Russia and Belarus electricity suppliers exploit EU law, grow in Baltics

Eesti Energia struggling with unfair competition from electricity generated in Russia and Belarus.
Eesti Energia struggling with unfair competition from electricity generated in Russia and Belarus. Source: Siim Lõvi /ERR

Russian and Belarusian electricity suppliers are entering the Estonian market, exploiting EU law on emissions to undercut prices. This has not, it is argued, improved the situation for consumers, however, and moves are in place across the Baltic States and Finland to curb its continuation.

The market share in electricity supply from Russia to the three Baltic States increased by 50% in 2018, at the same time as CO2 emissions charges under EU regulations have increased five-fold over the last few years, now constituting 50% of the overall cost of fossil-generated electricity. The current price in Estonia is around €50 per megawatt-hour, with €25 of that going on EU CO2 emissions dues.

Last year over 13.3 Terawatt-hours of electricity generated in Russia found its way into the Nord Pool European electrical energy market, via Lithuania and Finland. By way of comparison, Estonia's annual electricity consumption is around 8.4 Terawatt -hours per year, so Russian and Belarusian producers could supply it entirely with plenty left to spare – with plenty more capacity for further electricity export too.

Estonia and Latvia do not import electricity directly from Russia, instead buying indirectly via Belarusian and Lithuanian connections (though not indefinitely – see below).

Russian suppliers exploiting EU emissions laws

This undercutting is helped since no network management fees (Estonian: võrguhaldustasu) are charged during holiday periods in Estonia (Russian Orthodox Christmas is celebrated 6-7 January).

Domestic supplier Eesti Energia conversely is subject to CO2 emissions quotas to the tune of around €200 million per year on fossil fuels generation, which is supposed to encourage investment into renewables as these sources are exempt from the CO2 emissions charges, obviously. However, Russia can undercut this too – it uses predominantly non-renewable sources (ie. gas, coal and nuclear powered generation). All this is before we even get to the question of potential increasing dependency on Russian energy sources, adding electricity to the gas supplied by the Russian Federation to Europe via Nordstream and Nordstream 2 pipelines.

''The EU's principle here was to facilitate investment into renewables without subsidies which can compete with fossil fuel sources,'' said Eesti Energia CEO Hando Sutter.

Not a level playing field

''However, the presence of Russian-generated fossil fuel electricity has annulled a lot of this, since the Russian Federation does not have such taxation on its market,'' he added Eesti Energia itself has heavily invested in renewables in recent years, including the 2018 acquisition of Nelja Energia.

''This has in fact given Russia a fierce competitive advantage in the Baltic States and Finland. The supply of Russian electricity has increased greatly recently; added to that we cannot compete with electricity produced from oil shale,'' he added. Oil shale burning is controversial due to its emissions. Despite calls for it to be halted entirely, oil shale electricity generation has actually increased in recent years.

Mr Sutter went on to point out a values conflict in the phenomenon of Russian gas supply to Estonia and the Baltic EU countries, noting that whilst more choice for a consumer is generally a good thing, the current situation is not a level playing field, something which he says EU policy is partly responsible for.

Alcohol excise hikes all over again

''There is a clear reason why countries set their own alcohol excise duties,'' he continued, citing another area which has caused controversy in Estonia. '' If one country determines one way and another country another, consumers simply go elsewhere to buy their alcohol, which kills the local market,'' said Mr Sutter.

Alcohol excise duty hikes in Estonia have been attacked for pushing both Estonian and Finnish consumers over the border into Latvia to make purchases. The counter argument is that, whilst it cannot be denied that prices are cheaper in Latvia, the cause is not primarily differing excise rates but different business models in Latvia in terms of storage, bulk supply etc.

''In the case of electricity supply it is even easier since the product is brought into the consumer's home. However, the EU's rationale in taxing fossil fuel-generate electricity was not this...their policy makers have overlooked the existence of Russian-generated emissions tax-free electricity,'' he went on, pointing out that the dramatic increase in rates – five fold over a year – have caused the as yet unresolved situation to suddenly arise.

Problem quick to arise, slow to recede

Potential solutions to the problem will, however, not be reached quite so rapidly, according to Mr Sutter.

''I certainly don't think this is easy since it requires a multi-lateral agreement not only between several EU countries but also with the Russian Federation, which could prove even more complicated,'' he said.

''Nevertheless, this should not be left unresolved as there is clearly a great disparity in the market at present,'' he continued.

For the government's part, the Ministry of Economic Affairs and Communications acknowledges the problem has been topical for some time, with a growing gap between EU policy in the area and that of third countries, including Russia. Naturally the bigger the gap, the more incentive for those outside the EU and not subject to EU regulations to start supplying here, simultaneously reducing EU competitiveness and increasing the bloc's dependency on third countries, whilst not bringing any benefits to consumers either.

EU not unified on issue

''We have raised the issue consistently, both within the Baltic States region and more broadly at the EU level,'' said Timo Tatar, head of the economic ministry's energy department.

''Unfortunately, the attitude of the various member states in the EU tends to vary,'' he said, particularly with regard to the understanding and treatment of third countries.

''Because of this different understanding of the problem, agreeing a common EU approach has proved very difficult and tends to arise from the lowest common denominator, which means policy impact is likely to be limited'', he continued, stating however that the three Baltic states tend to have a similar appraisal of the issue, as evidenced by various joint declarations their prime ministers have made in recent years.

Baltic unity may give solution

''This unity has been enhanced by the building of a new nuclear power plant in Belarusia just 50km from the Lithuanian capital, Vilnius, which is clearly aimed at electricity exports to the EU,'' he said.

The nuclear plant in question is currently under construction in the Grodno region of Belarus, almost on the Belarus-Lithuanian border. Under its EU accession agreement, Lithuania had to decommission its own Soviet-era nuclear power station at Ignalina, itself also close to the border with Belarus. The Ignalina plant was of the RBMK model, very similar to the former Chernobyl plant on the Ukrainian border with, again, Belarus, which suffered a catastrophic explosion in 1986.

Russia itself had previously tried a similar project in the Kaliningrad exclave, but this was halted since no other country was willing to adapt its grid to facilitate the import of electricity generated there (the Kaliningrad Oblast is sandwiched between Lithuania and Poland and has a Baltic coastline).

The Lithuanians have not been slow to react to the new nuclear plant on their doorstep, however, according to Mr Tatar.

''In response to the construction of the nuclear plant in Belarus, and with increased nuclear safety issues, Lithuania has passed a law which will terminate electricity exchange via Belarusian/Lithuanian interconnections as soon as the Belarusian plant comes online, which could be as early as this summer.

''We are therefore hoping to see a significant reduction in electricity imports from third countries as early as this year,'' Mr Tatar said.

Further resolution should come from continued Finnish legislation in the area, and the proposed synchronisation of the Baltic States electricity grids with those of Western Europe in 2025. This already has the effect of making investments in networks connecting the Baltic States and third countries (ie. Russia and Belarus) moribund, Mr Tatar argues.

Electricity prices in Estonia reached an all-time high in 2018, at least for consumers; the average cost of electricity in Nord Pool Spot's Estonian region in 2018 was €47.07 per megawatt-hour, or €0.0471 per kilowatt-hour, last year  it is reported.

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Editor: Andrew Whyte

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