Investment in Renewable Energy in Lithuania and Other Baltic States: Legislative Update

Renewable energy generation projects have been attractive for small to medium scale investments in the Baltic States for the past several years.  The countries are seeking to meet their 2020 energy mix targets and have continuously supported renewable energy generation.  Generous support through feed-in tariffs and comparable structures has been granted to wind power, biomass heating and co-generation plants, solar power, biogas and other renewable energy generation projects.  At the same time, the support schemes and intensity of support has been changing, this way making investment decisions more challenging. 
 
In Lithuania the state policy on renewable energy generation is defined by the National Energy Independence Strategy (the Strategy), approved by the Lithuanian Parliament (Seimas) on 26 June 2012. 
 
The Strategy defines the main objectives of the Lithuanian government in the energy sector in mid and long term perspective.  The Strategy sets national targets for the implementation of strategic initiatives until 2020 and lays down guidelines for the development of Lithuania’s energy sector until 2030 and until 2050.  The principles underlying the Strategy are energy independence, competitiveness and sustainability principles.
 
Increase of the electricity generation capacity from renewable energy sources, mostly in co-generation plants fuelled by biomass and wind energy power plants, is set as one of the principal tasks in power generation.  It is planned that power generation from renewable energy sources will account for at least 20% of the final electricity consumption till 2020.  The Strategy also sets the aim to increase the share of renewable energy sources in the final energy consumption no less than by 23% by the same date. 
 
In the heating sector, which is very important in the region due to the long and often severe cold season of the year, the Strategy stipulates that the state will support initiatives aimed at increasing the use of biomass in heat production.  This initiates important changes as currently the heat supplied in district heating systems in Lithuania is dominated by the fossil fuels, mainly natural gas.  Natural gas is supplied into Lithuania from a single source (Gazprom in Russia).  Monopolistic supply is seen as the cause of gas supply price in Lithuania being one of the highest in Europe.  This is despite the geographical proximity of Lithuania to gas sources in Russia, compared to other European countries (e.g. based on official data, import prices on the German border are smaller than on the Lithuanian border by approximately 30%, although in order to reach Germany transit of additional 1,000 – 2,000 kilometres is required).  This situation is widely seen as great impetus for both the Lithuanian government’s efforts to diversify gas supply routes (the principal of these is the LNG Terminal in Klaipėda, due to be commissioned by the end of 2014), as well as the investment in new heat generation and heat-power co-generation capacities based on biomass, this way significantly reducing the projected consumption of natural gas in the heating sector. 
 
Pursuant to the Strategy, Lithuania is set to encourage economically viable investments into heat production from biomass with priority on co-generation plants fuelled by biomass.  More than 1 TWh of heat is planned to be produced each year in new biomass boilers.  Additionally the Government is planning to support utilisation of waste energy potential, use of solar energy and use of residual heat in district heating area.  According to the optimistic forecasts, in 2020 renewable energy sources in Lithuania will comprise no less than 60% of energy produced for district heating.  This will mainly be reached by unlocking the biomass potential.  Alongside biomass boilers, development of infrastructure for biomass production from wood and straw, logistics and management of flows of wood products will be required to ensure the availability of sufficient biomass resources at competitive prices.
 
Importantly, the Strategy sets competitive and affordable energy price as a principal criterion for decision making in relation to the support schemes for the renewable energy developments.  This has important implications for recent legislative initiatives and the Independent Regulator’s decisions.
 
Following the Strategy the Lithuanian Government passed legislation expanding state support schemes to various renewable energy fields.  In addition, it is expected that the National Development Program on Renewable Energy Sources will provide new support areas for projects like geothermal energy generation projects, usage of solid bio-fuel or biogas in electricity, heat or cooling production, acquisition of equipment that increases the usage of renewable energy sources for own needs in residential and public sectors.
 
Development of the bio-fuel market has also been encouraged.  Amendments to the Law on the Market in Energy Resources create favourable conditions for the development of trade in bio-fuel.  It is expected that in 2016 and later years significant amount of bio-fuel purchased for production of heat and for combined production of heat and electricity will be purchased on the exchange.  This measure will give rise to further competitiveness in usage of bio-fuel, especially in district heating area, and will further encourage investment into heat production from this resource.
 
As a result of the Government’s support, numerous renewable energy projects have been initiated and are now at the stage of development both in electricity and heat production areas.  It was seen by some that the state support for the projects may have been too generous (e.g. some solar or biomass eating projects had an internal rate of return allowing complete repayment of investments within 2-3 years).  This prompted the Government to exercise caution and revisit the support schemes.  Starting from the beginning of 2013, support for solar power developments has been reduced significantly – cutting the support for new commercial projects completely and reducing the feed-in tariff.  Likewise, the targets of tariff support for co-generation heat and power plants were reduced from 355 MW to 105 MW.  These measures are aimed at reducing the public service element of the electricity tariff, which is currently at the level of approximately 20% of the total domestic electricity tariff.  It is likely that the efforts to control the public service element of the tariff will continue in the nearest future.
 
At the same time, Lithuania remains to be one of the highest deficit electricity markets in the EU with approximately 60% of electricity imported from other markets.  This will continue to press the Government to search for solutions.  Unless the Visaginas Nuclear Power Plant is continued promptly, it is likely that the attention and resources may be turned to other areas, including renewable energy, which is said by some to be the most cost- and risk-efficient strategy.
 
“Lithuania and the other Baltic States will remain a favourable market for investments in renewable energy projects, allowing for a reasonable rate of return for investors.  At the same time, it should be expected that the governments will continue their efforts to control the cost of such projects for the market, which may make the very high return projects less common”, comments Vilius Bernatonis, partner of pan-Baltic Energy practice of regional law firm TARK GRUNTE SUTKIENE.
 
Vilius Bernatonis is a head of Baltic Energy practice of regional law firm TARKGRUNTE SUTKIENE.  He is a recognised professional in arbitration and international litigation, a Fellow of the Chartered Institute of Arbitrators, a Member of the Lithuanian Bar Association and International Bar Association.
 
The most influential international legal publications such as The European Legal 500, Chambers Global and others rank Vilius among top lawyers in Lithuania in energy, banking and finance, international litigation, and corporate and commercial matters. 
 
ViliusBernatonis can be contacted by phone on +370 5251 4444 or alternatively via email on vilius.bernatonis@tgslegal.com
 
Jelena Piatina is an Associate in the Energy practice of TARK GRUNTE SUTKIENE.  She joined Law Firm from the National Control Commission for Prices and Energy where she was the deputy head of the Law Division.  At TARK GRUNTE SUTKIENE she continues working with major companies from the energy sector in Lithuania advising on various regulatory matters. 
 
Jelena Piatina can be contacted by phone on +370 5251 4444 or alternatively via email on jelena.piatina@tgslegal.com