, Russia supplied about one third of domestic electricity supplies in Lithuania, about 15 % in Latvia, while Estonia is still relatively self-sufficient thanks to oil shale. However, emissions policies might force this form of electricity generation off the market, or require expensive auxiliary technologies.
New baseload capacity
Wary of their current reliance on Russia, the Baltic States recently set themselves the objective of joining and synchronizing with the EU internal electricity market by 2020. The feasibility study commissioned by the three Baltic transmission system operators (TSOs) and prepared by the Swedish consultancy company Gothia Power in 2013, concluded that synchronous operation with the Continental Europe (CE) power system is technically possible. However, this study also made clear that from a technical and economic standpoint, there is no particular reason that justifies a change of synchronization from the present IPS/UPS system to the CE system. Undoubtedly, the three countries have based their decision on broader political and strategic considerations.
Achieving the EU’s objective of closer integration of the Baltic States with the rest of the EU electricity markets will require the modernization and enhancement of existing transmission capacities within the three countries, the development of new transmission and interconnection links with the rest of the EU network, and synchronization of the networks. This will require investments of billions of euros, as concluded by a study commissioned in 2007 by the Baltic and Polish TSOs on synchronous operation of the Baltic power systems with UCTE, the predecessor of ENTSO-E (Union for the Coordination of the Transmission of Electricity). The need for significant investments for synchronising the Baltic States with CE was also confirmed by the 2013 feasibility study prepared by Gothia Power mentioend above.
But that’s not all. For the connection and the synchronization of the Baltic power system with the CE to become effective, stable and sustainable, there is also a need for investments in new baseload generating capacity, which would need to be able to compete for the reliable supply of (affordable) electricity to the Baltic and Nordic regions. This is because otherwise the linking of the Baltic States markets to the large quantities of nuclear and hydropower supplied in the Nordic markets would lead to price tensions. With electricity prices in the Nord Pool region being very low compared to the ones in Central and Eastern Europe, the Nordic power producers would price Baltic generation out of the market.
Much of the electricity generation capacity currently installed in the Baltic region is based on carbon-intensive indigenous resources. It is difficult to imagine, for evident strategic and political considerations, that the Baltic States would be keen to develop new gas-fired power plants, since they want to reduce their dependence on Russia. They could build LNG terminals and import LNG but this would be very costly. Furthermore, the Visaginas nuclear power plant (NPP) project in Lithuania, which the three countries were to develop jointly, is on hold for what seems to be an undefined period. There is no certainty that it will ever be implemented.
Big neighbour Poland has plans to build new nuclear power capacity, but the country is developing nuclear power for the first time, facing a number of challenges, which are likely to lead to cost increases and construction delays. Germany, Europe’s largest economy, is in the midst of its Energiewende program, resulting in higher electricity prices and putting pressure on cross-border interconnectivity capacity.
There is, however, another option that might be worth considering. At this moment Russian nuclear power producer Rosatom is building a 1200 MW nuclear power station in the Russian enclave Kaliningrad, scheduled to become operational in 2020. Rosatom also has plans to build a second reactor in Kaliningrad. Why not involve this plant in a broader solution for the region?
The Kaliningrad plant is being built already by a very experienced operator. It can be finished quite soon, in alignment with the needs of the region. It is also a low-carbon source.
Should the Baltic States migrate to the CE system by 2020 as currently envisaged, the Kaliningrad enclave may have to seriously consider if it should follow their decision and synchronize with the wider EU electricity market. Will the Russians want to do this? They might feel it is in their best interest to do so. The power plant is much too large for Kaliningrad itself, which has a population of less than 500,000. Most of its production will have to be exported to maintain the balance in the Kaliningrad power system and to make the project feasible.
In other words, if Kaliningrad does not follow the Baltic countries, it will in turn become an energy island – with a huge overcapacity in power generation. In this light, it might make more economic sense for the enclave to link and synchronize with the EC power system. This could lead to a very ironic situation: the completion of a new nuclear power plant in Russia could actually facilitate and support the migration of the Baltic States’ power systems from the Russian-dominated IPS/UPS area into the CE system!
Under such a scenario, the to-be-completed Kaliningrad NPP could provide the additional competitive baseload capacity that will be required technically to link and successfully synchronize the Baltic States with the wider European system. On the financial side, the operation of the Kaliningrad NPP could help to shoulder the substantial financial burden attached to the synchronisation, which would otherwise have to come on top of the costs for new interconnections with the CE system.
The Kaliningrad nuclear power plant project has been undergoing a reassessment recently. It will most likely aim at supplying industrial facilities in the special economic zone of Kaliningrad and off-takers in other markets in the region. As indicated, start of operation of the first 1200MW unit is foreseen for around 2020, of the second one a few years later. The first unit is already fully licensed, and significant parts of the construction works have been completed already, such as the concrete basement, parts of the reactor, safety and control buildings, and the installation of the core catcher.
Of course, Russia has been a challenging neighbour, especially in energy policy. An innovative solution as outlined above could only work if the planned Kaliningrad nuclear power station would, amongst others, be made fully compliant with the relevant EU regulation and standards, and meet the industry’s “best practice” in terms of information disclosure, corporate governance, social and environmental standards, technical and operational factors.
Nevertheless, looking at the synergies and benefits for the overall Baltic region, it would make sense to consider this option. It could work if energy security issues (from control and reliability perspectives) are properly addressed, thereby making the project apolitical. The bottom line is that integrating regional energy structures and eliminating energy islands would benefit everybody in the region, regardless of national boundaries. And a new level of cooperation would certainly be more advantageous than a cold war in energy affairs with a wall separating grids and national economies.
About the author
Professor Rudolf Dolzer is an advisor to the Kaliningrad NPP project. Professor Dolzer has specialized in legal issues of foreign investment for more than thirty years, with a focus on the law of oil and gas. On the academic side, he has published three books on this subject. In practice, he has been engaged in this field as advisor and, in arbitration disputes, as expert, counsel and arbitrator. From 1996 to 2009, he was Professor and Director of the Institute of International Law at the University of Bonn. Earlier he was Professor and Vice President of the University of Mannheim (1989 to 1992). Prior to that he was Senior Research Fellow at the Max-Planck-Institute of International Law in Heidelberg where he was also elected to a Supervisory Board of the Max-Planck Society.
Paul Murphy of Milbank, Tweed, Hadley & McCloy LLP, and Xavier Rollat of Alet Business Services Limited reviewed this article and contributed to it.