Time for Latvia to catch the wind

  • 2005-08-24
  • By Jekaterina Kolosova
When becoming an EU member, Latvia undertook the obligation to have 49 percent of its total electricity consumption come from renewable energy sources by the year 2010. Approximately 44 percent of total consumption is currently produced by the Riga Hydroelectric Station. A close analysis shows that, when it comes to finding the remaining 5 percent, Latvia will have nothing to choose but the wind.

There are seven wind parks in Latvia to date, with a total installed capacity of 24.6 MW. Together they produced 48 GWh in 2004. This amounted to only 0.8 percent of the country's total electricity consumption, so this number will have to grow fivefold over the next few years.

Latvia's geographical and topological conditions allow for the installation of wind generators with a total capacity of about 400 's 500 MW. Wind speed reaches 5 - 7 meters/second on the western coast of the Baltic Sea (in some locations up to 9.3 meters/second) at a hub height of 110 meters. The flat nature of the landscape diminishes wind turbulence and gives clear access to western winds. Yet despite these pluses, the development of wind parks is being obstructed in Latvia. Why?

In contrast to Estonia and a majority of the EU15 countries, Latvia does not have clear legislation that defines the status of renewable energy and mechanisms of state support. The government issues quotas for the development of wind parks on an annual basis: in 2004 four permits were issued; however, this year the number so far has been zero.

Since 1995 Latvenergo has been obliged to buy electricity from renewable energy sources at double the going tariff. That gave impetus for small hydro power plants to get up and running and for the development of wind parks. Now that has changed. Electricity from wind parks is bought at a predefined price 's e.g., in 2004 two wind parks signed an agreement to sell electricity at 47 euros/MWh. In a majority of other countries, the government offers fixed feed-in tariffs for a defined term (there are different variations of support schemes). This creates a favorable environment for improving wind turbine technology and gives long-term confidence which is important for investors. In particular, this policy helped wind energy in Germany, Denmark, Spain and the U.K. flourish.

The Latvian government's main arguments against proliferation of wind energy is that it is too expensive and that the country is already very "green" thanks to its hydroelectric station. Indeed, the energy generated from wind turbines is way more expensive than that generated by the HES or the Ignalina Nuclear Power Plant. The cost of producing 1 kWh of electricity from wind is 0.057 euro, while consumer prices in Latvia are 0.064 euro/kWh. The capital expenditures on 1 MW installed capacity are around 1 million euros. The average payoff period is seven - 10 years.

There are engineering problems with wind turbines as well. Wind is extremely difficult to forecast. The wind speed volatility is high 's 20 percent 's it is difficult to predict on day-to-day basis, much less an hourly one. When there is no wind, there is no energy; when the wind speed is too high, there is overproduction, and the excess cannot easily be stored. This situation requires specialized equipment to ensure a balance in the grid.

With all these negative factors, entrepreneurs are not willing to rush into this risky industry without governmental support. Wind is not financially viable at current market prices. There are difficulties in obtaining bank financing without a fixed term power purchase agreement. Still, wind power is poised to develop in Latvia. The country imports around 40 percent of its electricity from Russia, Estonia and Lithuania. After the shutdown of the second block of Ignalina in 2009, and looking at the increasing energy prices from Russia and rising oil and gas prices, Latvia will have no choice but to develop alternative energy sources at home.

Jekaterina Kolosova is senior analyst

at Bridge Capital