September 21, 2012

Keeping Energy Security and Competitiveness in Equilibrium: The Case of a Regional Nuclear Power Plant

Energy is a fundamental element of the economy. Lithuania has therefore put forward several relevant and necessary goals for all Baltic states in this field. The main goal is energy security, especially after the decommissioning of the second unit of the Ignalina Nuclear Power Plant (NPP). Lithuania is also seeking to ensure competitiveness of the energy sector.

Energy is a fundamental element of the economy. Lithuania has therefore put forward several relevant and necessary goals for all Baltic states in this field. The main goal is energy security, especially after the decommissioning of the second unit of the Ignalina Nuclear Power Plant (NPP). Lithuania is also seeking to ensure competitiveness of the energy sector.



Fig. 1. Regional ranges of LCOE for nuclear, coal, gas and onshore wind power plants (at a 5% discount rate)31
It seems that according to the pessimistic scenario, the costs of generating baseload electricity would be a bit higher in nuclear power plants than in gas-fired ones (see Figure 2). However, it is important to point out that Lithuania pays the highest price for natural gas in Europe – 480 US dollars per 1000 m3 (which has not taken into account in the study). Moreover, gas accounts for 60–80% of electricity costs,32 while nuclear fuel makes up about 16%. So, LCOE for gas power plants in Lithuania would be higher by 30% and the price of electricity would amount to about 9 ct/kWh, the reason being that natural gas is imported from a single supplier – the Russian gas monopoly Gazprom, which sets prices not only on the basis of their economic, but also political rationale. The study also argues that the competitiveness of power plants depends on local conditions, i.e. access to resources. The closer a power plant is to fuel resources, the cheaper electricity it produces.33

Fig. 2. Regional ranges of LCOE for nuclear, coal, gas and onshore wind power plants (at a 10% discount rate)34
So, electricity produced by the new NPP would be competitive and competitiveness is a constituent part of energy security. But in terms of security, the new NPP project would mean much more than that. Critics have said that it would be possible to import electricity at a competitive price via such interconnections as NordBalt, the LitPol Link (to be built by 2015), EstLink 1 and EstLink 2 (to be built by 2014), but these arguments do not account for the risk of cross-border restrictions that would be introduced because of technical reasons.35 Moreover, countries lose money by purchasing imported electricity, for example, Lithuania spends 0.87–1.16 billion euros a year to purchase imported energy resources and thus supports the importers’ economies, mainly Russia.36 Estonia has other problems related to CO2 emissions because oil shale-fired power plants emit more greenhouse gas than natural gas-fired plants. Meanwhile, Latvia has the Dauguva HPP – the biggest HPP in the Baltics – but as noticed by the Energy Department of Ministry of Economics of the Republic of Latvia, “power plants [”¦] are not capable of producing the required amount of electricity.”37 The Dauguva HPP uses variable hydro resources, which influences the production of electricity in some periods.38 This is the first sign of the predicted lack of generation capacities in the Baltic region. Therefore the development of power plants is a crucial element in the BEMIP, which takes into account not only interconnections, but also generation.39 This is why the Baltic states must be concerned about energy security. Yet one might wonder why, for example, Finland is constructing the Olkiluoto 3 NPP and is planning to build Olkiluoto 4, or why Poland seeks to build its own NPP. The answer in the case of Poland is simple: it has many coal-fired power plants that greatly pollute the environment and are economically unattractive due to expensive pollution permits.40
In conclusion, the new NPP in Visaginas will ensure energy security for the Baltic states, i.e. it will eliminate the risk of cross-border restrictions and electricity supply shortages, it will open an opportunity to exercise full control over supply and it will ensure potential inflows of export income. In addition, the money spent on imported electricity would stay in Lithuania and fuel its economy, while its electricity would be more competitive and cheaper than that generated by gas-fired or wind power plants. The discount rate used has a considerable impact on the price. To keep the rate at a reasonable level, it is important to ensure sustainable economic growth. It is, however, difficult to exactly predict the rate because construction costs could go up, while the construction process itself could become protracted due to economic growth. Moreover, electricity generated by gas-fired power plants could cheapen because of an LNG terminal to be built by 2014. This terminal will diversify gas supply and will open up new possibilities for importing gas from alternative suppliers like the USA, Norway, Central Asia and the Caspian Basin.41 Together with the gas pipeline between Lithuania and Poland, the terminal will also ensure competition with the Russian monopoly Gazprom, which is a precondition for lower and more reasonable gas prices.42
Should the  NPP’s costs of electricity be higher than the market price, the Lithuanian government might have to subsidise part of its costs, for example, its nuclear waste management costs (this depends on the outcome of the negotiations with the strategic investor Hitachi, but the probability is very low). Nevertheless, the government’s resolution to implement this project shows that its most important objective is to ensure energy security and to remain a state that uses nuclear energy. At the same time, this project guarantees higher efficiency in electricity generation because the environment is not polluted by CO2 emissions.
Conclusions
Having analysed the validity of the new NPP project, it is possible to conclude that the project will ensure energy security for the Baltic states and will satisfy their demand for electricity in the future. In terms of competitiveness, it should be pointed out that the price of electricity generated in this plant will be competitive and lower than that produced in gas-fired power plants, even with the construction of an LNG terminal. However, it is still possible that the price will be higher, i.e. less competitive. It all depends on the discount rate, on possible increases in construction costs and on whether the construction process will become protracted. Therefore it is important to ensure sustainable economic growth and consistency. In a pessimistic scenario, the Lithuanian government might have to subsidise part of the NPP’s costs, for example, by assuming nuclear waste management costs. The government’s resolution shows that this project will not be refused and, as declared in the New National Energy (Energy Independence) Strategy, energy security is its main goal up to 2020.
Finally, the implementation of the new NPP project will reduce Lithuania’s dependence on imported energy sources by increasing domestic energy production and by ensuring an alternative supply of electricity to all Baltic states and Poland (if the latter decides to participate in the project). This will also contribute to the formation of a common energy market, as emphasised in the BEMIP.
Despite all this, many concerns have been expressed over the project, mostly in relation to the issue of competitiveness. The main question is the price of electricity. What will the price be if the new NPP is not built? Not much research has been done on the impact of economic growth on this project (of course, a cost-benefit analysis could be prepared for that purpose). This kind of analysis could refine the criteria for the formation and the evaluation of economic policies and could be of recommendatory nature. It would also be advantageous if another boom in the construction sector were avoided because it would raise construction costs and would affect the discount rate. Yes, the new NPP would mean energy security, competitive electricity prices, many new jobs and opportunities to export electricity and to increase GDP. However, the Lithuanian government must exercise fiscal prudence and be consistent in implementing the National Energy (Energy Independence) Strategy because this is a long-term project with high investment risks, a project which therefore needs specific guarantees.
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1 The Seimas of the Republic of Lithuania, Fraction News, “Message by the member of the Seimas B. VÄ—saitÄ—: How much A. Sekmokas’s energy visions will cost to Lithuanian residents?” 18 February 2011.
www3.lrs.lt/pls/inter/w5_show?p_r=6258&p_d=10…. Accessed on 03.03.2012.
2 European Commission, Green Paper “A European Strategy for Sustainable, Competitive and Secure Energy.” Brussels, March 8, 2006. europa.eu/documents/comm/green_papers/pdf/com2006_…. Accessed on 17.11.2011.
3 Edward Lucas, The New Cold War: How the Kremlin Menaces Russia and West. Bloomsbury, 2008, p. 222–228.
4 BBC, “Russia-Ukraine gas row heats up.” BBC, 31 December 2008. news.bbc.co.uk/2/hi/7805770.stm. Accessed on 17.11.2011.
5 EUbusiness, “EU gas meeting off as Russia, Belarus solve supply row.” EUbusiness, 3 August 2007. www.eubusiness.com/topics/energy/russia-belarus-ga…. Accessed on 17.11.2011.
6 Communication Form the Commission to the European Parliament, the Council, the European Economic and Social Committee and Committee of the Regions “Energy 2020: A strategy for competitive, sustainable and secure energy.” Brussels, November 10, 2010, www.energy.eu/directives/com-2010-0639.pdf. Accessed on 17.11.2011.
7 European Commission, Green Paper “A European Strategy for Sustainable, Competitive and Secure Energy.” Brussels, March 8, 2006. europa.eu/documents/comm/green_papers/pdf/com2006_…. Accessed on 17.11.2011.
8 European Commission, Energy Infrastructure, Baltic Energy Market Interconnection Plan (BEMIP). ec.europa.eu/energy/infrastructure/bemip_en.htm. Accessed on 25.11.2011.
9 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and Committee of the Regions, “20 20 by 2020: Europe’s climate change opportunity.” Brussels, January 23, 2008, p 3–4. eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM…. Accessed on 17.11.2011.
10 Re-Shaping, Shaping an effective and efficient European renewable energy market, “Renewable Energy Policy Country Profiles”, March 2011, p. 82–88, 171–195.
11 National Audit Office of Lithuania, “Valstybinio audito ataskaita. Elektros energijos kainų didÄ—jimo pagrā¯stumas” [“State Audit Report. The Validity of Increase in Electricity Prices”], 30 December 2008, No. VA-P2-20-1-28 Vilnius.
12 Visagino atominÄ— elektrinÄ— JSC, “Nucleus.” (Informational Edition, No. 15). Vilnius: Visagino atominÄ— elektrinÄ— JSC, 2011.
13 Ministry of Economics of the Republic of Latvia, “Energy.” Rīga, 2012. www.em.gov.lv/em/2nd/?cat=30166&lng=en. Accessed on 26.01.2012.
14 Ministry of Economic Affairs and Communications of the Republic of Estonia, “National Development Plan of the Energy Sector until 2020.” Tallinn, 2009. www.mkm.ee/public/ENMAK_EN.pdf. Accessed on 26.01.2012.
15 Government of the Republic of Lithuania, Resolution No. 300 of 22 April, 2009, “Strategic Directions of the Implementation of the New Nuclear Power Plant Project in Lithuania.” www.vae.lt/files/resolution_no_300.doc. Accessed on 21.11.2011.
16 Resolution of the Seimas of the Republic of Lithuania, “DÄ—l nacionalinÄ—s energetikos (energetinÄ—s nepriklausomybÄ—s) strategijos patvirtinimo,” project (No. XIP-2488) [“On National Energy (Energy Independence) Strategy”].
17 Prof. Rudzkis R., “Kiek kainuos VAE gaminama elektros energija?” [“What will be the cost of electricity of the Visaginas NPP?”]. Delfi, 20 November 2008. www.delfi.lt/news/ringas/lit/rrudzkis-kiek-kainuos…. Accessed on 25.11.2011.
18 BALTPOOL JSC, Lithuanian energy exchange trade data, 1 January 2010–25 November 2011. www.baltpool.lt/index.php?585831303. Accessed on 25.11.2011.
19 Ministry of Energy of the Republic of Lithuania, “VAE – elektros tiekimo saugumas konkurencinga kaina” [“Visaginas NPP –Electricity supply security at a competitive price”]. Vilnius, 30 March 2010. www.enmin.lt/lt/naujienos/VAE_tiekimo_saugumas_kon…. Accessed on 16.04.2011.
20 Visagino atominÄ— elektrinÄ— JSC, “Nucleus.” (Informational Edition, No. 10). Vilnius: Visagino atominÄ— elektrinÄ— JSC, 2011.
21 Prof. Rudzkis R.
22 JuršytÄ— J., “R. Kuodis: elektra VAE iki paskolų išmokÄ—jimo kainuotų apie 30 ct/kWh” [“R. Kuodis: Electricity of the Visaginas NPP would cost about 30 ct/kWh until the loan is paid out”]. Delfi, 9 March 2012. verslas.delfi.lt/energetics/rkuodis-elektra-vae-ik…. Accessed on 18.04.2012.
23 Kuodis R., “Nauja atominÄ— elektrinÄ— – amžiaus mitas” [“A new nuclear power plant – Myth of the century”], Respublika, 27 November 2007, p. 3.
24 European Commission, Energy Infrastructure, Baltic Energy Market Interconnection Plan (BEMIP). ec.europa.eu/energy/infrastructure/bemip_en.htm. Accessed on 25.11.2011.
25 Kuodis R., „Kaip finansuoti naujÄ… atominÄ™ elektrinÄ™“ [“How to finance a new nuclear power plant”], ValstybÄ—, 2007, p. 86–89.
26 Prof. Rudzkis R.
27 Nageviāius M., “Visagino atominÄ—s elektrinÄ—s projektas ir atsinaujinanāių energijos šaltinių energetika – ar yra vietos abiems?” [“The Visaginas NPP and renewables – Is there enough space in Lithuania for both?”]. Vilnius: Lithuanian Energy Consultants Association, 2012.
28 Interview, “Ar tikrai energetikoje ignoruojama ekonomika? Kaip ekonominiu požiÅ«riu vertintinas Visagino atominÄ—s elektrinÄ—s projektas, šilumos Å«kio ir dujų monopolijų skaidymas?” [“Is economy really ignored in energy? How is the project of the Visaginas Nuclear Power Plant evaluated in terms of economy and the splitting of heating and gas monopolies?”]. News Radio, 28 February 2012. www.ziniur.lt/archyvas/2012/269/aktualusis-intervi…-. Accessed on 18.04.2012.
29 Ibid.
30 International Energy Agency, Nuclear Energy Agency and Organisation for Economic Co-operation and Development, “Projected Costs of Generating Electricity: 2010 Edition.” Paris: Organisation for Economic Co-operation and Development/International Energy Agency and Issy-les-Moulineaux: Organisation for Economic Co-operation and Development/Nuclear Energy Agency, 2010.
31 Ibid.
32 Visagino atominÄ— elektrinÄ— JSC, “Nucleus.” (Informational Edition, No. 15).
33 International Energy Agency, Nuclear Energy Agency and Organisation for Economic Co-operation and Development.
34 Ibid.
35 Gatermann R., “Energy fever in the Baltics.” European Energy Review, 5 February 2010. www.europeanenergyreview.eu/site/pagina.php?id=169…. Accessed on 25.01.2012.
36 Ministry of Energy of the Republic of Lithuania, “Lietuvos tikslas Nr. 1 – energetinÄ— nepriklausomybÄ—” [“Lithuanian goal no. 1 – energy independence”], 2011. www.enmin.lt/lt/nes/strategija.pdf. Accessed on 25.01.2012.
37 Ministry of Economics of the Republic of Latvia, “Latvian Energy in Figures.” Rīga 2011, p. 4. www.em.gov.lv/images/modules/items/Latvijas_energe…. Accessed on 26.01.2012.
38 Ibid. p. 4.
39 Gatermann R.
40 Visagino atominÄ— elektrinÄ— JSC, “Nucleus.” (Informational Edition, No. 10).
41 KlaipÄ—dos nafta SC, “Terminalas.” (Liquefied Gas Terminal Newsletter, No. 1) [“Terminal”]. KlaipÄ—da: KlaipÄ—dos nafta SC, 2011.
42 Resolution of the Seimas of the Republic of Lithuania.

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