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Swedbank Analysis 18 December 2009 Please read important information on the last page Baltic Energy Report We expect energy prices to grow in Baltic countries due not only to global developments but also to supply- and demand- mismatch (e.g., ,electricity), and that this will affect consumption of energy, companies, and households. Changes are needed in energy policies to avoid negative side effects, but support to renewables use should continue. A good mix of different energy sources is needed, and countries should cooperate more. The current crisis makes changes difficult, but might encourage these changes, which are good from a long-term perspective. Foreword Energy-related issues have become increasingly important for the economy and society. Many discussions about the sufficiency of energy resources and the en- vironment are taking place all over the world--about the impact these issues are having on energy prices, and about the accessibility and efficient use of energy. Questions of energy security and import dependence have been hot themes, es- pecially as Russian gas supplies to Europe were cut in the last two winters. The global energy price rally in recent years affected both consumers and producers, as it was also a part of the financial bubble. Important factors that increasingly had an impact on consumers and producers are international agreements (e.g., the Kyoto agreement and the expected agreement in Copenhagen), and rules and regulations inside the EU (e.g., affecting the use of renewable energy, and pollution). Those global processes affect the Estonian, Latvian, and Lithuanian energy sec- tors as well. Cross-border influences are increasing, and changes that some years ago were just on the waiting list are now becoming a reality of life. As the region until now has effectively been separated from the EU electricity grid (and connected only to the old Soviet Union system) and relying only on Russian natu- ral gas supplies, the changes have started to affect the region’s energy sector strongly. The quotas of carbon dioxide emissions, closure of the Ignalina nuclear power station (NPS), and opening of the electricity market are about to change significantly the Baltic energy market. The energy sector and related issues are also affected by the economic crisis, especially its deepness, which has changed substantially the outlook of that sec- tor. The existing development plans are still based on the old economic growth

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Page 1: Baltic Energy Report

Swedbank Analysis 18 December 2009

Please read important information on the last page

Baltic Energy Report We expect energy prices to grow in Baltic countries due not only to global

developments but also to supply- and demand- mismatch (e.g., ,electricity), and that this will affect consumption of energy, companies, and households.

Changes are needed in energy policies to avoid negative side effects, but support to renewables use should continue. A good mix of different energy sources is needed, and countries should cooperate more.

The current crisis makes changes difficult, but might encourage these changes, which are good from a long-term perspective.

Foreword Energy-related issues have become increasingly important for the economy and society. Many discussions about the sufficiency of energy resources and the en-vironment are taking place all over the world--about the impact these issues are having on energy prices, and about the accessibility and efficient use of energy. Questions of energy security and import dependence have been hot themes, es-pecially as Russian gas supplies to Europe were cut in the last two winters. The global energy price rally in recent years affected both consumers and producers, as it was also a part of the financial bubble. Important factors that increasingly had an impact on consumers and producers are international agreements (e.g., the Kyoto agreement and the expected agreement in Copenhagen), and rules and regulations inside the EU (e.g., affecting the use of renewable energy, and pollution).

Those global processes affect the Estonian, Latvian, and Lithuanian energy sec-tors as well. Cross-border influences are increasing, and changes that some years ago were just on the waiting list are now becoming a reality of life. As the region until now has effectively been separated from the EU electricity grid (and connected only to the old Soviet Union system) and relying only on Russian natu-ral gas supplies, the changes have started to affect the region’s energy sector strongly. The quotas of carbon dioxide emissions, closure of the Ignalina nuclear power station (NPS), and opening of the electricity market are about to change significantly the Baltic energy market.

The energy sector and related issues are also affected by the economic crisis, especially its deepness, which has changed substantially the outlook of that sec-tor. The existing development plans are still based on the old economic growth

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2 Swedbank Analysis, 18 December 2009

rates and, hence, are too heavily weighted by the risks emerging from the above-mentioned changes. Still, the coincidence of the changes in the energy sector with the time of economic crisis make the adjustment process in the economy more painful as generating the spike in prices. However, if structural changes are taking place anyway due to the crisis and the loss in competitiveness, they might be deeper because they being pressured also by the changes in the energy sec-tor and this together could be highly beneficial from a long-term perspective.

The changes taking place now and in the near future in the energy sectors of the Baltic countries are big and are affected by many processes, which quite often are working toward opposite outcomes. Hence, there are lot of uncertainties re-garding possible outcomes, particularly regarding prices, as many of these out-comes are dependent on political decision-making. The latter factor is hard to predict due to the wide range of views and the unknown outcome of international agreements (e.g., the Copenhagen climate summit).

Issues related to energy are very important for all of society; however, people’s general knowledge about these issues is fragmented. Hence, it is difficult to fol-low the energy-related discussions. Households and companies should take en-ergy-related aspects more into account when making long-term plans, especially concerning the efficiency of the processes and the targets. Although energy-related themes have been one of the media’s favoured themes, attention has been focused on rather narrow issues, and many important themes have been forgotten. Very often, a one-sided view of the problems has been presented. We hope that this report will help readers – managers and households - to follow the discussions better and make deliberate decisions.

This report1 primarily concentrates on the medium-term outlook, i.e., on the years 2010-15. We start by describing the situation in energy supply, industry, and con-sumption in 2008-09 so that the reader will be able to understand the situation of the three countries in those years. The second part of the report discusses the changes taking place in 2010 and onward and their possible consequences. We point to the shortcomings of the current processes and to the need to revise cur-rent energy sector development plans because of the changed economic envi-ronment. We look at future energy-, particularly electricity-, producing capacities and energy demand developments and assess the impact the emerging supply gap would have on economic developments. The analysis is based mostly on the data of 2005-08; if possible, 2009 data are used.2 The long-term analysis also uses data starting in 1996 to find the relation between energy consumption and the factors influencing it.

1 In December 2006 Baltic Energy Report was published by Hansabank Markets Research in which we covered the processes and developments in the Estonian, Latvian, and Lithuania energy sectors up to 2005.

2 Latest annual data in Eurostat are from 2007 and thus to some extent outdated. We have used also data from the national statistics of Estonia, Latvia, and Lithuania for 2008-09.

Page 3: Baltic Energy Report

Swedbank Analysis, 18 December 2009 3

Overview of energy resources, industry and consumption

Energy resources Primary energy resources comprise resources extracted, imported energy, and recovered products in a country.3

Estonia’s main energy recourses are oil shale, peat, and timber, which are mostly used for producing heat and electrical energy (approximately 70% of oil shale goes for the production of electricity, and peat and timber are used to gen-erate heating energy; the remaining shale oil is produced for exports and energy production). Natural gas and different oil products dominate among imported en-ergy. Estonia produces all its needed electricity; however, some municipalities use only imported natural gas for generating heating energy, and all motor fuels are imported. The share of renewables in energy consumption, which is approxi-mately 16-17%, is dominated by timber and products of timber. The share of hy-dro and wind energy, although very small (0.32% in 2008), has grown rapidly in recent years.

Estonia’s dependence on imported4 energy has declined, and, although there have been wide swings, it is one of the lowest in Europe (according to 2006 data, Estonia was the sixth-least dependent).5 Latvia’s and Lithuania’s import depend-ence is higher than EU average: in 2006 these countries’ dependence was 60% and 58.6%, respectively, compared with the EU average of 53.8%. Despite low import dependence, Estonia still imports all its natural gas and oil products. The same applies to Latvia and Lithuania.

Latvia’s high import dependence is the result of scarce domestic energy re-sources – only timber, peat, and hydro energy could be listed as important. Lithuania’s import dependence is related to its oil refinery Mazekiu Nafta, which imports all crude oil to produce oil products for export. However, Lithuania also imports natural gas and several oil products. The most important domestic en-

3 Recovered recourses have minor importance in Estonia, Latvia and Lithuania as of now.

4 Import dependence shows how much a country imports the energy it uses. It is calculated as the ratio of net imports of energy to general energy consumption (see definitions in appendix 1).

5 “EU Energy and Transport in Figures. Statistical pocketbook 2009.“ (http://ec.europa.eu/energy/publications/statistics/statistics_en.htm)

Table 1. Structure of primary energy in 2008

Estonia Latvia Lithuania Totaloil shale 81.5% 34.9%peat 1.2% 0.1% 0.5% 0.8%timber etc 16.9% 82.0% 20.1% 30.0%hydro and wind energy* 0.3% 15.2% 2.9%nuclear energy** 74.1% 28.9%other 0.1% 2.7% 5.3% 2.8%*In Estonia mostly wind energy, in Latvia mostly hydro energy**Includes hydro and wind energySource: national statistics

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4 Swedbank Analysis, 18 December 2009

ergy recourse in Lithuania is nuclear energy, but the raw material (uranium) is imported. Timber has also some importance.

Declining import dependence in the Baltic countries in recent years is a result not only of declining imports of natural gas and motor fuels, but also of growing ex-ports of electricity (imports of electricity have also grown). Such developments are possible mostly due to smaller consumption of heating energy (warmer win-ters, better isolation); however, the economic crisis has cut also the need to use energy. The increasing energy prices have definitely been a factor, forcing en-ergy consumers to change their habits.

Natural gas is imported only from Russia, as there are no other connections in the region. This type of dependency implies a very high supply risk, especially taking into account the problems experienced with Russian gas supplies to the EU in recent years. The supply risk has several sources, which have been dis-cussed extensively in recent years:6 the possible decline of production in Russia due to the low level of investments in the energy sector and the exhaustion of ex-isting gas fields; the too-high promises of exports, compared with current and fu-ture production capacities; political and economic interests; domestic consump-tion (including seasonal factors); and increased tensions between Russia and

6 These themes have been discussed in many reports and papers in which Russian energy policy, exports, and the economy in general are the main themes. See, for example, Steven Woehrel, Russian Energy Policy To-ward Neighboring Countries. Sept. 2., 2009.

Chart 1. Import dependance

0%

10%

20%

30%

40%

50%

60%

70%

Estonia Latv ia Lithuania

Source: Swedbank calculations on local statistics

Chart 2. Imported energy, TJ

0

150

300

450

600

750

900

Estonia Latv ia Lithuania Total

other

crude oil

electricity

oil products

natural gas

Source: Swedbank calculations on local statistics

Page 5: Baltic Energy Report

Swedbank Analysis, 18 December 2009 5

possible other suppliers (e.g., Turkmenistan7). Lithuania’s increasing import de-pendence from natural gas after the closure of the Ignalina NPS at the end of 2009 is clearly raising import-related risks. However, taking into account the de-cline of the demand for natural gas in Europe during the crisis, which has caused Russian gas production and exports to fall and the holding by Russian Gazprom of shares in local gas monopolies, we see that the realisation of these gas-related risks is currently very low. Still, the realization of these risks is unpredictable, as political interest may overrun the economic interest (and Gazprom is a state-owned company).

The three Baltic countries are also totally dependent on imported oil products, although there are small deposits of oil in the sea on the border of Latvia and Lithuania, and the latter has used them (and Latvia has considered doing the same). Mazeikiu Nafta has to import all its crude oil for production and this is an actual risk not only for the company but also for the Lithuanian economy.8 Esto-nia and Latvia are importing much of their oil products from Lithuania, but in re-cent years, imports from Norway and other countries have increased substan-tially. There is no obstacle to importing oil products from other countries, and this has been done in the past and will be done in the future. Hence, the import-related risks with oil products are not as high as with natural gas.

The big risks are related to prices – and this includes natural gas and all other energy products. Prices of different energy products - including domestic ones-are directly or indirectly dependent on the global price of crude oil. The rapid in-crease of oil prices in the last few years affected directly and seriously economic developments in all three countries. Although the global price growth was felt in all countries, the Baltics were affected more seriously than most of the other EU countries due to high energy dependence and the large share of energy in do-mestic consumption. The rapid price growth of heating and electrical energy was definitely one factor that made the crisis deeper in the three countries: due to regulatory factors,9 it continued in the second half of 2008 and partly at the be-ginning of 2009 when in other countries energy prices were already declining. The current price growth in global markets poses a risk for domestic consump-tion, and households, particularly, are vulnerable to a possible increase of (heat-ing) prices during the 2009-10 winter, i.e., when the decline of income will be the deepest during the crisis (see also Charts 13 and 14).10

7 Countries of Central Asia can export natural gas only through Russia. Turkmenistan just finished the building its gas pipeline to China. This will diminish the possibility of Russia’s buying gas from other countries if its own production is not enough to fulfil agreements. This would make also gas exports less profitable for Gazprom.

8 Lithuania has felt the negative impact of import-related risks since the supply of crude oil to the oil refinery ended after the government’s decision to sell shares of the company to a Polish company instead of to the Rus-sian Lukoil. The formal reason for stopping supplies was an emergency break of the pipeline, but the pipeline has not yet been repaired and Mazeikiu Nafta still imports all needed oil through ports. Estonia and Latvia have also seen different type of supply cuts from Russia.

9 For example, up to mid-2009 price regulations in Estonia had a minimum six-month lag. Prices for households (heating energy) thus grew at that time, when globally prices were already quickly declining.. See also Chart 14.

10 Of course, companies are not immune, and other countries are affected as well. The latter means increased pressure on the region’s economies, which are very open and export most of their production.

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6 Swedbank Analysis, 18 December 2009

Energy exports are most of all dependent on external demand or economic growth and prices. It is natural that domestic primary energy resources dominate in the energy exports of Estonia and Latvia; Lithuania, however, mostly exports oil products, produced from imported crude oil. Estonian energy exports are dominated by shale oil, but important also are timber and peat (the latter has lost its dominant position in recent years). Latvian energy exports are dominated by timber and timber products (over 50%), but oil products (19%) and bio fuels (3.5%) are also exported.

Energy industry Estonian energy industry is based on oil shale, although renewables have been growing very rapidly in recent years. The Lithuanian energy sector is using mostly nuclear energy and crude oil as input, but natural gas plays an important and growing role as input as well. The Latvian energy sector is concentrated around hydro energy, natural gas, and timber. The use of renewables has increased in all three countries. Outputs of the energy industry are electrical and heating en-ergy, and different energy products, of which a large share is used as inputs for energy generation (e.g., heating or electrical energy).

Not all energy resources are used for energy generation purposes: some are used as raw materials in industry or in other sectors and areas. Both in Estonia and in Latvia this type of energy resource makes slightly more than 2% of total energy resources, and its share has been increasing in recent years. Natural gas

Chart 3. Global energy prices (Reuters/CRB indexes), dollar

0

5

10

15

20

25

30

2005 2006 2007 2008 2009

0

20

40

60

80

100

120

heating oil (ls)

natural gas (ls)

crude oil (rs)

Source: ReutersEcowin

Chart 4. Structure of energy exports, 2008

0%

20%

40%

60%

80%

100%

Estonia Latv ia Lithuania

other

oil shale and products

bio f uels

crude oil etc

electricity

timber etc

oil products

Source: Swedbank calculations on local statistics

Page 7: Baltic Energy Report

Swedbank Analysis, 18 December 2009 7

is almost the sole energy resource that also has a nonenergy use, mostly as in-put for the chemical industry. The nonenergy use of energy resources in Lithua-nia was 12.8% in 2008 (of which almost 80% was natural gas, the remaining be-ing oil products).

Oil shale (the only Estonian resource) is mostly used as input for generating other types of energy. The use of oil shale for nonenergy purposes has declined constantly. As of now, approximately 70% of oil shale is used for generating elec-tricity; the rest goes for generating heating energy (a declining share, now less than 4%) and other fuels (mostly shale oil). The share of shale oil is now already 27%. Shale oil is used for generating energy, including heating energy. It is pos-sible to produce motor fuels from shale oil; however, due to some technological limitations, this is not done currently (but plans for the future exist). The majority of the product is exported – the rise in global prices and new technologies has made the production of shale oil profitable. Exports of shale oil have grown con-stantly, but the economic crisis brought down the demand in 2008, with export volumes declining by approximately 25%.

The biggest producer of oil products in the region is Lithuania’s Mazeikiu Nafta, and the company generates substantial imports and exports as well. This com-pany is the reason why the Lithuanian economy is so heavily dominated by the energy industry, and why Lithuania’s energy exports and imports are much bigger

Chart 5. Energy transformation, PJ

0

100

200

300

400

500

600

Gross inland

consumption

Energy

transf ormation

input

Energy

transf ormation

output

Final consumption

Estonia

Latv ia

Lithuania

Source: Swedbank calculations on local statistics

Table 2. Energy industry, PJ

Estonia Latvia Lithuania Total

Gross inland consumption 224.1 203.0 390.0 817.1

Energy transformation input 176.6 79.8 591.0 847.5

Energy transformation output 96.1 68.0 504.4 668.5

ratio to input 54.4% 85.1% 85.3% 78.9%

Is not going for transformation 47.5 123.1 -201.0 -30.4

ratio to incland consumption 21.2% 60.7% -51.5% -3.7%

Own use of energy sector 8.7 3.1 38.4 50.2

ratio to transformation output 9.1% 4.6% 7.6% 7.5%

Use as raw material 5.0 na 49.8 54.8

Losses 7.6 7.0 9.9 24.4

ratio to transformation output 7.9% 10.3% 2.0% 3.7%

Final consumption 122.3 181.0 205.3 508.5

ratio to incland consumption 54.6% 89.2% 52.6% 62.2%

Source: Swedbank on national statistics

Page 8: Baltic Energy Report

8 Swedbank Analysis, 18 December 2009

than Estonia’s or Latvia’s. The company was built before Lithuania regained in-dependence, when the supply risks were very small (if nonexistent). The factory would not have been built if current supply problems (crude oil imported over sea) existed at the time.

Heating energy in Estonia is mostly produced from local resources (oil shale, shale oil, peat and peat products, and different types of renewables), but natural gas also plays an important role. Latvia and Lithuania are mostly producing heat-ing energy from natural gas, although local resources are also important.11 The very rapid growth of energy prices in recent years and the lack of substitutes forced many municipalities and energy producers to look for alternatives, particu-larly for replacing natural gas, as the price growth was very sharp. As a result, the use of local resources has grown, but alternative ways have also been introduced (e.g., cogeneration plants, the use of waste, etc.). This development path will continue in the future, as this is also considered more environmentally friendly because it uses more renewable sources. The production of heating energy is in-creasingly accompanied by the production of electricity as well – most of the new plants are coproducing plants (CPPs) now.

The production of heating energy has fluctuated strongly, as demand has fluctu-ated. The two main factors for declining consumption are warmer winters and ris-ing prices, which have forced households to use energy more efficiently. The lat-ter effect is, however, expected to be more pronounced in coming winters as the economic crisis, declining incomes, and state-supported programmes (special EU funding is available) will work toward a more efficient and lower use of energy.

Electricity in Estonia is produced mostly from oil shale; in Latvia, from hydro en-ergy; and, in Lithuania, from nuclear energy. Electricity is also produced in CPPs and renewables (wind, bio energy, waste, etc.) (see also Chart 19, and above).

As the production capacities are distributed unequally in the Baltic region – there is a shortage in Latvia, while overcapacity in Estonia and Lithuania – electricity has always been traded between the countries. Latvia exports electricity at times of high water levels (usually in spring), when Estonia and Lithuania import it, but otherwise Latvia has to import electricity.

11 In statistics, the production and use of heating energy by many households (especially in the countryside, where density is very low) are not reported under production of heating energy; the latter covers only the pro-duction heating energy distributed centrally. Single households use mostly timber, peat, and products thereof, but also fuel oils, electricity (partly), and other sources

Chart 6. Actual heating-degree days, degrees

3500

3750

4000

4250

4500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Lithuania

Latv ia

Estonia

Source: Eurostat

Page 9: Baltic Energy Report

Swedbank Analysis, 18 December 2009 9

The three Baltics are not connected to the pan-EU electricity grid. The connec-tions with Russia and Byelorussia still exist; however as of now has been rather small (Latvia being the most active user)12. The first and only connection with the EU electricity grid is now through the Estlink between Estonia and Finland13.

The use of renewables has different aspects to it – as in overall energy con-sumption and electricity generation. The EU has set an target to produce 21% of electricity used from renewables by 2010. The target for Estonia is 5.1%, for Lithuania, 7%, and for Latvia, 49.3%. As of 2008, Estonia had produced 1.5%, Latvia 36.4%, and Lithuania 4.6% electricity from renewables; the average for the EU was 15.5%. The high level for Latvia is a result of its using hydro energy, which is not much used in Estonia or Lithuania. The EU targets its use of renew-able energy sources in 2020 at 20% of total energy consumption, while Estonia’s target is 25%.

The attainment of the 2010 target for Estonia is very likely despite the low level in 200814because new, big capacities will be employed in 2009-10. Besides CPPs, wind energy is widely used. In addition, other renewable energy sources will be used (e.g. waste, timber).

In 2008, wind-based electricity-generating capacities in Estonia, Latvia, and Lithuania were 77 MW, 30 MW, and 54 MW, respectively.15 The growth of these capacities in 2009 has been very rapid, and there are plans for further develop-ment. The rapid growth of wind parks is related to state support.16 The building of

12 The connection is also needed for technical reasons the total Baltic network is too small to maintain its stabil-ity for a long period).

13 Estonian Energy has a 39.9% share, Latvenergo, 25%, Lietuvos Energija, 25%, and Finnish Pohjolan Voima and Helsingin Energia, 5.05% each. See also http://www.nordicenergylink.com/. Poland has not been interested in building a connection with Lithuania. Finland has agreed to build a second connection (Estlink2) if Estonia opens its electricity market; hence, this will take place in April 2010 instead of 2013, as planned before.

14 ”Elektrienergia tootmine taastuvatest energiaallikatest 2007-2009. 29.10.09. Majandus- ja Kommunikatsiooniministeerium. Energeetika aruanded ja uuringud.”: The development plan of Estonian energy industry up to 2018 foresees that CPPs using bio fuels and wind generators could produce electricity of more than 800 GWh, or more than 10% of consumption.

15 See www.thewindpower.net

16 The support scheme, introduced in May 2007, includes both purchase obligation and support for selling elec-tricity. As of now, the limits on those who can get the support have been removed, and there are plans to in-crease the annual maximum limit to 600 MWh. As of 2008, Estonia subsidized production electricity by 100GWh, Latvia by 180 GWh, and Lithuania by 287 GWh; this includes subsidies for windmills in Estonia of 100GWh, in Latvia of 58 GWh, and in Lithuania of 130 GWh.

Chart 7. Exports and imports of electricity in Estonia, MJ

0

2000

4000

6000

8000

10000

12000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Balance

Imports

Exports

Source: ESA

Page 10: Baltic Energy Report

10 Swedbank Analysis, 18 December 2009

wind parks requires that compensation plants be built to stabilize the uneven pro-duction of electricity by wind energy. It is considered that plants based on natural gas are the most efficient for this purpose because they are the most flexible. However, there is a possibility of using other energy resources as well for this purpose (e.g., timber and peat based). However, the building of compensation (and reserve) capacities makes wind energy much more expensive, and, in the case of natural gas, it also increases the import dependence on one supplier (see above about the related risks).

Energy consumption Energy intensity has been constantly declining in all three countries, but Estonia is still one of the most energy intensive countries in the EU, tied for 3rdplace with the Czech Republic.17 Latvia and Lithuania are not far behind Estonia (see Chart 8 and 9). There are several reasons behind the high energy intensity in all three countries:

1. The heating period is relatively long – in Europe, the only longer heating periods than Estonia are in Finland, Sweden, Norway, and Iceland (see also Chart 6).

2. The large share of energy-intensive production in the economic structure. Although the share of such production has fallen, low prices (see Appen-dix 2) have not encouraged this change. As energy prices are rising rap-idly, we expect that the energy intensity of the economy will decline as energy-intensive production shrinks and disappears as becoming less competitive, but also the use of energy becomes more efficient.

3. Energy use is inefficient, partly because of the nonrational location of pro-duction (the very high level of transport cost and poor logistics). This is mostly an inheritance from the previous economic system (i.e., from the years before 1990), which can be seen also in other Central and Eastern European countries. The most striking fact is that important and big indus-tries are dependent on imported energy resources, including from one supplier. In the Baltic countries, those companies and industries that are importing and using extensively natural gas are most open to the related risks (e.g., the chemical industry in Estonia and Lithuania, and metalwork-ing in Latvia. This means that, if companies will not change their produc-tion or technology, they will become more and more uncompetitive due to rising energy prices (and the high use of energy).

4. Although companies have constantly modernized the production process, the use of old technology of wealthier countries, or cheaper, but more en-ergy consuming, technology has been rather widespread. There are many reasons behind such choices, but prices are among the most important: cheaper equipment, low environmental and energy taxes, and cheap en-ergy in the Baltic countries. As the price and cost factors will gradually cease to exist (actually, this change might be very rapid for some busi-nesses) the use of old energy-consuming technologies has to end, or companies will lose their competitiveness.

5. Although losses have declined, they are still relatively big in both con-sumption and production. The level of losses in Latvia was 3.9% of total

17 In 2006 Estonia was in 4th place; in 2007, 3rd; there are no data yet for 2008, but data from Estonian Statistics show a decline in energy intensity.

Page 11: Baltic Energy Report

Swedbank Analysis, 18 December 2009 11

energy resources in 2007 (and 3.4% in 2008, second only to Romania’s 4.2%). Estonia’s respective figure in 2007 was 3.5% (for 4th place, and .3% in 2008), while Lithuania’s was 2.8% (for 6th place, and 2.5% in 2008).

6. The extensive use of low-effective energy resources.

7. The share of energy industry in the economy (the oil shale industry in Es-tonia, and Mazeikiu Nafta in Lithuania) is very large. Latvia’s relatively low energy intensity is a result of its high dependence on imports. If measured by the final consumption of energy, then Latvia is the most energy-consuming country (energy consumption vs. household consumption spending) among the three.

Energy intensity has been constantly falling in all three countries, as mentioned above and taking into account current and future developments (price growth, the decline in energy supply, restructuring of the economy, etc.), we foresee that this process will continue. However, one cannot expect that changes to the industrial structure will be rapid. However, the more efficient use of energy could be a very rapid process, which would mostly be triggered by rising prices.

Households

Households’ energy consumption depends on the wealth and geographical loca-tion of the country: wealthier countries are using more energy, while those coun-tries located in the south use less energy. The positions of Estonia, Latvia and Lithuania in the EU are therefore logical, as they are relatively poor (which damp-ens use), but their required energy use is high (which increases use). The posi-

Chart 8. Gross inland consumption of energy in EU per GDP (2007, 2008)

0 5 10 15 20 25 30

IrelandDenmark

UKItaly

LuxembourgAustria

SpainGermany

FranceEU

GreeceNetherlands

SwedenPortugalCy prus

BelgiaMalta

Latv ia 08Finland

Slov eniaLatv ia

HungaryLithuania 08

PolandLithuaniaRomaniaSlov akia

Estonia 08Czech Rep

EstoniaBulgaria

Source: Eurostat, national statistics, Swedbank calculations

Chart 9. Final consumption of energy to GDP in EU (2007, 2008)

0 5 10 15

DenmarkIreland

UKMalta

FranceItaly

GermanyNetherland

EUSpain

GreeceAustria

SwedenBelgia

PortugalLuxembour

Cy prusSlov enia

Finland

Lith. 08HungaryLithuania

Estonia 08Latv ia 08Slov akiaEstonia

Romania

PolandCzech Rep

Latv iaBulgaria

Source: Eurostat, national statistics, Swedbank calculations

Page 12: Baltic Energy Report

12 Swedbank Analysis, 18 December 2009

tions of the three countries are also logical in light of their geographical location and differences in wealth level.

The differences in energy consumption among the three countries are relatively small; however, the Latvian people use less electricity and central heating, while Estonians use natural gas rather modestly. The use of motor fuels and solid fuels (mostly timber) is approximately the same in all three countries--4.1% and 9.6% of total energy consumption, respectively.

The changes in energy use can be seen in the example of Estonia. The share of energy products in the Estonian consumer basket were falling until 2008,18 but rapid price growth and the deterioration of the economic situation caused the share to rise to 14.6% in 2008. The strongest growth of shares was witnessed in heating energy (from 3.4% in 2007 to 4.4%) but consumption of motor fuels and oils also rose (from 5.6% in 2007 to 5.7%). In 2009, two opposite factors have af-fected the energy consumption of households. On the one hand, the deepening of the general economic problems has forced households to diminish their spend-ing, and to limit it more and more to necessary goods and services. Hence, the share of spending on energy should grow because it is for the most part neces-

18 We use the consumer price index (CPI) consumer basket, as there is no other source available. The CPI bas-ket reflects consumption structure in the previous year.

Chart 10. Household energy consumption in 2007

0

1

2

3

4

5

6

Mal

ta

Bul

g

Por

t

Rom

Spa

in

Cyp

r

Slo

vak

ia

Lith

Ital

y

Gre

ece

Pol

and

Slo

ven

ia

Hun

gary

Ne

the

rl

Cze

ch R EU

Lat

via

Fra

nce

UK

Irel

and

Es

toni

a

Ger

man

y

Sw

ede

n

Au

stri

a

Bel

gium

Den

mar

k

Fin

lan

d

Lux

emb

to consumer consumption per capitaSource: Eurostat, Swedbank calculations

Chart 11. Share of energy products in HICP in 2008

0

30

60

90

120

150

180

Mal

ta

Fin

land

Gre

ece

Ital

y

Aus

tria

UK

Fra

nce

Irel

and

EU

Net

herl

Den

mar

k

Sp

ain

Bel

gium

Por

tuga

l

Lux

em

b

Sw

ede

n

Slo

veni

a

Latv

ia

Ger

man

y

Cyp

rus

Lith

uani

a

Est

oni

a

Pol

and

Bul

garia

Cze

ch

R

Hun

gar

y

Slo

vaki

a

Rom

ani

a

electricity nat.gas liq.f uels

non-liq.f uels heating motor f uels etc Source: Eurostat

Page 13: Baltic Energy Report

Swedbank Analysis, 18 December 2009 13

sary spending (heating and partly transport). On the other hand, prices fell in the first half of 2009.

Chart 12. Retail trade volumes of motor fuels in Baltic countries, 2005=100

80

100

120

140

160

2004 2005 2006 2007 2008 2009

Estonia

Latv ia

Lithuania

Source: Eurostat

Chart 13. Chare of energy products in Estonian CPI basket

0%

3%

6%

9%

12%

15%

18%

2004 2005 2006 2007 2008 2009

motor f uels and oils

heating energy

stov e heating

heating oil

nat.gas

electricity

Source: ESA

Chart 13b. Share of energy products in Latvian CPI basket

0%

3%

6%

9%

12%

15%

2004 2005 2006 2007 2008 2009

solid f uel

motor f uel

heating

gas ov erall

nat.gas

electricity

Source: Latv ian Statistics

Page 14: Baltic Energy Report

14 Swedbank Analysis, 18 December 2009

Industry

The energy intensity of industry (manufacturing) is partly dependent on used technology, but economic structure plays the most important role. Most of the so-called new EU members have problems related to inefficient economic structure with regard to energy use. This is because energy-intensive production was placed in the past (i.e., prior to the 1990s) in areas where there was a need to import energy (i.e., transport and risk factors were not considered). As long as prices remained low, it was possible to continue such production. But when en-ergy prices rise, such production becomes less and less competitive and will gradually cease to exist.19 The adjustment process is taking place in the three Baltic countries as well, and it has not yet ended; moreover, it is possible that the biggest part of it has yet to take place.20 Of course, there are other aspects that determine the location of production besides energy accessibility and price, e.g., access to raw materials, transport, and consumers.

Some industries are more energy intensive than others (e.g., chemical industry, the production of several building materials, metalworking, timber and paper in-dustry vs. services). Hence, it is natural that, even with the best technology, some countries will have more energy-intensive industry (economy) than others will.

In 2008, the share of manufacturing in the final consumption of energy in Estonia was 21.9%; in Latvia, 15.5%; and, in Lithuania, 18.8% The average consumption of energy in manufacturing was relatively low in the EU (7.15 TJ per millions of euros of produced value added in 2007), and the lowest levels were reported not only in the biggest economies (Germany, Italy, and France), but also in Malta and Ireland.21 High value-added production in machinery and the equipment industry is the reason, which lowers the overall intensity of energy consumption in the in-dustry.

19 It is possible to support such a production, and this has been done due to social reasons. Until other produc-tion costs are sufficiently low, the more expensive energy (transport) will not affect production negatively. But as in the common economic zone one can expect convergence to take place, such an irrationally located produc-tion will finally become bankrupt as it is more costly and, hence, less competitive.

20 However, one should not forget that the current economic crisis has forced companies to concentrate heavily on cost efficiency; hence, it is quite possible that on the company level the adjustment has now neared its end. Hence, there remain only issues that are not related to particular energy consumption ways (e.g., technology issues and logistics).

21 As there are no data in Eurostat on value added produced in 2007 in Bulgaria, Spain, Portugal, the UK, and Denmark, we were not able to make the respective calculations.

Chart 14. Price level of main energy products in Estonian CPI (Jan 2004=1)

1.0

1.5

2.0

2.5

3.0

2004 2005 2006 2007 2008 2009

CPI

electricity

nat.gas

stov e heating

heating energy

motor f uels and oils

Page 15: Baltic Energy Report

Swedbank Analysis, 18 December 2009 15

The energy intensity of industry in Lithuania was relatively low in 2007 and com-parable with the Swedish level; Estonia’s was comparable with levels in Luxem-bourg and the Czech Republic, while Latvia’s was comparable with Poland’s (see Chart 17). Taking into account that Latvia has rather few own energy recourses, it is surprising that Latvian industry is so energy intensive. It is quite possible that this is the consequence of the old economic structure, which used imported en-ergy. For example, the metalworking industry in Latvia is somewhat energy con-suming, while the Estonian and Lithuanian metalworking industries are substan-tially less energy intensive. The chemical industry is a big energy user in Estonia

Chart 15. Energy use in industry, shares of total

0% 5% 10% 15% 20% 25% 30%

metal industry

chemical industry

building materials

machinery , transport v ehicles

f ood industry

paper-& pulp industry

wood processing

other

Lithuania

Estonia

Latv ia

Source: Swedbank calculations on local statistics

Chart 16. Final consumption of energy, PJ

0

50

100

150

200

250

Estonia Latv ia Lithuania

other

electricity

heating

timber etc

nat.gas

coal, oil shale

oil products

Source: national statistics

Chart 17. Energy consumption in industry per value added produced, 2007

0

3

6

9

12

15

18

Ma

lta

Irel

and

Ge

rma

ny

Ital

y

Fra

nce EU

Aus

tria

Hun

gary

Net

her

l

Gre

ece

Sw

eden

Lith

uani

a

Slo

ven

ia

Bel

gium

Est

oni

a

Lux

emb

Cze

ch R

Cyp

ros

Latv

ia

Pol

and

Fin

land

Ro

ma

nia

Slo

vak

ia

Source: Eurostat, Swedbank calculations

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16 Swedbank Analysis, 18 December 2009

and Lithuania, while the Latvian chemical industry plays a smaller, albeit still im-portant role among energy consumers (chemical industries are using mostly natural gas). Estonia is using a lot of energy in the paper and pulp industry, while in Lithuania the timber-processing industry is small and, hence, also a small en-ergy consumer.

Transport sector

The transport sector is not a big energy consumer: according to 2008 data, it ac-counts for 0.9% in Lithuania, 1.2% in Estonia, and 2.1% in Latvia of total final en-ergy consumption. However, the transport sector itself depends heavily on en-ergy (fuels), and its importance in the economy is far bigger than the figures sug-gest. Most of the energy in the transport sector is used by road transport. It is natural that the transport sector uses mostly oil-based motor fuels, although in Latvia and Lithuania natural gas and bio fuels are used as well (but not in Esto-nia).

The transport sectors in the three countries are relatively energy intensive, albeit far less energy intensive than EU’s top users, Cyprus, Luxembourg, Poland, and Slovenia.. Of the three, Latvia has the most energy-intensive transport sector, and Lithuania the least intensive.

The rise in prices forces the transport sector to work on making more efficient use of energy. It does not mean only that more effective engines will be used but, more important, that the logistics and work organisation should be improved (e.g., trips without load, and the location of warehouses and production). The global economic decline means that, at least in 2009, we can forecast a decline in en-ergy consumption in the transport sector. Growth will most likely not be seen until 2011 or in the 2nd half of 2010 at best.

The energy intensity of the transport sector is also affected by the structure of the transport sector and the use of public transport. In the three Baltic countries, road transport is more widespread than other means of transport, but it is the most en-ergy-intensive transport sector. The reason behind such a widespread use of road transport lies mainly in the shortage of other means (railways, waterways). The low use of public transport is a result of several factors ranging from low density, which makes public transport costly and hard to organize, to poor coop-eration between municipalities and legal shortcomings.

Chart 18. Energy consumption in Estonian transport sector (TJ/transport sales th EEK)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Total railway road marine air

Source: Swedbank calculations, ESA data

Page 17: Baltic Energy Report

Swedbank Analysis, 18 December 2009 17

Future developments in energy production and consumption Energy consumption in the three Baltic countries declined in 2008-2009, and it is highly probable that the decline will continue in 2010 as well, due to the deep economic crisis. The causes of this crisis are not the theme of our current report, but we are of the opinion that the developments in the (global) energy sector made things worse and that they will continue to negatively affect economic de-velopments in the region. For example, the rapid price growth in 2007 and espe-cially in the 1st half of 2008 caused several big companies to lose some of their competitiveness and diminished households’ consumption possibilities. With re-spect to the latter, it should also be noted that the increase of heating costs dur-ing winter is one major reason why households are now holding back on their spending and building up precautionary savings.22 Big changes like the closure of the Ignalina nuclear power station (NPS) and the development of renewable en-ergy, which will raise energy prices, will take place when the three economies are in the very situation that will compel them to make big and painful adjustments. The fact that several changes are taking place at the same time clearly are mak-ing things worse, compared with a situation in which those changes would take place separately.

As local energy supply will diminish and prices rise, the recovery of economic growth will be more difficult, and for some industries and enterprises this could be the final bell. However, this difficult time may also encourage companies and households to make changes (especially regarding energy efficiency) that proba-bly would not be so attractive if the general economic situation were to remain as it had been in 2007 or even in 2008. It might be that a very heavy cost burden may force the countries to make changes that will build up strong long-term ad-vantages for local economies (structural changes in production and consump-tion).

Closure of Ignalina NPS and its impact The biggest change is the closure of the Ignalina NPS.23 This closure means that Lithuania’s electricity consumption will be not covered by its own production (there will be shortages at peak times), Latvia will have fewer possibilities to im-port, and only Estonia could benefit, from increased export possibilities. However, as Estonia is about to close a substantial share of its production capacities24 and due to a shortage of CO2 emission quotas, there is a great need to build up new capacities, including renewables, in the Baltic countries and to import electricity.

22 Improved consumer confidence has not yet translated into consumption, and retail sales continue to fall.

23 The reasons for the closure are, first of all, political (Lithuania agreed to it as part of its EU accession agree-ment). The environmental and safety considerations have been criticized on several occasions as being too ex-cessive and ungrounded. The closure of the Ignalina NPS was pushed through at a time when nuclear energy was very unpopular, while now opinions have changed (but not the agreement on the Ignalina NPS). It is as-sumed that after the closure Lithuania will cover one-third of its electricity consumption from the production of Lietuvos electrine (a gas-based plant), about 4% from hydro and wind energy, some 12.5% from CPPs, and about 35% from imports..

24 According to Elering (the Estonian grid company), during 2008-10 393 MW of old capacities will be closed (and new capacities added of 80 MW); during 2010-16, capacities of 972 MW will be closed (with new capaci-ties 104-144 MW added). Capacities may increase in wind energy generation up to 444-3586 MW until 2013; however, this increase will be limited because of the shortage of compensative capacities. According to the same source, the shortage of electrical energy will appear at the latest by 2016, but maybe as early as 2011.

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18 Swedbank Analysis, 18 December 2009

The shortage of capacity has to be covered with electricity imports, at least in the short and medium term. There will be no problems in the summer, but in win-ter and in the event of an improvement in the economic situation (approximately in 2015-16) there will not be enough capacity in the Baltic countries to cover their electricity needs. It is possible to import electricity from Russia, and Belorussia, and Finland (i.e., from the Nordic countries). Estlink has a capacity of 350 MW, and Russian connections can provide up to 2700 MW.25 However, none of the three countries is wants to be so heavily dependent on imported electricity. In a worst-case scenario in which weather conditions worsen and capacity shortages occur at the same time, these connections might not be enough to cover de-mand. In the next three-six years, Estonia is the only country that can produce the electricity it needs and export it also to Latvia and Lithuania.

There is an urgent need to build more connections, with other countries of EU, which would diminish the risks and affect both the consumption and price of elec-tricity. As of now, there are plans to build following connections: Estlink2 (650 MW), Lithuania-Poland and Lithuania-Sweden (both 1000 MW). The earliest time for new connection seems to be 2013 (Estlink2).

The increase in electricity imports will be accompanied by the opening of an electricity market in 2010 (Lithuania at the beginning of the year,26 and Estonia in April27). The Latvian electricity market is already open.28 The opening of the market means that companies with more consumption than certain amount of electricity will start to buy electricity from the free market (will lose access to the electricity sold by regulated prices). The opening of the market includes some limits. For example, exports and imports in Lithuania will remain the monopoly of Lietuvos Energija, and there will be import limits to keep local producers working besides their higher price. The limits are mostly motivated by the intention to limit the inflow of cheap Russian electricity, and to prevent Russian producers from

25 At peak demand (in winter) in Baltic countries there is peak time also in Russia and hence the import possibili-ties will decline for Baltic countries. (OÜ Põhivõrk. Eesti elektrisüsteemi tootmisseadmete piisavuse aruanne. Tallinn 2008).

26 This means that about 35% of the market will be opened; imports will be limited.

27 According to the draft law, companies that use more than 2GWh of electricity (approximately 35% of con-sumption) will start to buy electricity from the free market, where the electricity change will be created (as a rule electricity buyers and sellers will participate, and the market price will affect the electricity price sold to custom-ers). Two-party contracts are allowed between producers and consumers.

28 Only two-party contracts are allowed.

Chart 19. Installed capacities of electricity in Baltic countries 31.12.2009, MW

0

1000

2000

3000

4000

5000

Estonia Latv ia Lithuania

Windmills

Hy dro

Hy dro Pump Storage

Nuclear

CHP

Thermal

Source: Eesti Energia

Page 19: Baltic Energy Report

Swedbank Analysis, 18 December 2009 19

overtaking the market with dumping-like prices.29 Due to differences among the three countries in the opening of the markets, there will be no common electricity market in the region in 2010: Lithuania will clearly differ from Estonia and Latvia through its higher price, but differences between Estonia and Latvia will also re-main. It is unlikely that a common electricity market will emerge in the event that situation one of the countries runs a different policy than the others, whether this applies to price regulation, access to the market, or how trading between produc-ers and users is conducted. It is hard to predict when the harmonization will take place, but it will definitely require time (although not a connection with other EU countries).

The opening of markets and the closure of the Ignalina NPS will result in electric-ity price growth, as the local electricity supply will diminish and generally more expensive Nordic electricity will be sold in the Baltics. It is difficult to forecast what the price will be as of now. While households and smaller companies will still buy electricity, the price of which is regulated according to existing rules, the free market prices are very difficult to predict. The price decline that could be ex-pected from the imports of Russian electricity will be avoided due to the limited openness of the market and the limits set on Russian sellers. Taking into account the price dynamics in the Nord Pool, it is likely that the free market price will be somewhat higher in the Baltics than currently; however, there will be periods when the price of electricity will be lower than now.

The potential price increase is limited by the current economic situation, in which demand for electricity (and overall for energy) has strongly fallen. According to Eurostat data, in the first seven months of 2009, electricity consumption in the three countries was 7.9% lower than a year before, including 8.1% less in Latvia, 8.9% in Lithuania, and 6.4% in Estonia. Taking account of the economic outlook for 2010, we expect electricity consumption to fall in 2010 as well (although in Es-tonia slight growth may appear, particularly in the second half of the year). On the assumption that economic growth in 2011-12 will be rather modest compared with 2005-08, we see that the long-term projections on which the energy devel-opment programmes are built are too high and, hence, that the capacity problem the three countries face will be smaller than commonly assumed both previously and often now.

29 The Russian electricity prices are dumping-like as Russia does not apply carbon dioxide quotas, which makes the electricity production there much cheaper.

Chart 20. NordPool prices (1-year futures), euro

25

30

35

40

45

50

Nov .08 Jan.09 Mar.09 May .09 Jul.09 Sep.09

Page 20: Baltic Energy Report

20 Swedbank Analysis, 18 December 2009

The electricity price is also affected by the changes that will take place in carbon dioxide trading in the EU in 2013, when the quotas will become freely tradable. It is highly probable that this will result in higher electricity prices in almost all coun-tries. It is extremely difficult to project now what the price of the quotas will be, but some forecast that the electricity price in the Baltic countries will increase very substantially (e.g., twice as high in Estonia). It might happen that the production of electricity from fossil fuels and particularly from oil shale will be economically unsound,30 if the price of the quotas is too high. The price growth of electricity will have a direct effect on many industries and companies and, hence, on the econ-omy. Of course, high energy-consuming sectors will be affected the most, and we can expect that these companies will have to change their production and tech-nology and increase efficiency, or else close production. Higher energy prices will also affect consumer prices and households. A very rapid rise in prices may slow economic growth rather dramatically: taking into account that the three econo-mies will be on the verge of economic recovery at that time, such an increase could cause another setback to the economy in the worst case. The price growth could be smoothed in two ways: by producing electricity with little need (or with no need) of carbon dioxide quotas and by importing electricity from Russia. Both options are now carefully being studied in all three countries.

Building additional capacities All three countries are interested in building up additional capacities for electricity generation. However, many agreements and regulations concerning environ-mental issues should first be considered, including issues related to carbon diox-ide trading. This means that the countries should focus on finding a way to pro-duce electricity from renewables or in a way that requires fewer carbon dioxide quotas (e.g., from waste, using nuclear energy).

Despite risks related to import resources, both Latvia and Lithuania are develop-ing the generation of electricity from natural gas. For example, a plant is under construction in Latvia with a capacity of 400 MW, and a similar one is being planned. Lithuania is reconstructing an existing plant, and Estonia is planning to build a CPP based on natural gas instead of an outdated plant using oil shale, for peak time and rebalancing purposes.

30 Einari Kisel. Makromajandusliku mõjuga protsessid Eesti energeetikas. Ettekanne Eesti Panga avatud seminaril. Oktoober 2009.

Chart 21. Carbon Dioxide Emission Rights (IPE), euro/ton

5

10

15

20

25

30

35

Apr.05 Jan.06 Oct.06 Jul.07 Apr.08 Jan.09 Oct.09

Source: EcoWin

Page 21: Baltic Energy Report

Swedbank Analysis, 18 December 2009 21

Lithuania is planning to build a new nuclear power station after Ignalina is closed. Unfortunately, the process has been very slow, with several setbacks, and, hence, there is no certainty that the plant will be built. At first there were hopes that the new NPS would be built before the closure of the Ignalina NPS or soon thereafter. Now this target date has shifted into the more distant future. As of now, Latvia, Estonia, and Poland have also agreed to participate in the project, and [ok?] a strategic investor with a majority stake will be involved in the project as well. The possibility of having too small a stake in the project may diminish the interest of the above-mentioned countries in participating in the project; Estonia in particular has expressed a concern that too many participants may diminish the expected benefits to others. The building of a new NPS requires that a connec-tion between Lithuania and Poland be built. The more participants are involved in the building of a new NPS, the bigger its capacity should be (3400 MW is now be-ing considered) and, hence, the more costly and time-consuming the building it-self would be.

In Estonia, other options for the use of nuclear energy have been discussed, in-cluding possible participation in a NPS in Finland or the building of an NPS in Es-tonia. The building of a third nuclear reactor in Olkiluoto (the fifth in Finland) has taken more time than planned; hence, it is unknown when the next one will be built (suggested locations include Olkiluoto and Loviisa). It is also uncertain whether Finnish producers would be interested in this new partnership. The build-ing of Estonia’s own NPS is one potential option, and there have been some preparations made for this (e.g., a study about possible locations, and the starting of geological research on the Pakri peninsula). It is not clear, therefore, whether an NPS will be built in Estonia. However, if it is decided to do so, the NPS most likely will be small and it will be built over the long-term (the so-called 4th genera-tion reactors are targeted).31

Adding renewable resources

There are many possibilities for using renewable energy. In Estonia, wind energy is the most discussed, but timber (and products) and other local resources are used the most in all three countries, particularly in local heating plants, which generally are small. However, bigger plants are now being built or planned, in-cluding CPPs. The use of renewable energy is supported by different initiatives. However, the negative aspect is that the development of the use of renewable energy has brought up many negative side effects, which, in the case of the pro-duction of electricity, is making energy far more expensive or creating problems in other areas (e.g., the environment).

The use of additional hydro energy resources is rather limited in the three coun-tries: only small capacities could be added. The major objection against the use of hydro energy is its negative impact on the natural environment (e.g., on the spawning of salmon and other fish, flooding of forests).

The use of wind energy for generating electricity is the fastest expanding area. It is relatively expensive requiring compensation plants to stabilize the instability of wind energy. Estonian wind energy companies have built no such plants yet. Hence, there is no good understanding among wind park developers (and others) of how expensive the production is and what kind of obstacles the high level of

31 Nuclear energy issues, including the possibility of an Estonian NPS, are discussed, for example, here: www.tuumaenergia.ee

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22 Swedbank Analysis, 18 December 2009

wind energy generation creates.32 It is considered that the most effective com-pensation plants should use natural gas, as the work of the plant must be easily started and stopped. However, this would increase the dependence on imports and related risks.33 Additional wind energy capacities are impossible to use if there are not enough compensation plants; as of now, there is not even a clear understanding of what the limit is for current systems.

The use of wind energy has brought up several negative side effects. Many of them are the result of the irresponsible behaviour of investors and insufficient regulation, as seen in the example of Estonia. There have been many intentions expressed to build the windmills too close to houses (which increases vibration-caused health problems),34 in areas of relatively dense population35 or areas of natural beauty (thereby polluting the landscape). There are also problems directly related to natural protection – the migration paths of birds are also the windiest areas – and defence. The intentions of some (foreign) investors to build big wind parks for electricity exports while allowing all negative the side effects and con-sequences to be borne by local people have not worked well for the development of renewable energy.36

The development of other energy resources has also brought up hot disputes, particularly in the case of CPPs. When bigger CPPs using waste or timber have been opened, accusations about rising prices and shortage of resources have always followed, including that the other big investments using the same re-source will now be unsuccessful. However, quite often (but not always) these ac-cusations are just the reflection of growing or emerging competition. Sometimes, a decline in very large profits is also behind such accusations.

The use of timber and other related products is one area where there is lot of room for growth in the Baltic countries, particularly Estonia and Latvia. The use of residues from the wood and timber industries, which are important industries in the region, would benefit in different way: by diminishing waste, making the in-dustry more profitable, and increasing its competitiveness. However, as men-tioned above, the expansion of such a type of energy generation has also kindled disputes. This is in addition to the accusations that the forest cutting will destroy nature and diminish forests (in fact, the forested areas are growing because the wood industry can use only forests of a certain age, while energy generation is using waste and brushwood).

Bio fuels (here we mean from agricultural sources), which have been used in Latvia and Lithuania, have been far less successful in Estonia, although several plants are being built. There are many reasons behind this, mostly related to the price of raw materials and problems in companies’ management. Globally, there have been pointed to the fact that the increased use of bio fuels was one reason

32 The most striking outcome of this ignorance is that the amount of planned capacities exceeds by several times the maximum of capacities that could be added to existing system (see above).

33 Anto Raukas. Eesti energeetilised valikud. Ettekanne Eesti Panga avatud seminaril. Oktoober 2009.

34 Estonia has a low population density (houses are located sparsely), and, hence, the nonpopulated areas are mostly forest and swamp areas, which are either not suited for the development of wind energy or are natural reserves.

35 For example, one municipality (Lüganuse) would have been covered totally with windmills if all projects had been finalized (http://www.epl.ee/artikkel/402048)

36 For example, the Hiiumaa wind sea park was meant to generate electricity for Sweden, but the related cost to be borne by Estonia and the local population (http://www.epl.ee/artikkel/462117, http://www.kalev.ee/est/hiiu/?news=974773&category=9&Hiiumaa-tuulepargi-elekter-hakkaks-Rootsi-minema)

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Swedbank Analysis, 18 December 2009 23

behind the rapid growth of grain prices in 2007-08, and this could be one factor to be blamed for the increased nutrition problems in the world.

Consequently, there is a need to talk about negative side effects: what the use of renewables might bring, especially if the policy measures are not adequate. Al-though the use of renewable energy is very important for the future, we must still recognize that the economic measures taken to encourage the use of renewable energy have brought many negative side effects. We are of the opinion that the support schemes meant to encourage the use of renewable energy should be considered carefully, and that those methods that have smaller negative side ef-fects should be used. The direct subsidies37 are clearly supporting the use of re-newable energy. However, the excessively high level of them (at least in the case of Estonia) has created a situation of possible overinvestment and, hence, big negative side effects. 38

Taking into account the rise in energy prices, the generation of electricity from wind parks (and other sources) should soon become profitable without subsidies. At the same time the energy produced from fossil fuels will become more expen-sive (carbon dioxide quota trading), which means that the profitability differentials between “old” and “new” energy production will diminish in the future. If the gov-ernment finds that there is still a need to continue the financial support of renew-able energy, then we are of the opinion that other measures should be used (e.g., financial support to guarantee the justified profitability of producers39). It is important that both enterprises and governments work harder more to avoid and reduce the negative side effects, i.e., clear rules should be set to develop energy production in the future.

It is quite probable that a Copenhagen climate agreement could further support the use of renewable energy. Hence, all three countries have to work to increase the generation of renewable energy and reduce pollution.

The biggest problem with the use of renewable energy is, however, that the Baltic countries are not able to cover their energy needs only or mainly from that source (the use of fossil fuels will diminish in distant future also because fossil fuels will become more expensive and be exhausted). One option is to generate nuclear energy. This energy source, the direct effect of which on the environment is mod-est, has low production costs, and high working reliability, albeit the investment costs are very high. The nuclear waste is generally small in amount,40 but its handling in the distant future needs special attention. Of course, there are strong opponents of the use of nuclear energy, and the issues related to nuclear energy should be discussed widely and openly in society. While Lithuania with its exist-ing (but closing) NPS has generally experienced public support for its use of nu-clear energy, Estonians differ in their opinions on the topic.

37 From January 2010 onward, the price that every electricity consumer pays for the support of renewable en-ergy will double in Estonia (from 6 cents to 12 cents per kWh).

38 When the support scheme was created in 2007, the government suggested it should be 84 cents per kWh, but Riigikogu set it at 115 cents. (BNS). It is possible that the lower level would not have guaranteed the fulfil-ment of the target of renewable energy consumption, but it definitely would have caused fewer problems and reduced the opposition to wind energy generated by the very aggressive and irresponsible developers. There are now applications to build wind energy capacities over 4000 MW, but Estonia’s peak time consumption in last winter was only 1888 MW. (Eesti Päevaleht, 3rd Dec., 2009. Erik Müürsepp interview with the manager of Eler-ingi Mr Taavi Veskimägi).

39 I.e., analogous to how the prices of natural monopolies are regulated.

40 A. Raukas.

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24 Swedbank Analysis, 18 December 2009

Factors affecting consumption How much capacity is needed (and how big imports should be) depends most of all on how much energy will be consumed in the future. The expectations in cur-rent energy development plans regarding future energy consumption have clearly been overestimated, taking into account the deep crisis the three countries are in now. The actual need for not only imports and additional capacity, but also calcu-lated profitability of the investment projects, is outdated as of now.

Although there are signs of stabilisation and growth in the global economy, as well in the Baltic countries, the overall long-term outlook remains subdued. The projection of slow economic growth, which will be much lower than in past (at least in the next couple of years), is dominating, but we cannot rule out alterna-tive outcomes.

The estimations of future energy consumption are usually based on the relation between economic growth and energy consumption. However, strong energysav-ing considerations (driven by prices and supply) are weakening this relation. There are other aspects to take into account (the following takes into account the specifics of the Baltic countries).

Oil shale-based electricity generation will decline future as carbon dioxide trad-ing will make this type of production substantially more expensive than now, and cheaper imported electricity will mean that oil shale-based electricity will be gen-erated only at the time of peak consumption and in case of emergency (e.g., supply cuts with Finland). The gradual shutting down and renovating of produc-tion is already taking place, and, in a 10-year perspective, the generation of oil shale-based electricity will be substantially smaller.

The production of shale oil seems to have good prospects as of now, especially taking into account that prices of oil products will continue to grow in the future. Assuming increasing investments in the sector, we forecast that production and exports will grow, and it might be that in the long term the Baltic countries will use motor fuels produced from oil shale.

Although energy generation from natural gas is relatively environmentally friendly, we expect that after strengthening its position in the next few years in the Baltic countries, it will lose its position in the long term. There are several reasons for this (supply security, supply amounts, price, import risks, and wish to diminish import dependence). The connection for using natural gas provided by other pro-ducers (i.e. other than Russian) would increase the use of natural gas.

The production technologies are a very important factor, to which all Baltic en-ergy producers are paying attention as they try to produce more cheaply and more effectively while also reducing waste. For example, the new Estonian En-ergy generators in Narva will use a new technology, and Lithuania will use new generators to reduce the use of natural gas and the price of electricity.

Industries, which are highly dependent on imported energy, will try to lessen that dependency. This means that more effort will be made to use more effective and less energy-consuming technology, but it will also cause the energy-intensive sectors to lose ground in the Baltic countries.

Energy intensity will also diminish because of faster price growth. If the most pessimistic projections about electricity (but also all energy) prices prove correct, we could already see in 2013 substantial changes in the economies of the three

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Swedbank Analysis, 18 December 2009 25

countries, as many products will cease production, and companies will close due to much higher energy prices.

Households will continue to make big efforts to diminish the use of heating en-ergy (and electricity). The rising prices and state support schemes (e.g., loans, guarantees, and direct support for increasing the energy efficiency of housing) should hasten the process significantly.41 It is quite likely that dependence on one (imported) energy resource would be reduced and cheaper ways used more. However, one should take care that negative side effects do not emerge (e.g., cheap energy resources may pollute the air more; many smaller heating plants might increase pollution).

Energy consumption will decline in 2009-10, and maybe even into the beginning of 2011, due to the economic crisis – production is substantially lower and low incomes are forcing households, municipalities, and companies to use energy more efficiently. Although the resumption of economic growth might also bring higher energy consumption, we cannot rule out the possibility that the substantial changes in energy consumption habits will take place, especially taking into ac-count the rise in energy prices.

Energy price

The price is the most important factor affecting the production and consumption of energy. The global price decline in the second half of 2008 was a short term albeit very deep response to the break-up the crisis, which ended immediately af-ter consumer and business confidence stabilized and recovered. However, a fur-ther price rise has been limited by weak demand and generally weak economic developments. Still, the pressure for further growth is strong. There is a strong long-term underlying process of diminishing resources and growing population and wealth, such that demand will be generated while supply is about to diminish. At the same time, the conditions exist for building up a new price bubble of natu-ral resources as investors are looking for good investment opportunities, which are scarce in the current economic situation.42 One should, however, not forget that the rapid price growth in recent years and problems with supply have made consumers cautious; they are looking almost everywhere for alternative sources and suppliers,43 and efficient energy use has become an area of rather strong growth (supporting also businesses that are tackling the issue).

41 The positive side effects would be the growth of construction and investments, which in the current economic situation is important also from a social and general economic standpoint.

42 If the major economies do not succeed in reducing the money supply in a timely fashion, the chance that such a price bubble will emerge is big.

43 For example, the EU has substantially intensified its in building up connections with other than Russian sup-pliers, and supply routes.

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26 Swedbank Analysis, 18 December 2009

Several factors that will affect energy prices in the Baltic countries have been mentioned above – the misbalance between supply and demand, the opening of markets, carbon dioxide trading, more expensive ways of producing energy. In addition, however, the tax policy should be considered. In the last couple of years, fuel excises have been increased several times, excises on electricity and natural gas have been introduced, and environmental taxes have been in-creased.44 There is no reason to expect that the currently known tax increases will be the last ones. In fact, there are several reasons to expect the opposite as being inline with environmentally friendly policies and there is need to increase budget revenues. For one thing, some tax rates are relatively low in the Baltic countries (i.e., in monetary terms, although high compared with incomes) and do not cover all the negative side effects caused by energy production or consump-tion. For another, taxes, especially excises, are not always easy to collect, and if the shadow economy flourishes, the tax increase will not necessarily bring better revenues (compare the situation in Estonia and Latvia after tax increases in 2009). If taxes are not collected, their impact on energy consumption remains poor.

Estimation of energy demand

We analysed the factors that are most likely affecting energy consumption: wealth (as real GDP per capita), economic growth, household consumption growth, climate (heating degree-days) and prices (growth of housing costs in the CPI basket).45 We used annual data for 1996-2008 in Estonia and looked for a connection between growth rates. Although we did not analyse the factors affect-ing fuel consumption due to data shortages, we did analyse the consumption of electricity and heating energy. Taking into account the similarities among the three countries (particularly in consumption structure), the conclusions reached with respect to Estonia should apply also to Latvia and Lithuania.

As expected, wealth level has a positive impact on energy consumption, but this effect worked through enterprise energy consumption. Household consumption of energy seemed not to be dependent on general wealth at first. The analysis, however, revealed that the crisis years (1999 and 2008 in our sample), were

44 For example, in 2010, Estonia will increase electricity and fuel excises and Latvia will introduce excises on the natural gas used to generate heat.

45 Other possible prices (e.g., global prices) did not have an impact or data about them were not available for a long enough period of time.

Chart 22.Oil price (Brent, USD) and stock markets (NYSE)

3000

4000

5000

6000

7000

8000

2004 2005 2006 2007 2008 2009

0

20

40

60

80

100

120

140

160

NYSE index (ls)

Brent, USD (rs)

Source: Reuters EcoWin

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Swedbank Analysis, 18 December 2009 27

blamed for this outcome– households just cannot cut their energy consumption below a certain level (because of the need for heating and lighting in winter).

Energy consumption is more affected by household consumption than by eco-nomic growth. The only exception was enterprise electricity consumption, which was more dependent on economic growth, as enterprises are working not only for domestic, but also for external markets (including services, which use electricity extensively). However, household electricity consumption is not dependent on household consumption, as, just as with heating, there is a minimal consumption limit.

As expected, temperature is very important and direct factor in determining en-ergy consumption; it works mostly through heating energy. Electricity consump-tion is affected rather modestly, as lighting hours affect it more (but we did not manage to get data to reflect this factor), and the use of electricity for heating purposes has declined constantly.

The most surprising result of our analysis was that prices affected energy con-sumption rather modestly: the only strong connection was seen with heating con-sumption in the overall economy. It is highly probable that there is a certain mini-mum level of consumption, below which households, in particular, cannot go. , Hence, the price increase will not affect consumption much. It is also probable that other factors have affected consumption more, as until 2008 energy prices were generally quite low and most energy consumers were able swiftly to adjust to growing prices and cut the dependence of production on energy (this applies mostly to companies). Our analysis has suggested that increases in electricity tariffs in the past had only a short-term (up to two quarters) effect on enterprise finances, which means that price increases have changed energy consumption, but only in a minimal way; this also suggests that cost growth has been avoided with cuts in other areas (this, of course, points to a highly inefficient organisation of production in past). Further energy price increases will most likely have a more direct impact on energy consumption, taking into account that companies have cut costs very extensively during the last two years, and that most of them claim that there is no possibility of making further adjustments.

Our estimates suggest that energy consumption in Estonia in 2010 will fall ap-proximately to the level of 2000 (i.e., more than the fall in economic growth, which will be on the level of 2004), and then start to grow again, reaching the 2005-06 level in 2016 (we assumed that climate conditions will be the same as in 2008). Final consumption of electricity will fall by 8.5% in 2010 compared with 2008 (i.e., to the level of 2006) and will then start to increase again. Our forecast estima-tions suggested that consumption growth after 2011 would be stronger than in the past, as our calculations did not include the price factor, which, however, will have a decisive impact on energy consumption in the next few years.

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28 Swedbank Analysis, 18 December 2009

Conclusions The three Baltic countries – Estonia, Latvia, and Lithuania – differ distinctively from other EU countries in regard of energy production and consumption, while displaying some similarities with other Central and Eastern European countries. The biggest difference is the detachment of their electricity grid and total depend-ence on Russian natural gas supplies. All three countries have been amongst the most energy inefficient in the EU, as price levels are relatively low, and the coun-tries are paying the cost of the inefficient decision making of the Soviet-time economy.

The three countries have differences in their energy systems regarding produc-tion and consumption. Although it seems that different policies are applied, a strong undercurrent should make the future development of their energy systems similar. The closure of the Ignalina NPS, and the opening of markets and carbon dioxide trading will affect all three countries and cause substantial changes in their energy systems in the next 5-10 years. Not only the decline in the use of fossil fuels and the increase of renewables, but also stronger connections with other EU countries are expected. Hence, the energy industry will see strong changes in the next decade: renewable use (wind, timber, etc.) will increase, while oil shale will become the energy resource for emergency electricity genera-tion and shale oil production. Nuclear energy generation will end in 2009, but in the more distant future, a new plant might be built in Lithuania (less likely in Esto-nia). The connections with other EU countries will tighten and energy related risks will decline.

We expect prices of electricity and heating energy to rise in the next few years as demand grows while supply diminishes substantially (other energy prices are about to grow as well). This will have both a negative and positive impact on en-ergy use and the economy. While encouraging a more efficient use of energy and, hence, reducing the dependency on imports and the environmental impact, it will also force companies to make substantial changes, which most likely will bring about structural changes in the economy. The latter are never without (short-term) negative consequences-- e.g., unemployment growth. We foresee a decline in energy-intensive production and closure of industries (sectors) highly dependent on (imported) energy, although some companies may be able to make technology and product changes and survive. It is hard to identify which indus-tries are more threatened, but the chemical and metalworking industries might see the biggest changes.

Energy policies should be changed and direct subsidies replaced with better regulation, thereby supporting renewables without causing negative side effects. It would be beneficial to harmonize energy-related legislation and systems in the region to create a bigger and stronger independent energy system instead of the fractionalized and in some cases highly import dependent (on Russia) system that exists now. A strong mix of different energy resources would reduce the en-ergy-related risks in the region.

The current economic crisis, while making the changes more painful, is also en-couraging that changes be made, especially substantive ones, which in the long-run may provide the Baltic companies and economies with a stronger competitive position.

Maris Lauri

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Appendix 1. Glossary Actual heating-degree days express the severity of the cold in a specific time period taking into consideration outdoor temperature and room temperature. Heating threshold is considered to be 15 degrees C. the data are calculated on a daily basis, added up to a calendar month and a year.

CPP (co-producing plants) or CHPP (combined heat and power plants) are plants that produce both heating energy and electricity at the same time.

Energy dependency or imports dependency – energy dependency shows the ex-tent to which a country relies upon imports in order to meet its energy needs. It is calcu-lated by dividing net imports with gross inland consumption + marine bunkering. A net import is imports less exports.

Energy intensity – shows how much energy is used for producing value added. It is calculated by dividing GDP with by gross inland consumption of energy. GDP is meas-ured in constant prices, in the EU in euros; gross inland consumption is measured in kgoe (kilogram of oil equivalent)

Final energy consumption – energy finally consumed in the transport, industrial, commercial, agricultural, public and household sectors (in the economy), without con-sumption of energy in the energy transformation process, energy consumption of energy sector and losses.

Gross inland consumption (also Supply of primary energy) – quantity of energy consumed within the borders of a country. It includes primary production, recovered products, imports, stock changes less exports and supply to marine bunkers (to sea-going ships).

Kgoe – kilogram of oil equivalent

Marine bunkering – supply of energy to seagoing ships

Primary energy production – extraction of energy from natural source (hard coal, lignite, crude oil, natural gas, nuclear heat, hydropower, wind energy, solar photovoltaic energy, geothermal energy, biomass, wastes).

Renewable energy includes hydro energy, biomass, wind, solar, tidal and geothermal energy.

Transformation of energy is a process in which primary energy resources are trans-formed into other types of energy (heating, electricity, fuels etc).

Short energy balance:

1. Primary energy resources 2. Recovered products 3. Imports 4. Exports 5. Stock changes 6. Marine bunkers 7. Gross inland consumption = 1+2 +(3-4)+5-6 8. Transformation process: (a-b)

a. Transformation input

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30 Swedbank Analysis, 18 December 2009

b. Transformation output 9. Energy sector own use 10. Losses 11. Non-processed energy resources (is not usually listed in the tables) 12. Final consumption = 8b + 11 = 7 – 8 – 9 – 10

a. Industry b. Agriculture c. Transport d. Households e. Etc

Energy balances are usually annual tables, which also show different type of energy re-sources (e.g. gasoline, timber, peat, etc) and consumption (electricity, heating, fuels). Sometimes separate balances are made for heating and electricity.

There are some country-specific differences in energy balances if made by national statis-tical institutions (e.g. in row names, level of aggregation etc). Sometimes there is row in-dicating non-energy use of energy resources (e.g. as input in chemical industry).

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Appendix 2. Prices of electricity and natural gas for European consumers

Chart 1. Natural gas price for households w ith consumption 20-200 KJ in 1H 09, euro/GJ

0

5

10

15

20

25

30

Rom

ania

Po

land

Es

toni

a

Lith

uan

ia

UK

Hun

gary

Slo

vak

ia

Bul

garia

Cze

ch R

Latv

ia

Fra

nce

Por

tuga

l

Bel

gium

Spa

in

Ire

land

Ger

man

y

Au

stria

Slo

ven

ia

Ital

y

Ne

the

rland

Sw

ede

n

Den

mar

k

w/o taxes taxesSource: Eurostat

Chart 3. Electricity price for households in 1H 09, euro/kWh

0.0 0.1 0.2 0.3 0.4 0.5

BulgariaEstonia

RomaniaLithuania

GreeceLatv ia

Cy prusMalta

HungaryPoland

UKFrance

Slov akiaEU

FinlandNetherlaSwedenBelgium

Slov eniaLuxemboCzech R

AustriaDenmark

ItalySpain

PortugalGermany

Ireland

w/o taxes taxes Source: Eurostat

Chart 4. Electricity price for industrial user (<20 MWh) 1H 09, euro/kWh

0.00 0.10 0.20 0.30

BulgariaEstoniaFinlandSweden

RomaniaFrance

LithuaniaHungary

Latv iaUK

PortugalGreecePoland

MaltaCy prusBelgium

EUSpain

Czech RIreland

Slov eniaLuxemboGermanyNetherla

DenmarkSlov akia

Italy

w/o taxes taxes Source: Eurostat

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32 Swedbank Analysis, 18 December 2009

Chart 2. Natural gas price for industrial consumers w ith consumption 10 - 100 tuh GJ in 1H 09, euro/GJ

0

5

10

15

20

25

Rom

ania

Es

ton

ia

Pol

and

UK

Spa

in

Irel

and

Po

rtug

al

Lith

uani

a

Fin

lan

d

Bu

lgar

ia

Bel

gium

Cze

ch R

Hun

gary

Fra

nce

Ital

y

Net

herla

nd

Lat

via

Slo

vaki

a

Sw

ede

n

Ger

man

y

Slo

veni

a

Den

mar

k

w/o taxes taxes Source: Eurostat

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Swedbank Analysis, 18 December 2009 33

Referred sources: 1. Aastaaruanne. Eesti Gaas. 2008 [Annual report of Estonian Gas]

2. Anto Raukas. Eesti energeetilised valikud. Ettekanne Eesti Panga avatud seminaril. Oktoober 2009. [Presentation in open seminar of Eesti Pank: Energetic choices of Estonia]

3. Aruanne elektri- ja gaasiturust ning kaugküttesektorist Eestis 2008. aastal. Konkurentsiamet. Tallinn 2009. [Estonian Competion Board. About elec-tricity and natural gas market, and distant heating sector in Estonia in 2008].

4. Eesti elektrimajanduse arengukava aastani 2018. Majandus- ja kommunikatsiooniministeerium. [Development plan of Estonian electricity market up to 2018.]

5. Einari Kisel. Makromajanduliku mõjuga protsessid Eesti energeetikas. Et-tekanne Eesti Panga avatud seminaril. Oktoober 2009. [Presentation in an open seminar of Eesti Pank: Processes in Estonian Energy sector af-fecting overall economy]

6. Elektrienergia tootmine taastuvatest energiaallikatest 2007-2009. 29.10.09. Majandus- ja Kommunikatsiooniministeerium. Energeetika aru-anded ja uuringud. [Energy production from renewables in 2007-2009. The Estonian Ministry of Economy and Communication]

7. Energiasäästu sihtprogramm 2007-2013. Majandus- ja kommunikatsiooniministeerium. [Target plan of energy saving in 2007-13]

8. EU Energy and Transport in Figures. Statistical pocketbook 2009. (http://ec.europa.eu/energy/publications/statistics/statistics_en.htm)

9. OÜ Põhivõrk. Eesti elektrisüsteemi tootmisseadmete piisavuse aruanne. Tallinn 2008 [Report on Estonian electricity generating capacities]

Page 34: Baltic Energy Report

Swedbank Economic Research Department

Sweden

Cecilia Hermansson Chief Economist +46 8 5859 1588 [email protected]

Jörgen kennemar Senior Economist +46 8 5859 1478 jö[email protected]

Magnus Alvesson Senior Economist +46 8 5859 3341 [email protected]

Helena Karlsson Assistent +46 8 5859 1028 [email protected]

Estonia

Maris Lauri Chief Economist +372 6 131 202 [email protected]

Elina Allikalt Senior Economist +372 6 131 989 [email protected]

Annika Paabut Senior Economist +372 6 135 440 [email protected]

Latvia

Mārtiņš Kazāks Chief Economist +371 67 445 859 [email protected]

Dainis Stikuts Senior Economist +371 67 445 844 [email protected]

Lija Strašuna Senior Economist +371 67 445 875 [email protected]

Lithuania

Lina Vrubliauskienė Chief Economist +370 5 268 4275 [email protected]

Ieva Vyšniauskaitė Senior Economist +370 5 268 4156 [email protected]

Disclaimer: This research report has been prepared by economists of Swedbank’s Economic Research Department. The Economic Re-search Department consists of research units in Estonia, Latvia, Lithuania and Sweden, is independent of Swedbank and re-sponsible for preparing reports on global and home market economic developments. The activities of this research department differ from the activities of other departments of Swedbank and therefore the opinions expressed in the reports might differ from opinions expressed by other employees of Swedbank.

This report is based on information available to the public, which is deemed to be reliable, and reflects the economists’ personal and professional opinions of such information. It reflects the economists’ best understanding of the information at the moment the research was prepared and due to change of circumstances such understanding might change accordingly.

This report has been prepared pursuant to the best skills of the economists and with respect to their best knowledge this report is correct and accurate, however neither Swedbank or any enterprise belonging to Swedbank or Swedbanks directors, officers or other employees or affiliates shall be liable for any loss or damage, direct or indirect, based on any flaws or faults within this report.

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