‘There is a total lack of competition in the regional gas market’

Estonia, the smallest of the Baltic States, is striving after diversification of its energy resources to reduce dependence on its mighty neighbour, the Russian Federation. Estonia has found a welcome ally in the European Commission, but it is also facing obstacles to its energy policy, notes Einari Kisel, the Deputy Secretary General of Energy of the Ministry of Economic Affairs, in an interview with EER. Kisel, who is generally regarded as Estonia’s leading energy expert, specifically notes the ‘total lack of competition on the regional gas market’ and ‘the lack of reciprocity between the EU and Russia’. These aspects ‘have a major impact on the operations of the energy markets and on the security of energy supply in the Baltic region’, he says. About the nuclear power plant that Russia apparently intends to build in the Russian enclave of Kaliningrad, he says that the project is ‘aimed at creating confusion’ among western investors who are considering investing in a new nuclear power plant in Lithuania.

Einari Kisel, Estonian Deputy Secretary General of Energy of the Ministry of Economic Affairs

If there is one constant factor in the way Estonians think of energy policy, it is the widespread idea that Russia will not hesitate to abuse its position as energy supplier. No policymaker in Estonia approaches energy as a purely economic matter. The broader geopolitical context is always taken into account.

This is not surprising. Ever since the restoration of national independence in 1991, relations with Russia have been tense. This has to do with disputes on the position of the Russian-speaking minorities in Estonia, the demarcation of the border, NATO enlargement and colliding visions of twentieth-century history. The suspension of gas deliveries to Ukraine in 2006 and 2009 and Georgia in 2006 only confirmed Estonia in the notion of Russia employing its “energy weapon” to keep the adjacent republics in its sphere of influence.

Estonia’s position differs from that of other countries in the region, however. For its gas supplies, it is one hundred percent dependent on imports from Russia (the gas enters the country from the southeast and from Latvia). At the same time Estonia is almost self-reliant in the production of electricity. In 2008, 91 percent of its electricity was generated on basis of oil shale, a sedimentary rock that is won in the northeast of the country. Estonia wants to maintain this autonomy, but the European Commission is critical of the large-scale use of oil shale, which is highly polluting. To deflect the the Commission’s criticism and forestall the necessity to increase electricity imports from Russia, Estonia decided to foster energy relations with Finland and to participate in the plan to construct a common Baltic nuclear reactor, together with Latvia and Lithuania (and possibly Poland).

In addition, in 2006 a working group of the Estonian Foreign Policy Institute prepared an advice on energy security for the Riigikogu, the Estonian Parliament. Among other things, the working group recommended a deeper integration of the national energy networks into those of the wider Baltic Sea Region and the European Union, and stressed the need for alternatives for imports from Russia, including a greater use of renewable energy. The ruling government coalition, which consists of the Liberal Reformierakond, the party of Prime Minister Ansip, and the Conservative IRL (led by former PM Mart Laar, a well-known critic of Russia), has taken over the advice. Moreover, the Government is exploring the possibilities of importing LNG and build a national nuclear power plant in Estonia.

So what progress has been made so far? How has Estonia dealt with the – inevitable – obstacles on the road to energy diversification? Is it satisfied with the support it has received from Brussels? If there is one authority in Estonia to answer those questions, it is Einari Kisel, currently Deputy Secretary General of Energy at the Ministry of Economic Affairs and Communication, and considered by many as Estonia’s leading energy expert. European Energy Review spoke with him in Tallinn.

Over the past two decades, Estonia has repeatedly alluded to Russia employing its so-called ‘energy weapon’, in order to exert pressure on former Soviet republics that want to integrate in the West. Isn’t that an exaggeration? If we look at the facts, we can see that Russia suspended gas deliveries to Estonia only once, in June 1993, for the duration of five hours.

It is correct that there have been no deliberate suspensions of gas deliveries from Russia since 1993, when Tallinn and Moscow were quarrelling about the legal status of Russian-speaking citizens in Estonia. From that point of view, Russia has been a reliable partner. And it is in Russia’s own interest to present itself as such to the European Union, of which Estonia is a part now. However, back in 1993, Russia seriously tried to exert pressure on Estonia, in order to acquire a strategic majority in national gas company Eesti Gaas [Gazprom is currently holding 37 percent of the shares, J.B.]. It is also quite remarkable, to say the least, that Estonia, Latvia and Lithuania have to pay higher prices for Russian gas than other European countries.

I would like to point out that Estonia has taken several measures to reduce its dependence on Russian gas. Estonian gas consumption as a whole has decreased by one-third since 2005. The Government has encouraged the use of alternative energy, such as peat, wood chips and wind. Over the past three years, the share of renewables in the total electricity balance has gone up from 0.5 to 10 percent. Efficiency has also increased considerably. Over the past fifteen years, heating losses have been reduced by one-third and heat consumption by more than a quarter, for instance. All these steps have reduced our dependence on Russian energy supplies.

The European Commission once characterized the Baltic States as ‘an energy island in the EU’. The EU has expressed its support for and provided financial means for the construction of electricity ‘bridges’ to Finland (Estlink), Sweden (Nordbalt) and Poland (LitPolLink). (See here and here for more information.) Is that enough to break the Baltic isolation?

Progress has been made. The Estlink I cable from Finland to Estonia is operative now, and a second cable, Estlink II, will be operative by 2014. The legal and technical problems concerning Nordbalt from

‘It is also quite remarkable, to say the least, that Estonia, Latvia and Lithuania have to pay higher prices for Russian gas than other European countries’
Sweden to Lithuania have been tackled. One could argue that we are no longer an ‘energy island’, and that we have become an ‘energy peninsula’ instead. LitPolLink remains a problem, however. The number of investments that Lithuania has made so far is fairly low. This link also requires massive investments from the Polish side, but they would not benefit much from this new cable. I can understand that economically this cable doesn’t make much sense for Poland.

The Baltic States have repeatedly stressed the necessity of a more vigorous common European energy policy. The 2009 Lisbon Treaty (Article 176A, Special Amendments) is referring to ‘ensuring the functioning of the energy market’ and ‘ensuring security of energy supply in the Union’. This is the first time energy is being mentioned in a European Treaty. Is it sufficient in your view?

At this very moment, it is difficult to say how things will develop. Estonia’s view is that a European energy policy should be driven by the European Commission, but be agreed upon by the Member States. This should include matters that are related to energy production and to the external dimension as well. In this context the Baltic Energy Market Interconnection Plan (BEMIP) is a good example of such a coordinated approach. It also takes into account regional developments. But again, we are still in the middle of the process.

Today, two fundamental problems still remain in the Baltics. Firstly, the total lack of competition on the regional gas market. The use of LNG might change this situation. Secondly, the lack of reciprocity between the EU and Russia. Because of its big gas resources and its lower environmental standards, Russia can sell cheap electricity to Europe, for instance. These aspects have a major impact on the operations of the energy markets and on the security of energy supply in the Baltic region.

The European Commission has been rather critical about Estonia’s use of oil shale as fuel for its electricity plants, which is considered to be harmful to the environment. The topic was already touched upon during the accession talks between Estonia and the Commission in 1998-2002. Some media even reported that Estonia will have to give up using oil shale after 2016 all together. So what will happen?

Oil shale mining in Estonia
The core of the matter is that there are clear environmental restrictions that will come into force on 1 January 2016. Our two oil shale-based power plants will have to meet those standards by that date. In practice, there are three possible scenarios: 1. the electricity plants could be provided with completely new units; 2. the existing boilers of the plants could be modernized, by adding desulphurisation components; and 3. the units could be taken out of production. We are currently applying a mixture of these options. Two units have already been provided with new equipment, as a consequence of which pollution has declined sharply. They comply with all environmental criteria set by the EU. The rest of the boilers will be modernized or be replaced by 2015 at the latest.

Does Estonia have any plans in the field of ‘unconventional gas’ or shale gas?

Currently there is no evidence that Estonia possess shale gas reserves. Yes, we have produced gas out of oil shale, but that’s not the same thing. However, if the gas networks between Lithuania and Poland are connected, the Polish shale gas would certainly have a positive impact on our market.

Russia has started the building of the Baltiskaya Power Plant in the Kaliningrad exclave, not far from the border with Lithuania. In the future, it should generate 2,300 to 2,400 megawatt, part of which should be exported. Do you think this will affect the nuclear power project that Estonia, Latvia and Lithuania agreed upon in 2006 in one way or another? Foreign investors like Siemens or Areva might feel more attracted the Russian project. The construction of the planned ‘Baltic’ reactor, in the Lithuanian town of Visaginas, hasn’t even begun yet.

The Visaginas project has been delayed, that is for sure. This is mainly due to internal legal and political problems in Lithuania. However, it appears these have been solved now. As to the Kaliningrad plant, one should ask himself two questions. First of all: How will Russia export the electricity it will generate there? The local network is only suited for 700 Megawatt. Secondly, how do they guarantee a

‘LNG could be a good alternative for Russian gas, but we will have to work out a proper financing scheme first’
reserve capacity? Some developments are rather odd indeed. Officially, the construction works started last February, but not much has been realized so far. Then there is the peculiar thing that the building activities have already kicked off, but that the financial and budgetary plans as well as the environmental impact assessment are due to be presented only in 2011. It seems that one or more steps in the process are missing. So it appears that this whole Baltiskaya project is aimed at creating confusion, also among foreign investors who might be willing to embark on the Visaginas project.

Estonia also announced that it intends to build its own national nuclear plant. How realistic is this? After all, Estonia is just a small energy market.

This is an open issue. The national nuclear plant should be seen as an alternative to the ones that are planned to be built in Lithuania and Finland [the Olkiluoto 3 reactor, for which Estonia has also displayed interest, J.B.]. We are currently busy with the legal preparations, and the topic will be discussed in detail by the politicians in the years to come. We have to define very clearly what the conditions are – and then it will become clear, as to whether it will be a profitable project.

Last Summer, the Estonian Government announced that it intends to unbundle national energy company Eesti Gaas, in order to diversify the country’s gas market. Some commentators have asserted, however, that this is a form of re-nationalization of the gas transmission grid and that the ruling parties are trying to play the ‘Russia card’, as Gazprom is one of the shareholders of Eesti Gaas. What are your thoughts on this?

The Government does not intend to re-nationalize the gas grid, as some media have indeed argued, but wants to fulfil the unbundling requirements of the new EU gas directive. This means restructuring the gas company in such a way that the suppliers of the gas will not be in a position to control the transmission grid anymore. In the Estonian context this means that Gazprom will have to give up its share in the control of EG Võrguteenus, the national gas network company. One option is that TSO Elering, the state-owned electricity company that controls the transmission system, will be one of the bidders for the Gazprom stake.

Estonia has worked out plans to build an LNG terminal in the vicinity of the town of Paldiski. However, on the LNG market expensive long-term contracts are the norm, while supply by ship will not be cheap – the Baltic Sea Region is a remote area. Lithuania also has plans to construct a terminal. Do you think the high investments and costs will eventually be compensated?

LNG could be a good alternative for Russian gas, but we will have to work out a proper financing scheme first. From an economic point of view, a common, regional terminal would make much more sense. In this context, we should not only look to the Baltic gas market, but to the Finnish gas market as well, which, at the moment, is an even more remote one. One terminal for all four states would be best, yet it is not unequivocally clear, where it should be located. There are also uncertainties as to what Finland’s gas needs for the longer term are. It is even most likely that the gas consumption in Finland will decrease in the coming years. Discussions on LNG cooperation certainly won’t be easy ones, yet without regional cooperation none of the terminals will materialize.

 Who is Einari Kisel?

Einari Kisel (1972) graduated in Thermal Engineering at the Tallin Technical University and afterwards obtained a Master of Arts in Social Sciences from the same University. From 1995 to 2001 he worked for Eesti Energia, among other things as head of the Strategic Planning Division, Environmental Manager and head of Trade. In 2002, he joined the Ministry of Economic Affairs as Head of the Energy Department. In 2008 he became Deputy Secretary General for Energy.