Caspian Energy (CE): Latvia, the Baltic States and the EU have a common energy policy, what is its peculiarity in Latvia and what does it have in common with the EU as a whole?

Kaspars Melnis, Minister for Climate and Energy of the Republic of Latvia: One of the most important features of Latvian (and Baltic) energy markets in the context of the EU energy policy is that historically energy systems and policy planning (power grid, natural gas network, as well as heating systems) were not integrated with the European Union countries and were operated in line with different principles.

For example, the power grid and natural gas transmission network were built as a part of the united grids of the former Soviet Union and thus until relatively recent history there were no physical connections with neighboring countries other than Russia and Belarus. Thus, to become fully integrated participant of the Common European energy market, Latvia and other Baltic countries had to build new power and natural gas infrastructure, and adapt to new, more liberalized market rules.

In principle the energy market of Latvia and other Baltic countries operates quite similarly to that of the rest of the European Union, with the exception of the fact, that in power sector the systems of Baltic countries do not operate in synchronous mode with European or Scandinavian countries, but until early 2025 will continue parallel operation with grid of Russia and Belarus.

After successful disconnection from BRELL grid, and start of synchronous operation of grids, Baltic countries will become fully integrated with European Union energy markets. In the heating sector Latvia and Baltic countries is different from many other European countries with the fact that Baltic countries have relatively large centralized heating systems, which we consider an advantage.

CE: How effective is the EU’s energy security policy today? What risks affect the economic growth of the EU and the Baltic countries?

Kaspars Melnis: The energy price crisis of year 2022 and decision-making process about new initiatives in the power and gas sector has proved that in general the EU energy security policy is quite effective.  Despite the fact that energy price shocks in mid-2022 were unprecedented, European Union countries by late 2022 were able to start the heating season and meet winter without any significant worries about the security of supply.

It was possible mainly due to liberalized and competitive energy markets, which gave market participants the necessary flexibility to quickly adjust to the new situation, to agree on effective use of infrastructure. Also, the share of renewable energy, especially wind energy, combined with energy resource saving initiatives also allowed European countries to reduce consumption of fossil fuels and thus stabilize the market.

Also, one significant advantage of the decisions made in European Union was the principle that impact of any crisis measures on functioning of the market must be minimized and negative effect on competition should be reduced as much as possible. This principle was significant to avoid uncertainty regarding investment decisions. Of course, significant growth of energy prices in the European Union has slowed down economic growth of European economy, but, at the same time, it is remarkable, how quickly energy markets, for example, natural gas market has recovered and returned to pre-war prices.

It is also important to mention that at this point the economic performance of European countries and Latvia is mostly related with other factors, and not so much with energy prices. It is also obvious, that the price crisis of 2022 also contributed to energy sector positively, because it has facilitated new investments in energy sector, and especially renewable energy, and has reignited debate about other energy production sources, for example, nuclear energy.

The Ministry of Energy and Climate is planning to develop a “RePowerEU funding programme”. The “green light” from the European Commission we received just at the end of 2023. Financial resources are planned to be used for the electricity synchronization project – purchasing of a battery, modernisation of the electricity transmission and distribution system, construction of biomethane input point. The amount of funding is about 134.4 million-euro, absorption period until 2026.

CE: Is there a panacea for climate change today, or shall countries and societies have to prepare only for mitigating the consequences?

Kaspars Melnis: There is no miracle to reduce Greenhouse gases (GHG), there are two ways to reduce emissions, either by replacing fossil resources with renewable ones or by spending less on existing resources, boosting energy efficiency.

Latvia is currently actively working on the updated National Energy and Climate Plan to determine additional measures to reduce emissions and move towards achieving of GHG targets in 2030. The final version of the plan must be submitted to the European Commission by the end of June 2024. 

Emissions are divided into two parts: the first is called emission trading system (ETS), which is coordinated by the EU. In Latvia, the ETS sector is relatively small – only 19% of the total national emissions in 2021. ETS emissions refer to large industry and energy facilities with installed capacity of more than 20 megawatts.

If these companies use fossil fuels, then they must buy emission allowances. There are initially free allowances that can be sold on the market to raise funds for decarbonisation. With each period, free allowances become less and their price increases, making it more expensive for companies to operate on fossil energy, instead of being “greener” that make you more advantageous.

Each ETS company is itself responsible for ensuring that the system is followed, and their decarbonisation at EU level is also seen very well. Compared to other EU Member States, there are few industrial plants in Latvia and the share of renewable energy in the total energy consumption is 42.1%.

The other sector, non-ETS (Effort Sharing Regulation/ESR sectors), is the rest of the economy (transport (37%), agriculture (27%), small energy and industry (20%), waste management (7%), etc.) for which each EU Member State is responsible. The non-ETS sector creates 81% from total GHG emissions in Latvia. In this sector, our three big whales are transport, agriculture, and small energy, which mainly is the energy efficiency of buildings. In other EU Member States, the proportion between the ETS and the non-ETS is different.

There are some examples of measures for GHG reduction that are included in the Plan project.

Transport sector:

We are moving towards the efficiency and development of public transport and increasing electrification of the transport sector by ensuring less use of fossil fuels in the transport sector and therefore lower GHG emissions. To implement this, the Plan envisages several measures for the transformation of the sector. Incentives are also offered – for example, State aid programmes for purchase of electric vehicles:

1. Optimizing the public transport system;

2. Ensuring a competitive and environmentally friendly rail network;

3. Purchase new electric trains, new batteries for electric trains;

4. Increase the number of charging stations/points;

5. Install hydrogen refueling points;

6. Enable liquefied or compressed methane filling points;

7. Promote micromobility,  etc.

The agricultural sector:

1. Encourage organic dairy farming (low-emission dairy farming);

1. Support for fertilization planning;

2. Promote consumption of livestock products produced in Latvia;

3. Encourage and support direct soil application of organic fertilisers;

4. Contribute to improving the quality of feed;

5. Maintenance and modernisation of land-based amelioration systems;

6. Promoting the production of biogas and biomethane and the use of biomethane;

7. Increase in the share of organic agricultural land relative to total agricultural land;

8. Promoting the conservation of grassland, etc.

Small energy or promotion of energy efficiency in the building sector:

1. Improve the energy efficiency of public sector, multi-apartment buildings, private houses;

2. To oblige all new residential and non-residential buildings to comply with the conditions of the zero-emission building;

3. Change decision-making procedures for renovation or connection of buildings to an efficient district heating system, etc.

CE: What is the attitude towards nuclear energy in Latvia? Does its high emergency hazard cause a phase-out?

Kaspars Melnis: Both Poland and Estonia have been analyzing the construction possibilities of nuclear power plants for several years - in Poland since 2016, but in Estonia this solution was updated in 2019. A large proportion of electricity in both countries is produced from local fossil fuels (lignite in Poland, shale in Estonia), which won’t be used in the future. Both Poland and Estonia have different energy production portfolio compared to the situation in Latvia, which motivates them to move more rapidly towards renewable energy resources, diversifying them.

Each country has different starting positions, which explains why all Baltic states also have different development strategies. Estonia is a few steps ahead of Latvia and Lithuania in the development of atomic energy – the end of the use of shale for electricity production until 2035.

Latvia’s position among the three Baltic States is the best. Of course, this is largely due to the historical heritage – three hydroelectric power plants provide a high share of renewable energy sources in Latvia’s electricity production balance. Each year, our hydroelectric power plants generate between 2 and 3 terawatt hours of electricity, covering 30-40% of our consumption and often cover up to half of the energy we generate.

In addition, we have natural gas thermal power plants (TEC) that we can “make the green” in the future by using biomethane and adding hydrogen to the gas. At the same time, we still see a strong interest in developing wind and solar electricity production in Latvia, with which will replace electricity imports in the future and strengthen the competitiveness of our economy.

Answering to the question – when there will be space for nuclear energy in Latvia’s production? The answer is the price of electricity production comparing to other alternatives. Currently, electricity generation in small modular nuclear power plants remains relatively expensive. Firstly, their purchase and installation require sufficient investment, but it is important to recognize that the nuclear energy is determined not only by economic considerations, but also by the willingness to invest in the education system and to facilitate the availability of specialists for the construction and operation of the plant.

In the nearby future, we will develop competitive wind and solar energy in Latvia, but at the same time, we closely follow technological developments and work with our neighbors to find the best solutions for our region in the long term. Latvia has prepared an informative report on the prospects for development of atomic energy in Latvia, which has been directed in inter-ministerial conciliation. We are expecting to have intense debates within the Parliament.

CE: Is the possibility of supplying Caspian gas to Latvia and the Baltic States as a whole being considered? Does such diversification of gas exports serve as a solution for reducing the burden of high energy prices on the EU economy?

Kaspars Melnis: Regarding potential supply of natural gas from the Caspian region, Latvia also notes that the Latvian natural gas market is fully liberalized and thus natural gas market participants are free to obtain natural gas from any country or commercial entity, which are not subject to international or European Union sanctions, and in principle Latvia warmly welcomes active participation and competition of Caspian natural gas producers in global markets, which could be beneficial to diversify LNG supplies and routes globally.

Government policy does not envisage interference in commercial trade of natural gas large consumers, traders or other qualified buyers. However Latvian government would welcome bilateral negotiations about potential partnership in line with principles of common European gas market among companies from our region and Caspian region.

CE: Is it beneficial for the Baltic States to create a Russian-Turkish gas hub?

Kaspars Melnis: Regarding the gas hub, it would be however important to note that Latvia welcomes increased activity and participation in the global natural gas market of Türkiye and other Caspian region countries who share their foreign policy principles with the European Union and are willing to cooperate with European countries in line general principles of the Common EU natural gas market.

Latvia together with other EU member states believe that competitive global environment in the natural gas market is beneficial to both consumers and producers of energy resources.

CE: Does Latvia have geothermal energy reserves or methane hydrates in the Baltic Sea? Is the possibility of using these natural resources being explored?

Kaspars Melnis: There are no considerable, currently commercially viable geothermal energy reserves or methane hydrate in the Baltic Sea. According to publicly available research papers, the Baltic Sea is considered too shallow for methane hydrates and thus there are no foreseeable plans for further research in this field. Shallowness of the Baltic Sea should be also considered in relation with exploration of other offshore activities.

Regarding the geothermal energy potential, research papers suggest that in the future geothermal energy can be potentially used for application in low temperature district heating systems. However, it would require significant increase of price for other energy sources such as fossil fuels and biomass.

At this point other available, and competitive technologies, such as air source heat pumps or ground or water source heat pumps also lay doubt on future prospects of more intensive usage of geothermal energy in the future. The project of National energy and climate plan we are expecting to promote the production of biogas and biomethane and the use of biomethane from the agriculture sector.

Thank you for the interview