THE TUG OF WAR OVER NEW POWER PLANTS IN LATVIA

C O N F I D E N T I A L SECTION 01 OF 02 RIGA 000200

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/17/2018
TAGS: ENRG ECON EINV PREL LG
SUBJECT: THE TUG OF WAR OVER NEW POWER PLANTS IN LATVIA

REF: RIGA 00110

Classified By: Ambassador Charles W. Larson for Reason 1.4(d).


1. (SBU) Summary. The debate over future power plants in
Latvia is rapidly heating up. As electricity demand grows and
the 2009 decommissioning of Ignalina nuclear power plant in
Lithuania approaches, the GOL is weighing its options. Among
them are building new power plants and/or linking Latvia's
energy grid with Sweden. There are major foreign policy and
energy security implications attached to what type of plants
are built (as well as local business interests),and a
political divide has emerged over what type of fuel should be
used -- natural gas or coal. Building two additional natural
gas plants would significantly increase Latvia's energy
dependence on Russia, but it is supported by Latvian oligarch
Andris Skele. This option has lower start up costs and a
shorter timeline. A coal-fired plant, on the other hand,
would lessen Latvia's energy dependence and increase energy
source diversification. It would, however, likely put Latvia
over EU-mandated CO2 emission caps. American companies have
expressed an interest in bidding on a coal plant. End
Summary.

LOOMING ENERGY SHORTFALL
--------------


2. (SBU) Post discussed future prospects in the energy sector
with the GOL on several instances, including with Economics
Minister, Kaspars Gerhards. According to our contacts, the
GOL projects an energy capacity deficit in the near-to-medium
term of 200MW-700MW from 2009-2016 (deficit rising over
time). This is mostly due to the nuclear power plant being
taken off line in Ignalina, Lithuania, in 2009
(reftel)*-plus the rapid growth of the Latvian economy.
According to our contacts, the government foresees the need
to develop several projects in Latvia. Due to technical
constraints, the first plant will likely be gas-powered.
Such a gas plant would likely be built in the Riga region,
taking advantage of existing infrastructure.

GAS OR COAL FOR PLANT NUMBER TWO?
--------------


3. (SBU) However, in the medium-term, one new plant will
likely not be enough to meet growing electricity demand.
Minister Gerhards is pushing for a coal-fired plant for the
second facility, basing his choice on the relatively safe and
diverse supply of coal. The coal-fired plant would be
combined with biomass technology (10 percent share of
production) to meet EU regulations on renawables; the
timeline for this plant is medium-term (projected completion
of 2016). This plant, too, would be 350-400MW in size. It
would likely be built on Latvia's west coast, at either
Liepaja or Ventspils. (Note: American firm AES has expressed
interest in this project.) Coal, however, brings up numerous
environmental issues, such as CO2 emissions and the disposal
of byproducts. A coal plant would also require the GOL to
purchase large numbers of CO2 permits to comply with EU
emissions regulations and quotas.


4. (C) The Chair of Latvia's largest energy supply company
Latvijas Gaze, Adrians Davis, is pushing for Latvia to build
only gas-fired plants--claiming that gas plants would be
cheaper and faster to build, and less harmful to the
environment. However, Latvijas Gaze is co-owned by Gazprom
and E.ON., and since the primary supplier of natural gas to
Latvia is Gazprom, building two natural gas-fired plants
would only increase Latvia's energy dependence on Russia.
Proponents of natural gas include members of the People's
Party (TP),especially Latvian oligarch Andris Skele and
former Prime Minister Aigars Kalvitis. Another argument
cited in favor of natural gas is that Latvia has one of the
largest underground natural gas storage facilities in Europe,
which could provide fuel to the plant for several months even
if the supply from Russia is cut off. TP's support for
natural gas, however, may be linked to business interests.
Skele recently revealed he has been involved in discussions
regarding building a liquefied natural gas terminal in
Latvia--which could then supply gas to any new plants. Other
TP members have been lobbying for natural gas as well.


5. (U) On March 11 the Cabinet decided to move forward with a
solid fuel power plant (coal) and tasked the Ministry of
Economics to begin groundwork research. However, Finance
Minister and TP member Atis Slakteris made a request to the
Cabinet to change the wording of the decision, directing the
Economics Ministry to go back to determining the feasibility
of the coal project. These changes were approved by the
Cabinet on March 18th; in effect, they reduced the
government's support for a coal-fired plant and indirectly

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increased backing for natural gas.


6. (U) The debate over what types of power plants to build
has broken out into public, with commentary and coverage
splashed across the front pages of Latvia's leading dailies.
One of the most vocal opponents to more natural gas plants is
political party New Era (JL)--arguing that the move would
compromise national security. JL drafted a bill mandating
that the GOL immediately begin preliminary work on a
coal-biomass power plant and called an extraordinary
parliamentary session on April 9th to put the bill to a vote;
the bill was rejected in a 35 to 47 vote.


7. (C) Comment: The medium-term energy shortfall that is
forcing the GOL to consider building more than one power
plants was not anticipated. The GOL assumed that Ignalina
would be rebuilt by 2015 or a bit later; however, as the
drive to rebuild Iganlina has gotten bogged down (reftel),
the GOL has been forced to focus on other sources of power
earlier than anticipated. What types of energy plants are
eventually built have real foreign policy consequences for
Latvia. Latvia's electricity and heating production are
already heavily dependent on Russian gas. The projected
energy shortage is approaching rapidly, and at this point the
first new plant built will likely be gas fired: it will be
quicker and cheaper to build, and Latvia has experience with
this type of power generation.


8. (C) Comment continued: For the second plant, there are
legitimate arguments against a coal-fired plant. The GOL is
already struggling with how to comply with CO2 emissions
quotas coming from Brussels; a gas plant would produce fewer
emissions and not exacerbate the problem. However, were
Latvia to build two new gas plants, and not build any other
significant new plants from different fuel sources and
technologies, the country would only deepen its energy
dependence on Russia. That the GOL is even considering such
a move speaks to efforts by Skele and others to focus
Latvia's economic relations toward the east for their
personal benefit.
LARSON