Economic Policy Program

Policy Brief
September 20, 2011

Summary: While there is much about energy that unites Europe, EU member states have different interests when it comes to their energy-related foreign policies, whether it be varying perceptions of the reliability of non-EU sources or a wish to protect considerable energy-related investments and/or land desirable contracts. This paper touches upon some of the most compelling issues that energy security raises, such as the need for diversification of supplies, integration of markets, expansion of strategic interconnectors, creation of adequate replacement capacities, and fulfillment of environmental mandates, as they relate to the Baltic states.

The Baltic States and Energy Security in Europe Much Progress Made on a Critical Issue
by Miguel Rodrigues
Energy security looms large in the geostrategic world inhabited by the Baltic countries due to their location, vulnerability as energy islands largely isolated from Europes energy networks, and single-source dependency for much of their energy needs. Securing reliable and affordable sources of energy is a key national goal for them, and they are not alone in pursuing this objective. Countries on both sides of the Atlantic partnership are for ensuring adequate interconnections for their markets, decreasing prices, combating global warming, and having the autonomy to decide the right amounts and mix of energy fuels to purchase, and from whom. Thus, energy security is truly of interest on both sides of the Atlantic and is a critical component of the transatlantic relationship. This paper reflects in part views expressed at a recent roundtable discussion with Estonian Prime Minister Andrus Ansip, held under the Chatham House rule at the German Marshall Fund. But while there is much about energy that unites Europe, EU member states have different interests when it comes to their energy-related foreign policies, whether it be varying perceptions of the reliability of non-EU sources or a wish to protect considerable energy-related investments and/or land desirable contracts. Moreover, Europes dependence on imported energy supplies is forecast to grow, some might say at an alarming rate, from roughly 40 percent at present to approximately two-thirds of all demand by 2030. This paper touches upon some of the most compelling issues that energy security raises, such as the need for diversification of supplies, integration of markets, expansion of strategic interconnectors, creation of adequate replacement capacities, and fulfillment of environmental mandates, as they relate to the Baltic states. Energy is a very wide topic; this paper does not address the situation or energy needs of other parts of Europe. The Baltic states Estonia, Latvia, and Lithuania have made significant progress in recent years toward addressing their energy security needs, and they have done so in a number of ways. They have built and are expanding strategic electricity interconnectors linking their countries with the neighboring Nordic states and Poland. Estlink-1, which in 2006

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became the first power link between the Baltic and Nordic electricity networks, helped provide what Estonian President Ilves has termed an energy window to Europe, while Estlink-2, when ready in 2014, will further increase EstoniaFinland interconnection capacity up to 1,000 megawatts. Other ties are planned as well with EU funding: NordBalt (an electricity cable to Sweden), LitPol (Lithuania-Poland electricity bridge), and new inter-Baltic power supply channels. This process will be helped along by a recent European Council resolution calling for an end to isolated markets after 2015. Energy security requires that interregional connections be expanded, so that EU members can support one another, especially during disruptions. Only when no one feels cut off will the concept of energy islands disappear from the European lexicon. These electricity connections have been a while in the making. But with high transport costs to import petroleum products from alternative sources, the Baltic states appreciate the need for more options, which they have been trying to create in the natural gas and nuclear power markets as well. Individually and jointly, they are exploring options to import liquefied natural gas (LNG) to their region to diversify gas supplies, especially while LNG prices are down and can compete with the cost of natural gas. For instance, Lithuania intends to build a floating LNG terminal in its port of Klaipeda, and Poland also plans an LNG terminal. The Baltic governments are considering a common high-capacity LNG terminal, scaled to market size and possibly located in Latvia (the site has not yet been selected). On the nuclear power front, the three Baltic states and Poland are planning a nuclear power plant in Visaginas, Lithuania, to replace the decommissioned Ignalina plant. They recently selected Hitachi GE Nuclear Energy as a strategic investor. Estonian President Ilves observed during a recent visit by his Lithuanian counterpart that this new plant, targeted for completion in 2020, will constitute a very important element of the regions common goal of enhancing its energy security and independence. With these important projects underway all aimed at increasing the regions energy security, intra-Baltic and intra-EU coordination has become all the more important. There is much coordination at the Baltic level: A committee of senior Baltic energy officials consults within the framework of the Baltic Council of Ministers, and important energy projects, such as the proposed Visaginas nuclear power plant, are regularly discussed by Baltic heads of state and government at their meetings. But coordination at the EU level is also important to achieving common goals on energy security. For instance, Russia charges Germany a lower price for gas than it does the Baltic states, a situation that may partly be explained by the greater bargaining power of larger states. The gas supply interruptions leading up to the cutoff in 2009, which affected a large number of European countries, both east and west, suggested to Europeans that a foreign monopoly source may be unstable, and gave new impetus to the formulation of a common European energy policy.

Energy security requires that interregional connections be expanded, so that EU members can support one another, especially during disruptions. Only when no one feels cut off will the concept of energy islands disappear from the European lexicon.
To optimally enhance energy security, an integrated internal energy market must be developed in tandem with alternative external sources of supply and increased connectivity. In this area too, the Baltic states have made progress. They plan to extend the liberalized Nordic electricity market to themselves by removing regulated tariffs and cross-border restrictions, opening retail markets more fully, and creating a market exchange for physical trade. Such an integrated market, supported by enhanced intra-Nordic, Baltic-Nordic, Baltic-Polish, and Polish-German interconnectors, as called for in 2009 by the Baltic Energy Market Interconnection Plan (BEMIP), would eliminate energy islands, address EU

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goals of a fully integrated market, allow for electricity trade, help incorporate renewables (especially wind power) into the system, and usher in greater competition, and therefore reduced prices, for consumers. The Baltic countries have been leaders in addressing the requirements of the EUs Third Energy Package to unbundle gas and electricity production and distribution. And as they do so, they are conscious of the need to guard against unfair competition from outside: With the advent of new EU safety and environmental standards for energy production, producers of electricity outside the EU, which follow different rules and may adhere to lower standards, should not be allowed to acquire a competitive advantage. To guard against this possibility, the Baltic countries and others should urge the EU to adequately stress the need for transparency, minimum environmental standards, and fair competition in its dialogue with non-EU suppliers and transit countries. Last but not least, the Baltic states, as well as EU member states in general, could enhance their energy security and meet environmental mandates by increasing the proportion of renewables in their energy mix. The EU requires its member states to generate 20 percent of their energy from renewables by 2020. The Baltic countries have potential in this regard for instance, observers have noted that Estonias solar resources, such as its flat and relatively unshaded landscape, would be conducive to collecting solar energy, and its wind conditions are among the best in the EU. Estonia and its sister Baltic nations should therefore consider meeting the EU goal by leaning heavily on wind and solar energy and supporting subsidies and tax breaks. Before concluding, it is worth mentioning a unique feature characterizing Estonias energy situation. Estonia meets a large proportion of its energy needs from domestically mined oil shale, and because of this, it enjoys the relative luxury of being at the lower end of the dependency spectrum vis-a-vis foreign sources of fossil fuels. Despite this relative energy independence, however, Estonia has been active in efforts to forge consensus among friends and allies on energy security, whether it be on the need for more interconnectors, a common LNG terminal, or a common replacement nuclear plant at Visaginas. In so doing, it has admirably pursued the common good energy security for all. Energy security is a defining issue for the Baltic states, Europe, the United States, and the transatlantic relationship. It will, for years to come, determine the types of energy we use, the supplies we can count upon, the environmental footprint we leave, and underlining it all, the inter-connectedness that will help us jointly address common challenges. The Baltic states have rightfully promoted the overarching principle of multiplicity of energy sources and power connections, articulating a common desire that no market operator be able to exercise dominant power. In the process, they have made progress in enhancing Europes collective energy security, as well as their own.

About the Author

Dr. Miguel Rodrigues is a visiting fellow at the German Marshall Fund on detail from the U.S. Department of State. The views expressed in this article are those of the author, and do not necessarily reflect those of the U.S. Department of State, the U.S. government, or the German Marshall Fund.

About GMF
The German Marshall Fund of the United States (GMF) is a non-partisan American public policy and grantmaking institution dedicated to promoting better understanding and cooperation between North America and Europe on transatlantic and global issues. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has seven offices in Europe: Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has smaller representations in Bratislava, Turin, and Stockholm.