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New political season: what events await the Lithuanian energy sector?
2018-09-05

Last summer, there were a lot of important events in the Lithuanian energy industry, but the upcoming political season will be no less active and significant. It is expected that concrete steps and decisions will be reached that will help the country to achieve the goal set in the National Energy Strategy – to generate 100 percent of electricity locally and from renewable energy sources until 2050. Which of those energy sources will be the most important?

Context and important highlights

Initially, to sum up the three summer months in the energy sector, it can be said that they were exceptionally active and tense. In June, the Parliament confirmed the country’s ambition to locally produce 100 percent of the electricity needed for Lithuania from renewable energy sources in the future. Lithuania is the first among all the countries of Eastern and Central Europe to announce such an ambitious goal. In order to implement it, a debate about the new auctioning procedure was launched, which should allow the successful expansion of renewable energy production.

At that time, due to the hot, calm and dry weather, the electricity prices on the Nord Pool began to rise. Near the end of the summer, a further increase was stimulated by the disconnection of NordBalt for scheduled repairs. As we forecasted, due to all these factors, the Lithuanian price zone for electricity went up to 60 EUR/MWh. It is still difficult to “offset” the disconnection of the 700 MW power connection, especially during the summer, with the domestic production from renewable sources, including from the wind. Currently, the electricity production in our wind farms in the summer can amount up to one third of the capacity of the connection, and half as much in the cold and windy months.

However, as soon as the supply of electricity between Lithuania and Sweden is renewed, the price of electricity should stabilise. Of course, the autumn months usually have windy weather, which will have an effect on the wind power plants and should increase their production volumes. However, it is already clear now that the average price of electricity in the market for 2018 will be well above that of last year.

Investors are waiting for news on the auctions

The production of electricity in the wind farms is important not only for the market price of electricity; it is also important for the strategy to produce electricity for the entire country from renewable energy sources. According to the plan, by 2030 the wind power plants will already have to produce more than 50 percent of Lithuania’s electricity.

However, for the second year, the construction of new wind farms has been virtually non-existent, with the exception of a few projects that have used wind turbines. This is due to the fact that in the year 2015, after the last auction, the 500 MW quota for wind energy provided in the legislation was exhausted. In other European countries, the development of wind farms has also slowed down somewhat: in the first half of the year, the installed capacity of the new power plants was only 4.4 GW. By comparison, the total amount installed last year was 16.8 GW. Therefore, investors are waiting for information on the new auctions both in Lithuania and abroad, and expect them to take place next year.

Many unknowns in the proposed model

The Ministry of Energy has already firmly decided that the new auctions in our country will be technologically neutral. This means that they will involve all the producers of electricity from renewable sources – wind, solar, biomass and others. The auctions will be very important for everyone, but after the summer discussions about the future auction model, there are currently more questions than answers.

So far, one thing is clear: the expected model will be significantly different from the previous one. In particular, it has been proposed that the energy producers themselves should sell the electricity on the market and take on all the risks involved, including the selling of electricity in the market, market price differences, balancing costs, etc. Secondly, feed-in tariffs will no longer be in place. Instead, the producers will compete in the auction for the premium above the market price, which cannot be higher than a certain maximum value. Therefore, there is a high possibility that the premium will be low and there may be a lot of risk taking.

In addition, it is foreseen that producers will be penalised if they produce less energy than the volume they commit themselves to during the auction. Nevertheless, in the discussions with authorities it was agreed that a three-year period would be assessed, and the deviation from the committed production volumes could reach up to 20 percent. This is needed to assess the changes in the climate conditions, which fluctuate significantly during the different years. Also, producers will have to cover all the costs of connecting the wind parks to the electricity grid. Thus, they may have to assume new responsibilities and risks, which may affect the project prices and the successful auction results. However, all of this will still be discussed in Seimas this autumn, and all the energy sector stakeholders will need to wait for the solutions.

Nevertheless, despite the challenges that lie ahead, it is mostly important that Lithuania has turned to the direction chosen by modern states, and will seek to abandon fossil fuels in its energy balance.

Author of the commentary – Aistis Radavičius, Executive Director of the Lithuanian Wind Power Association