Business Analysis: Dependent on no one

  • 2011-07-20
  • By Charles Cormack

I had a very interesting conversation last week with one of the senior academics at the Scottish Energy Center, which is part of Edinburgh Napier University and is recognized as one of the foremost energy research institutes in the UK.  Its role is to advise government on the strategies it needs to keep the lights on and the power working in the UK.
During the conversation I was told that the energy shortage in the UK was a serious issue, that we did not have enough generation capability to deal with the increasing demand, and that there was a real danger that England could suffer power shortages during the London 2012 Olympics. The discussion brought home to me the real dangers that face us all through a lack of energy security.

The Institute had asked to meet up with me, as they were fascinated by recent developments in the Baltic States and were keen to explore opportunities there, and possibly to partner with local institutions to conduct research projects, etc. 
I had started to have conversations to update them about the development of the last few weeks, explaining that Lithuania had taken the brave decision to go head to head with Gazprom and implement the EU Third Package by the book. This will require gas supply companies (Gazprom) to sell off any distribution operations (pipelines in Lithuania) they control. In effect, this paves the way for  nationalizing the Lithuanian gas pipeline network, which will allow for multiple gas companies to begin to supply Lithuanian homes and business.

This decision, in contrast to Latvia and Estonia, which seem to have adopted a much more “wait and see” policy when it comes to taking on Gazprom, is courageous, if nothing else. It is particularly brave as Lithuania starts to come out of crisis, and move back towards steady and sustained growth.  Though the recovery is real, it is also fragile, and with a number of other European countries seemingly on the edge of collapse, it would not take much to derail it.

One thing we have learnt in the past is that Gazprom is unafraid to use its position as the only player in town to manipulate the local gas market for its own advantage, or on behalf of its political masters to influence the local political situation. 
Following the announcement by President Dalia Grybauskaite on July 13 that she had signed a law calling for the unbundling of the Lithuanian gas market, Gazprom has acted with predictable venom. Lithuania already has to pay up to 15 percent more for its gas than its Baltic neighbors, and a spokesman for Gazprom has made it clear that if the Lithuanian government continues down this route, the company will use the price of gas as a weapon.

So there is the real danger of steep increases in the gas price in Lithuania over the next few years, putting pressure on the costs of businesses already struggling to emerge from the recession. 
But this danger must be put into context. At present, all three Baltic States are to some large extent dependent on Russia for their energy, and Russia is quite happy to use that position of power to involve itself in the politics of the Baltics and the EU as a whole.

The blame for the energy reliance on Russia should be laid, at least in part, at the doors of the Baltic governments. It is now almost 20 years since independence, and over those 20 years all three economies have had periods of real economic boom, without making the investment needed to secure energy independence.

The Lithuanian government’s failure to deal with the closure of Ignalina is certainly part of the problem; it was clear from the beginning of the century that the plant needed to close, and that when it did there would be a massive shortfall in local power generation, yet for whatever reasons the government failed to start to address this issue until a couple of years ago, and though they have now reached agreement with Hitachi, contracts are still to be signed, and it is unlikely that the new plant will be generating any power until the early 2020’s.

However, now there does seem to be action, with the announcement of the new liquefied natural gas terminal at Klaipeda, and investment across the Baltics in the development of new renewable energy plants, and schemes for implementing energy efficiency measures in commercial and domestic buildings.

In the future, energy independence needs to be at the heart of all three Baltic governments’ policies. In the short term the focus needs to be on using energy efficiently and on bulking up energy production.  Then the not-so-invisible hand of Moscow will have lost one of its most powerful leavers for exerting control in the Baltics.