Lithuanian Energy Eyes Expansion in the Baltics

May 24, 2016 | 00:00
Lithuanian Energy Eyes Expansion in the Baltics
Lithuanian Energy Eyes Expansion in the Baltics
Nominated by a popular Lithuanian weekly journal as CEO of the Year 2015, Dalius Misiunas, the unassuming Chairman and CEO of the state-controlled energy company Lietuvos Energija (Lithuanian Energy), prides himself on being the first head of a state company to ever clinch the nomination but the now viable, expansion-hungry and investment-ready company is facing imminent challenges ahead.

LJ: With the LitPol and NordBalt electricity links already in operation and the LNG terminal on the Baltic coast, Lithuania has made huge progress towards energy independence during recent years. But the Baltics –and Lithuania- still rely on the Russian-controlled BRELL (Belarus, Russia, Estonia, Latvia and Lithuania) high voltage power transmission energy ring. When can full grid synchronization with Europe be expected?


DM: Indeed, BRELL is worrying. Russia has not played unfairly [in electricity trading - L.J.] against us despite the current geopolitical tensions, but, well, the card is still in its hands.

I’m not going to play a guessing game about what might or might not happen should Russia or Belarus play this card or not - and I hope they won’t - but the three Baltic States have to deal with this inevitability so far. I mean the BRELL ring.

The construction of the Litpol-2 grid interconnector, which will link the Baltic HVP TS with Europe and free us from dependence on the Russian-controlled HVP transmission ring, is thought to begin in 2020 at best. I hope the countries involved in the project will agree on the best technical solution soon [a submarine cable has been suggested by Estonia, but Lithuania insists on a land cable - L.J.].

Otherwise, Lithuania’s accomplishments in the energy sector have been astounding recently and we are deservedly held up as an example to other EU member states as to how to secure energy security and gain energy independence.

We may still be uncertain as to whether we need a new nuclear power plant, what power reserves ought to be accumulated from local generation and to deal with other important energy market questions, but the bottom line is the energy security and independence Lithuania has gained with the launch of the grid cables with Poland and Sweden at the end of 2015 and the launch of the Klaipeda LNG terminal in late 2014.

This year, for the first time in history, natural gas imports from Norway’s Statoil have surpassed those from Gazprom. Part of the latter’s natural gas import to Lithuania is set to dwindle.

LJ: You are praised for your financial accomplishments as well as the innovations and diversification of the company’s activities. Can you tell me more about this?

DM: Over the last couple of years, Lietuvos Energija and the companies under its supervision have substantially improved their performance, a fact reflected in our posted profits. To compare the end of year results of 2012 against the same period in 2015, the profitability of Lietuvos Energija has risen by 41%. Notably, the value of the holding has grown as much.

LJ: What is behind this surge?

DM: A few things should be taken into account here. First, the expansion we observed with the acquisition and integration of Lietuvos Dujos, a gas import, supply and distribution company. Then, in the spring of 2015, we merged our two secondary natural gas supply companies Lietuvos Duju Tiekimas and LITGAS. We have empowered the merged company, Lietuvos Duju Tiekimas, to pursue market expansion within the Baltic region. The strategy has paid off as the new single company is already reaping dividends from the merger. Not to mention the increase in efficiency.

Importantly, the earnings from our main business activity - the generation, supply and transmission of electricity - have edged up over the last three years, a fact not only relating to the larger market share but also one that can be given to considerable cuts in operational costs.

LJ: What are your thoughts about innovation

DM: The topic is extremely wide as innovation has affected nearly every aspect of our activities. I would however praise the modern management philosophy of our company, which, I should remind you, is owned by the state. A number of credible experts have acknowledged the innovative approach to our business’ management. Note again, please, in such a traditionally hard-to-change sector as energy.

LJ: Your company has set very ambitious targets for the future, such as increasing your company assets and value two-fold before 2020 and becoming the most valuable energy enterprise in the Baltics. Is this realistic? Can you explain how you aim to achieve this?

DM: Based on what we’ve achieved over the last couple of years, namely raising the holding’s value 41% since the end of 2012, I believe the goal is feasible. Note, please, the value was assessed according to the EBITDA, that is our net earnings. The upward profit - and, simultaneously, value growth - trajectory should be pointing up through to 2020.

In meeting the 2020 target, we are counting heavily on the expansion of our assets. In this pursuit, Lietuvos Energija has acquired from the Baltic region private equity and venture capital investor BaltCap investment in the 18MW Tuuleenergia wind farm in Estonia and the 24MW Eurakras wind farm in Lithuania (the total transaction price for Lietuvos Energija was €28 million for a 100 percent share in Tuuleenergia and a 75 percent share in Eurakras, including the buy-out of BaltCap’s co-investors).

One of Lietuvos Energija’s strategic directions is the development of production and diversification. Naturally, in assessing the current environment and future prospects, we chose wind energy as one of these directions, and we are looking forward to adding even more regional wind power to the grid.

In another development, Lietuvos Energija is continually diversifying its activities. In early 2016, we founded a new company, Energijos Sprendimu Centras (Energy Solution Center), which has been tasked with increasing energy efficiency and renewable energy project development, both in Lithuania and abroad. The new business formation’s activity is based on the ESCO (Energy Service Company) model. What differentiates these companies, defined as Energy Service Companies (ESCOs), from traditional energy consultants or equipment suppliers is that they can also finance or arrange financing for the operation and their remuneration is directly tied to the energy savings achieved. We see potential in this new company as the current energy saving capabilities are not fully tapped.

Last but not the least, we are expanding our electricity and gas trade volumes, making our generation and transmission more efficient with investments into the network.

LJ: Can you provide a glimpse into your expansion plans in the Baltic region?

DM: Our primary targets are the Baltic States of Estonia, Latvia and Lithuania, plus Poland. First, we want to ramp up our presence in the local energy service markets, offering them attractive energy cost-cutting and energy efficiency-boosting solutions.

Speaking of the nitty-gritty, we want among other things to spearhead the transition to power-saving street lighting. We have carried out a pilot project within the Sirvintos Municipality in eastern Lithuania, where over 70% of the most energy consuming street lights were replaced with modern LED lighting. The project was implemented by Energijos Tiekimas, a member of the Lietuvos Energija company group. This modern technology allows the municipality to save around 75% of consumed energy for street lighting every year. We’re looking to pursue similar projects in the other Baltic States.

We also are set to focus on small-scale renewable projects in the region, especially on rooftop solar installations. What gives us a competitive edge is our ability to provide the client with not only the equipment, its installation, maintenance and options for the energy trade, but also an attractive form of financing.

I believe the additional workload, capable of generating extra revenues for the mother company, can be carried out by our construction company, which lays high-voltage grid transmission lines, build transformer substations and makes necessary transmission system repairs.

LJ: Your Baltic competitors, Latvia’s Latvenergo and Eesti Energia in Estonia, also have expansionist policies. Aren’t you all going to clash in the modest Baltic energy market? Where could Lietuvos Energija have an edge over the other two?

DM: Indeed, they are our primary rivals in the region. Eesti Energia showed a strong performance for seven consecutive years before slumping last year [Eesti Energia’s turnover declined 12% to €777 million in 2015 with pre-tax profits of €266 million, down 15% on the previous year. Andri Avila, Financial Director at Eesti Energia, said that these lower turnover and profit figures were due to low energy market prices - L.J]. But shale oil still gives it a competitive edge over the Latvian and Lithuanian energy companies. The Latvians’ advantage is the big hydro power capacities, which, in fact, are around 10 times higher than ours.

Compared to the Latvian and Estonian energy companies, Lietuvos Energia started off from the worst position, but with expansion and diversification our company ended up being the most diversified of the three.

Being involved in a range of activities- from electricity generation, to gas sales, supply and distribution to the acquisition of renewables - certainly gives us an edge. Besides, quite differently from Eesti Energia and Latvenergo, Lietuvos Energija is involved in a number of unrelated sectors such as real estate and transport lease, for example. All of this makes us more resilient in the market than the Estonians for example, who last year were extremely vulnerable to exterior trends in the oil market.

LJ: The electricity market in the Baltics comprises a mere 8 to 9% of the Baltic Sea region states’ power market. Could the merger of the three Baltic energy companies be the solution in increasing the Baltic power market’s competitiveness and attraction?

DM: (Grins). First of all, I want to emphasize that there are only hypothetical variations on such a possibility.

If I were to embark on hypothetical thinking, the situation might be possible in the future under certain circumstances. Would the Baltic power market benefit from it? I believe so. First, we would instantly turn from a small energy market player into a medium-size one. That would put us in the orbit of interest of many European energy companies such as Sweden’s Vattenfall, Germany’s E.On or the Czech Republic’s Chez. This, in turn, would open brand new opportunities for us here.

Today, we can measure only one against the other here, that’s all. The subject of a merger is a very sensitive issue in the Baltic States, as these small nations view the individual energy companies as part of their national identity. Personally, I believe we should be more open to the possibilities out there, including those related to energy.

LJ: To continue with the hypothetical, maybe combining the three Baltic States’ electricity trading zones on the Nord Pool Spot Exchange could prompt a Baltic energy market merger? What’s your take on this?

DM: Already today, Latvia and Lithuania belong to the same single zone on the exchange. The story with Estonia is a little bit different, but with NordBalt in place, the differences (in price and trading opportunities) have dwindled. The bottleneck at the Estonian and Latvian electricity transmission junction, which has always been a major determinant for price and trading volumes, plays quite a small role now with the interconnector in operation.

Personally, I do not think that joining trade zones would make a big difference. I guess I am more concerned with the things I often hear from my colleagues abroad. For example, why the Baltics, with the exception of pivotal security and energy security issues, cannot hammer out single policies on so many issues within trade and bilateral dealings? Unless we can find an answer to this, I believe it makes little sense to speak of a larger unity within the energy sector.

LJ: How does the Lithuanian electricity grid compare to the more developed grids in Western Europe?

DM: In the broader picture, we are more or less on a parity with these countries. Our main drawback is the comparatively old electricity network, the bulk of which still dates from the Soviet period. One of the goals that Lietuvos Energija has set is a substantial renewal programme over the next 10 years. For that purpose, we are allotting €1.5 billion for an upgrade of the transmission network. Most of the advanced European countries have also installed smart grid metering, which we are still yet to do however. This innovative idea did not get off the ground in 2012, but we may reconsider a roll-out of massive smart grid-metering next year. In comparison, Estonia is implementing a major project of that kind this year. As many as 3,000 smart grid meters will be installed there. This technology is already common in the West, and we need to catch up.




Image: LitPol Link overhead power line crosses Lithuanian-Polish border. Courtesy: Litgrid AB, Lithuanian TSO.
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