LITHUANIA SEEKS TO CORONATE A NATIONAL ENERGY

C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000239 SIPDIS SIPDIS E.O. 12958: DECL: 04/02/2022 TAGS: ENRG PREL ECON EUN XG LH SUBJECT: LITHUANIA SEEKS TO CORONATE A NATIONAL ENERGY CHAMPION TO REALIZE ITS NUCLEAR AMBITIONS REF: A. VILNIUS 77 ¶B. 06 VILNIUS 637 ¶C. 06 VILNIUS 549 Classified By: Political/Economic Section Chief Rebecca Dunham for reas ons 1.4 (b) and (d) ¶1. (C) Summary: The GOL has promulgated a draft law that outlines Lithuania's participation in the construction and operation of a new nuclear power plant. The legislation, which requires parliamentary approval, calls for the merger of three energy companies to create a national energy champion that will represent Lithuania in this multinational project. The plan may create an entity large enough to secure the billions of dollars necessary for Lithuania's share of the power plant, but it does little to liberalize the electricity market or improve Lithuania's investment climate. Given an opportunity to emphasize private investment in a major energy infrastructure project, the GOL has opted instead to emphasize state control, once again demonstrating its instinctive mistrust of private capital. End Summary. GOL approves draft law -------------- ¶2. (C) Prime Ministerial energy advisor Saulius Specius told us on March 27 that the cabinet earlier that day had approved a draft law outlining Lithuania's participation in a new nuclear power plant (NPP). He said that he had led the team that had designed a "national investor," the legal entity that will represent Lithuania's portion of the "implementing company" that will issue the tender for, and eventually operate, the new NPP. The Ministry of Economy registered the law with the parliament on April 2; the parliament may begin deliberation on the law as early as April 5. A member of the parliament's Economic Committee told us that the measure may receive fast-track treatment that could allow it to receive full parliamentary approval within days. ¶3. (C) Specius said that the draft law requires Lithuania's national investor to own at least 34 percent of the shares in the new NPP's implementing company. Specius expects that the Polish, Estonian, and Latvian participants will own 22 percent of the implementing company, but these portions are subject to negotiation. He said that he expects the new NPP have a 3200 MW capacity: either two 1600 MW reactors or four 800 MW reactors. He emphasized, however, that the draft law did not mandate a specific capacity for the new NPP, and that the implementing company would ultimately decide how large the new NPP would be. Too small to pay the piper -------------- ¶4. (C) A 3200 MW NPP, Specius said, would probably cost about EUR 6 billion (USD 8 billion). Lithuania's investor would therefore need to come up with about EUR 2 billion (USD 2.7 billion) to cover its 34 percent of the project. The size of Lithuania's commitment creates a problem, he explained, because its most obvious candidate as national investor, the GOL-owned energy company Lietuvos Energija (LE -- Lithuanian Energy),is too small to secure a EUR 2 billion loan. Its earnings before interest, taxes, depreciation, and amortization (EBITDA) last year were only about one-half that of its Latvian counterpart, he said, and only about one-quarter that of Estonia's national energy company. (A representative of one of the companies likely to be in the running to build the new NPP told us that he estimated the total price to be closer to EUR 7 billion/USD 9.3 billion.) ¶5. (C) After weighing several options, Specius said that his team concluded that the only viable solution was to re-merge LE with the companies that operate Lithuania's two electricity grids. (Lithuania created these companies out of LE in 2001.) The GOL maintains a majority (approximately 71 percent) holding in the eastern grid; Germany's E.ON has a 20 percent share. The western grid, on the other hand, has been entirely in private hands since late 2003, owned by a subsidiary (NDX Energija) of Lithuania's largest retailer (VP Market). (Re)building a national champion? -------------- ¶6. (U) Minister of Economy Vytas Navickas announced on March 23 the GOL's intention to reorganize these companies. Instead of pursuing the GOL's long-stated intention to completely privatize the eastern grid, he said that the GOL VILNIUS 00000239 002 OF 002 would do the opposite, merging both grids back into a newly reformed LE. He said that LE will issue new shares that it will swap for shares in the electricity grid companies. The new, larger LE will then secure the loans needed to purchase at least 34 percent of the NPP's implementing company. ¶7. (C) Specius said that this reorganization would give the GOL a majority share in all three companies. Specius added that the larger LE would be able to participate in all three of the planned electricity projects: the new NPP, SWINDLIT (an undersea electricity cable to Sweden),and the Polish-Lithuania power bridge (reftels). Specius also said that the plan would allow the GOL to avoid putting any public money into these projects because the companies themselves would be responsible for securing the necessary funding. ¶8. (U) Prime Minister Gediminas Kirkilas had sounded a somewhat different note in January, saying in a radio interview that the NPP project had attracted significant international interest and that he envisioned a mix of public and private capital in the enterprise. Lithuania's Free Market Institute (LFMI) tried to push the GOL in this direction, telling reporters after Kirkilas's interview that the involvement of private investors would mitigate risk. LFMI also encouraged the GOL to float shares of the new NPP on the Vilnius stock market. Don't call it nationalization -------------- ¶9. (C) We suggested that some observers might view the merging of these companies as the re-nationalization of Lithuania's electricity infrastructure, which would send an unfortunate signal to possible foreign investors. Specius said that he expected NDX to happily participate in the venture because it would make good business sense, but admitted that NDX was nervous about the possibility of having its assets under the control of management appointed by the GOL. Specius also explained that if NDX refused to go along with the plan, the GOL was prepared to nationalize the company. He also insisted that the new arrangement would not violate current EU guidelines on having separate companies controlling the generation and distribution of electricity, but acknowledged that rules being discussed in Brussels that would require different ownership of generation and distribution companies would, if enacted, complicate the government's NPP plans. ¶10. (C) When asked if the GOL had consulted with the Polish, Latvian, or Estonian governments while drafting the law, Specius explained that they had reached a general understanding with their partners that Lithuania should be allowed to have a larger stake in the implementing companies than the other countries. He made it clear, however, that this law was a GOL creation, not the product of consultation with its NPP partners. Comment -------------- ¶11. (C) Lithuania has many geopoliticians and few economists. Its plans to develop the largest commercial venture ever envisioned here reflect that correlation of forces. The NPP project could attract considerable foreign investment, which in turn could reduce the GOL's financial exposure for this enormous venture with its attendant up-side risk for large cost over-runs. The GOL seems prepared to forego that opportunity and rush through the Parliament a hastily conceived plan that conflates government control with security, with little thought to the economic, competition, and investment dimensions of the issue. KELLY