Flanschverbindung_Gasleitung

Energy cooperation between Lithuania and Poland: the Polish perspective

02.10.2014 | By Mariusz Antonowicz, Linas Mickus, Vytautas Mikulėnas, Šarūnas Steckis

During the last 25 years Poland and Lithuania have initiated numerous bilateral cooperation projects and initiatives. Ambitious expectations of such cooperation were based in the energy sphere. It was expected that it would help Lithuania to exit Russia’s energy system. However, these expectations did not materialise and many energy projects are delayed. This raised doubts whether the countries are truly interested in such cooperation. This article tries to answer this question and analyses Poland’s motives behind energy cooperation with Lithuania. It appears that Poland has little interest to participate in the construction of a new nuclear power plant in Lithuania, whereas it has a strong interest to construct electricity and gas interconnections with Lithuania.

Energy is currently a hot topic in Lithuania. It is widely discussed among the country’s politicians, experts, media and the wider population. The reason behind that is Lithuania’s precarious energy security situation, particularly in the gas and electricity sectors. After regaining independence Lithuania inherited an energy infrastructure which completely tied it to Russia. This made Lithuania almost 100% dependent on Russia for energy supplies. That dependency was further aggravated when Lithuania under the pressure of the European Union (EU) closed its antiquated Ignalina nuclear power plant in 2009. Although in some cases Lithuania managed to alleviate the situation, for example in the oil sector, today Lithuania still lacks energy security. This situation has had a negative impact on the country’s overall condition. Firstly, the economic sphere was affected. Russia used its monopoly position to make Lithuania pay higher energy prices that did not correspond to market value. For instance, in 2010-2011 Lithuania paid $356 per 1000 cubic metres of gas, whereas Estonia, Latvia, France, Romania, Austria and the Netherlands paid around $300 for the same amount, which shows that Lithuania overpays for its gas. This was detrimental to Lithuania’s economic competitiveness and reduced its inhabitants’ disposable incomes. Secondly, damage was done to Lithuania’s security. Dependence solely on Russia for energy supplies increased the likelihood of politically motivated energy blackouts and energy pricing with the aim to pressure Lithuania to adopt a more pro-Russian foreign policy.

In response to this situation, Lithuania devised a new energy policy, which was grounded on two key principles: first – establishing a market in energy, second – diversification. Regarding the former, Lithuania’s government started to create a market for electricity and decided to implement the EU’s Third energy package which unbundles energy suppliers, energy producers and energy distributors. As for the latter, Lithuania started numerous energy infrastructure projects in order to gain access to alternative energy supplies. One example is the LNG terminal in Klaipėda, which will become operative in December 2014. Many of Lithuania’s energy infrastructure projects are built specifically with the aim to connect Lithuania with the EU-wide energy system. This means that Poland becomes an indispensable partner for Lithuania, since the easiest way to gain access to European energy markets and integrate into the EU energy system is through Poland.

Therefore, Polish-Lithuanian cooperation is essential to secure Lithuania’s energy security. Both countries launched joint energy projects, which are the LitPol electricity link, the Polish-Lithuanian gas interconnector and the Visaginas Nuclear Power plant, where Poland had been expected to be a participant. The reasons for Lithuania’s participation in these projects are obvious. However, it is not the case with Poland. The aforementioned projects are constantly delayed and it is often claimed that one of the reasons for that, is Poland’s lack of interest in these projects. Hence, this paper will examine this claim and evaluate how Poland sees and values its participation in energy projects with Lithuania. It will be done by presenting an overview of Poland’s energy policy and determining how the Visaginas Nuclear Power Plant (VNPP), LitPol link and the Poland-Lithuania gas interconnector satisfy Poland’s energy interests.

Poland’s energy policy

Before explaining Poland’s energy policy one must look closer at Poland’s energy sector. In 2011 Poland imported 33,7% of its total energy. Poland imports more than 70% of its gas and 95% of its oil from foreign sources, mostly from Russia. It receives the former from the Yamal-Europa gas pipeline and the latter from the Druzhba oil pipeline. However, these pipelines also provide gas and oil for Germany. This makes Poland a transit state and thus reduces the negative impacts of its dependence on Russia for energy supplies. Moreover, Poland produces most of its electricity. This is because of Poland’s vast coal reserves. Nevertheless, this has recently started to cause Poland problems due to stricter global and EU environmental regulations.

Poland has an obligation to satisfy the so-called EU 20-20-20 objective. It obliges all member states to cut down CO2 emissions by 20% compared to 1990 levels by 2020, reduce energy demand by 20% compared to the forecast for 2020. It also makes the signatories increase the participation of renewable energy in the overall energy mix up to 20%, which entails that renewable energy will encompass at least 10% in transport’s energy mix. This agenda is the main framework on which Poland bases its energy policy, which is outlined in an official document released by Poland’s Ministry of Economy in 2009.

Poland’s energy policy also identifies threats. One of the main threats to Poland’s energy security is Poland’s dependence on energy supply from Russia, particularly gas and oil. Further, high energy demand and low quality of energy extraction and distribution infrastructure are also named.

In response to this environment Poland declared several priorities in its energy policy. The most important ones are: increasing security of supply of energy and fuel (which entails developing internal energy resources), developing competitive markets for fuel and energy and limiting the impact of the energy industry on the environment. Increasing energy efficiency, diversification of electricity generation by introducing nuclear energy and development of renewable energy resources are also named as important goals.

Further attention must be given to the sectors, which are relevant for Polish-Lithuanian energy cooperation. In the gas sector Poland aims to diversify its supply. It will do so by gaining access to gas from other suppliers than Russia, extracting more natural gas in Polish territory, developing Poland’s gas distribution network. To make this happen, Poland will focus on creating a favourable economic environment to promote investment in these areas. Moreover, Poland has started building an LNG terminal in Świnoujście which will be operative in 2015, started to extract shale gas, built interconnections with Germany and the Czech Republic and in 2015 will open a new gas storage facility in Włocławek. These measures will significantly reduce Poland’s reliance on gas imports from Russia.

In the electricity sector Poland wants to ensure sufficient supply for electricity demand, which has risen sharply recently. This will be done by creating new electricity generation centres, improving and modernising Poland’s electricity distribution network and gaining access to foreign sources of electricity. Poland is especially interested in participating in international electricity trade. This is related to the fact, that Poland lacks reserve capacity and import of electricity is one of the solutions to this problem. Moreover, it is important to note, that Poland plans to reduce the share of coal in electricity generation from 90% to 53%. This means, that Poland will not expand electricity generation based on coal and instead will focus on natural gas, renewable sources and nuclear energy.

The nuclear energy sector is relatively new in Poland. Poland has never had a nuclear power plant, but the Donald Tusk government declared a willingness to introduce nuclear energy to Poland by 2022. In this way, the government aims to diversify Poland’s electricity generation sources and produce environmentally friendly electricity. Recently, the Polish government has confirmed its plans to produce nuclear energy. However, it not yet a foregone conclusion, since there is still a lack of political consensus on this issue.

Finally, it must be noted that Poland expresses its interest in regional cooperation and developing regional energy integration. Poland particularly emphasises its interest in the Visegrad and Baltic regions and cooperation with them in devising and implementing EU energy policy.

Poland’s interest in participating in Visaginas Nuclear Power Plant project

At the end of 2009 Lithuania closed its last nuclear reactor, Ignalina Nuclear Power Plant (INPP), which had been generating around 70% of the country’s electricity. Since the closure of INPP, electricity imports have increased to more than 60 %, and imports of all energy resources have increased to 80 %; all this is bought from a single country – Russia.

A new nuclear power plant project in Visaginas was agreed upon in 2006 by the Baltic States. Poland joined the project a bit later the same year, acknowledging the importance of the interconnection between Lithuania and Poland. However, in 2011 Poland decided to withdraw from the project stating that the given conditions are unacceptable for them and that they wish to pursue other key projects. Apparently, there have always been issues and lack of political consensus between strategic partners on the Visaginas NPP project. Currently, the project is on stalemate, following the 2012 referendum during the parliament elections on whether Lithuania needs a nuclear power plant. In the referendum 53% of the population participated and 2/3 of them voted against the construction of a new nuclear power plant. However, the referendum results are non-binding, i.e. the referendum was of an advisory nature. This does not preclude to possibility of building the Visaginas NPP, though it will be harder to gain support for it and makes its status even more ambiguous. Therefore, it is unlikely for Poland to show any further interest in the project, having in mind that Poland seeks to pursue its own nuclear program.

However, the failure to reach an agreement between the Baltic States (namely Lithuania) could play straight in Russia’s hands. With Russia’s Kaliningrad NPP and Belarus’ NPP, both near the border of Lithuania, the lack of consensus between Poland and Lithuania is helping to isolate the Baltic States from the rest of the European energy network. With the need to reduce CO2 emissions by burning coal Poland is forced to find alternative electricity production sources, otherwise it risks becoming too dependent on Russia for energy. Currently Poland has plans for two nuclear plants. In order to deliver the government’s objectives, PGE (Polska Grupa Energetyczna), as Poland’s largest power group by generation capacity, announced plans to build two nuclear power plants, each with a capacity of 3,000 MWe, one in the north and one in the east of the country. Both facilities are expected to be operational by 2035. A public opinion poll in December 2006 carried out for the National Atomic Energy Agency showed that 60% supported construction of nuclear power plants to reduce the country’s dependence on natural gas and to reduce CO2 emissions, while only 48 agreed to a power plant being built in a neighbouring country. Though, it is a large number, many issues concerning Visaginas NPP forced PGE to cancel its agreement with Lithuania. Having in mind the above mentioned plans for two nuclear plants in Poland, we can assume that now Poland has very little interest in rejoining the Visaginas NPP project, even though it would be beneficial for Baltic States.

Poland’s interest in LitPol Link electricity interconnection

The history of LitPol Link starts more than two decades ago when the first meeting initiating negotiations on this topic between the two countries was held in Vilnius in 1992. Since then many important decisions and agreements have been made that led to the current situation when the LitPol Link connection between Lithuania and Poland is actually being realized. Currently, the project is in its final stage. The electricity lines between Alytus and Elk are being built and the project should be completed in 2015.

However, during the negotiations, the countries paid different attention to this project. For Lithuania LitPol Link was a strategic project whereas for Poland it was a minor objective. This different perspective was caused by several reasons. Firstly, according to statistics, Lithuania is second largest importer of electricity in the EU after Luxembourg with approximately 75% import of overall electricity consumption. Secondly, Lithuania is highly dependent on electricity resources from Russia. According to the Ministry of Energy, in 2012 imports from Russia constituted 45% of total consumption. That makes Lithuania vulnerable from an economic as well as from a political point on view. Thirdly, at the moment Lithuania is a so called “Energy Island” in the EU as it has no connection with the European Continental Network (ECN) and in this context Russia has even more influence on Lithuania as it has absolute control over the post-Soviet energy system. Meanwhile Poland is in a reverse situation because it produces most of its power and is little dependent on imports. Moreover, Poland is well integrated in the ECN as its total capacity of connections of electric power system with the EU member states is 2000 – 3000 MW and such capacity of cross-border connections achieves the goal recognized by the EU which requires a minimum of 10% transmission capacity of cross-border connections in relation to installed capacity in the domestic electric power system.

Nevertheless despite the different situations in the energy sectors, Poland and Lithuania managed to find a common interest in the project which satisfied both parties and this success was highly determined by the energy policy of EU. In 2005 the European Council agreed upon mandatory and comprehensive Energy Policy for Europe (EPE) which was the background for the European Council to call for the adoption of a Priority Interconnection Plan (PIP) in 2006. PIP was introduced in order to build efficient energy infrastructure which is essential for the internal energy market to work properly. Moreover, in 2009 another important agreement was made among eight Baltic Sea Member States, which proceeded to signing of a Memorandum of Understanding on the Baltic Energy Market Interconnection Plan (BEMIP). The BEMIP was an initiative of the European Commission (EC) to look at concrete measures to connect Lithuania, Latvia and Estonia better to wider EU energy networks. Also, due to the general EU position towards energy policy and the emphasis on the need of cross-border interconnections, the LitPol Link as an important intermediate step towards the EU internal energy market was included on the list of projects of common interest presented by the European Commission.

All in all, considering the above mentioned facts, a conclusion can be made that Poland’s interest to participate in building the LitPol Link derives more from international obligations and EU energy policy rather than from the actual economic or security need as Poland at national level considers this project to be a minor objective.

Poland‘s interest in Polish-Lithuanian gas interconnection

In 2007 the European Commission adopted an energy policy for Europe which aims at ecological consumption of energy and the EU‘s ability to act in a unanimous manner on the international arena. According to it, the EU internal energy market must be competitive (free market) and characterized by cross-border trade in energy. In 2009 the Third Energy Package was adopted. It provides important policy and specific instruments of regulations for the member states to handle monopolist energy companies. In the gas sector it sets common rules on the internal gas market and conditions for accessing cross-border gas transmission networks. In other words, in order to establish a single energy market of supposedly lower prices and ensure better gas supply, the EU legislation encourages, obliges and gives the member states, namely Poland, legal and financial tools to establish a free internal gas market and develop inter-state energy infrastructure: transmission networks, LNG terminals and international gas interconnections. Building Polish-Lithuanian gas interconnection (GIPL) is a part of the common policy.

Central-Eastern European (CEE) countries, including Poland, are not sufficiently interconnected. They suffer from low throughput pipelines and bottle-necked interconnections which in many cases allow for one-directional flow only. In addition to West-oriented cross-border capacity, there is a lack of diverse gas transport routes and sufficient storage facilities. This prevents member states from the necessary energy integration and full-fledged trade in gas with each other and more distant suppliers from third party countries. Moreover, the national gas markets need transformation as well.

In 2012 Polish natural gas wholesale segment was dominated by one company – PGNiG SA. On the other hand, the segment is developing successively and there were about 100 entities licensed to trade gas. The gas demand has increased from 13.3 bcm1 (2000) to 18 bcm (2012). In 2012, under a long-term contract, PGNiG SA imported 82% of total imports of gas from Russian Gazprom, the rest brought from Germany and via new interconnection from the Czech Republic. This suggests Poland’s stronger interest in interconnections with countries in the East, West and Central Europe rather than Lithuania in the North.

Currently Poland has gas interconnections with four neighbour states: Germany, Czech Republic, the Ukraine and Belarus. The infrastructure is being built or improved according to EU energy policy of ending “energy islands” and Poland‘s national interest in securing gas supply and meeting its growing long-term gas demand. Accordingly, Poland’s transmission system operator Gaz-System SA is cooperating with Czech NET4GAS on the Cieszyn Polish-Czech interconnector (0,5 bcm, completed in 2011) and German Ontras Gastransport GMbH on Lasow Hub (1,5 bcm) and on reverse flow availability via the Yamal pipeline (3,3 bcm). These projects are of high importance for securing Poland‘s gas supply. New sources of import amount to 30% of the current import level. Upcoming interconnections, namely with Lithuania, would not measure up to such projects and their tasks of satisfying Poland‘s gas demand.

At the same time Poland is implementing other projects of lower national urgency: maintaining bilateral relations with other German gas entities with expectations of extending national transmission further into Poland from German-Polish border. Poland is also cooperating with Slovak operator Eustream to build a Polish-Slovak interconnection (feasibility study 2012) and with Lietuvos Dujos to build a Polish-Lithuanian gas interconnection (feasibility study 2013). Both of them are more advantageous in country‘s gas supply diversification rather than ensuring national security.

In 2010 Lithuanian Lietuvos Dujos and Polish Gaz-System SA signed an agreement to build a Polish-Lithuanian gas interconnection and applied for support from the European funds. The interconnection was included into the European Commission Trans-European Energy Networks (TEN-E) Program. The project received EU contribution covering 50% Business Case Analysis and Feasibility Study’s preparation costs. The remaining part was financed by Lithuanian and Polish gas operators. The interconnection was submitted to the EU to be considered as a potential project of common interest in BIMAP gas corridor in order to receive financial support from the Union.

Preliminary estimates reveal a pipeline length of 562 km (major part in Poland) and 2,3 bcm/year throughput with possible increase to 4,5 bcm. The reason for such an option might depend on Polish interest in this project and overall on gas markets in the Baltics.

The GIPL has bigger regional potential than bilateral only. With certain adjustments the project is going to connect not only Poland (18 bcm consumption 2012) and Lithuania (3,3 bcm), but Latvia (1,5 bcm), Estonia (0,7 bcm) and, in the interim, Finland (3,7) as well. This could make a:

3-Country-Market (EE, LV, LT) of ~5,5 bcm consumption per year;

3+1-Country-Market (EE, LV, LT, FIN) of ~9,2 bcm;

Or even a 3+1+1-Country-Market (EE, LV, LT, FIN, PL) of ~27,2 bcm.

Finland could join after completion of FIN-EE Balticconector pipeline and LNG terminal project in 2020s. Establishing regional gas markets is encouraged by the EU energy policy. Moreover, being “bigger” reasonably suggests expecting lower gas prices while playing on the international stage. Nevertheless, compared to other major EU states (Spain 32 bcm, Netherlands 46 bcm; UK 75 bcm in 2012) the size of such a single market would be relatively small.

Another GIPL incentive for Poland is engaging new gas consumers in the Baltics. This opens an opportunity for Polish gas companies and dealers. The previously mentioned PGNiG SA and other gas importing entities could enter East-Baltic markets and face new competition in their home country. Moreover, the interconnection corresponds with European energy policy and Poland’s interest in diversifying gas supply and accessing more gas infrastructure. CEE countries, including Poland, generally suffer from the lack of LNG terminal solutions and storage facilities. The access to the upcoming Lithuanian LNG terminal and gas repository facilities in Latvia is a welcome addition to the Polish transmission system. However, considering the size of Poland, the capacities of such facilities and Poland’s own infrastructure projects the usage of them might be limited.

Finally, by exploiting the GIPL Poland may expect geopolitical benefits. Regarding the international gas transmission issue, the North-Eastern Baltic region (LT, LV, EE, FIN) is isolated and, unlike other geographical gas regions of Europe around Poland, it has Poland as the only option for territorial gas integration with the rest of the EU. By participating in regional gas trading activities via GIPL, Poland may assume the role of an “energy bridge”. Economically it may transform into income from gas transmission to the Baltics, whereas politically, and more importantly, it could increase Poland’s presence in the regional political agenda and strengthen it on the European stage. In summary, Poland’s possible geopolitical interest in GIPL could obtain the largest beneficial viability in the mid-to-long-term perspective.

Conclusion

All in all, not all of Lithuanian-Polish energy projects fit into Poland’s energy policy and interests. The most problematic issue is Poland’s participation in Visaginas NPP. This is because of Poland’s own nuclear ambitions and the lack of political consensus in Lithuania regarding this issue. Thus Poland’s participation in Visaginas NPP is very unlikely. The other energy projects would help Poland achieve its goal of diversifying its energy supplies. But due to their size they have little impact on Poland’s energy security and they have no economic justification from a Polish point of view. Nevertheless, Poland fully participates in the LitPol project due to its international obligations and EU funding. Moreover, on condition that the EU provides funding for the Polish side, Poland is also likely to participate in the Polish-Lithuanian gas interconnector project due to the strategic benefit it gives. This situation proves the point that energy in CEE is more about geopolitics and strategy than about economics.

This research was conducted during the project “Idea Spotkania” in January-February 2014.

picture: Markus Schweiss