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Energy Law newsletter, December 2012

Imbi JürgenLinda ŠtrauseVilius BernatonisMāra StabulnieceRamūnas Švenčionis

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Dear Reader,

You are reading the first Baltic Energy Law Newsletter of TARK GRUNTE SUTKIENE. This publication gives you an overview of the latest and most important energy-related legislative updates in Estonia, Latvia and Lithuania and introduces the highlights of our recent experience in the energy sector.

The Baltic energy market today is certainly a very lively market, facing great challenges and changes. The way from an isolated and regulated playground to a liberalised and integrated market is not easy.

Today, one of the most topical subjects in the Baltic energy sector seems to be natural gas. This was evident also at the 4th Annual Baltic Energy Summit held on 14 and 15 November 2012 in Tallinn, where several speakers gave intriguing and sometimes controversial messages on developments in the Baltic gas sector.

In terms of security and diversification of gas supply in the isolated gas markets of Finland, Estonia, Latvia and Lithuania, LNG could play an important role. A need for a regional LNG terminal is commonly recognised. Yet, there is no consensus regarding its location and there are 6 projects proposed in different port locations in 4 countries. On 23 November 2012 the European Commission published a study on gas supply issues in the East-Baltic region. The study was expected to bring clarity to the matter of location of the LNG terminal, but it still leaves several options open, providing only the strategic framework based on which concerned Member States and project promoters should make future decisions. According to the study, the LNG terminal should be built on the shore of the Gulf of Finland, whereas a regasification terminal in Finland would grant Baltic area same benefits of the Estonian one. Furhter, there are three different port locations in Estonia that might be eligible for the realization of the LNG terminal. Muuga, Paldiski and Sillamäe would all require similar investment spending, while the key economic differences lie in the costs of connection from the terminal to the grid. Thus, the hard decisions on the location of the regional LNG terminal are yet to be reached. Meanwhile, TARK GRUNTE SUTKIENE has been strongly involved in all aspects of development of the the LNG terminal project in Klaipeda, Lithuania, which is the only LNG terminal project in the Baltic region that has reached a stage of implementation.

Another controversial issue in the Baltic gas market is definitely implementation of the 3rd Gas Directive. We have seen that Latvia has chosen, based on Article 49 of the Directive, to opt out from the implementation of the unbundling obligation until Latvia is directly connected to the system of any Member State other than Estonia, Latvia, Lithuania and Finland. At the same time, Estonia and Lithuania which also had the opportunity to derogate from the unbundling requirements have chosen ownership unbundling model which certainly strongly affects the rights of integrated gas companies. This has brought along fierce opposition of the Estonian and Lithuanian national gas companies and their shareholders. OAO Gazprom has initiated an international arbitration dispute against Lithuania, claiming that the Lithuanian gas transmission system unbundling rules constitute violation of Lithuanian-Russian bilateral investment protection treaty. A similar investment dispute in Estonia between the shareholders of AS Eesti Gaas and the state is possible. TARK GRUNTE SUTKIENE is actively engaged in the gas market liberalisation process, having provided assistance to the Lithuanian government in all aspects of implementation of the 3rd Gas Directive, from drafting regulation to representation in the arbitration.

In the sector of electricity, a sizzling issue today is full opening of the Estonian electricity market which has brought headache to the consumers. Apart from the electricity market opening, the Baltic states are facing the questions whether to invest in production capacities to fully meet its consumption demands or to rely on import. Today, no investments are made to production capacities without subsidies. Especially reliant on subsidies are the producers of renewable electricity. As you can see from the following legislative updates, the renewables support schemes in Estonia and Latvia are being reviewed and the support will most likely be reduced. Many of our clients may have to adjust their renewable electricity production projects accordingly.

There are strong voices saying that the less costly way to achieve security of supply is a common Nordic-Baltic power market, and priority should be given to interconnections such as EstLink2, NordBalt, LitPol and the 3rd interconnection between Estonia and Latvia. In this context, also synchronous connection between the Baltics and the Central Europe is of crucial importance. TARK GRUNTE SUTKIENE is a party to these processes, too, advising on the LitPol interconnection project as well as on the feasibility study on interconnection variants for the integration of the Baltic States to the EU Internal Electricity Market.
As you can see, the Baltic energy market is facing many interesting developments. Let’s be prepared!

Vilius Benatonis
Partner, Head of Baltic Energy Law practice
Vilnius office

Imbi Jürgen
Senior associate
Tallinn office