Estonia Hopeful but Expects Little from Baltic

C O N F I D E N T I A L SECTION 01 OF 02 TALLINN 000110

SIPDIS

FOR EUR/NB, EUR/ERA AND EEB/ESC
VILNIUS FOR DANIEL GAGE
DOE FOR MICHAEL APICELLI

E.O. 12958: DECL: 04/23/2019
TAGS: PREL PGOV ENRG KGHG RU LH LG EN
SUBJECT: Estonia Hopeful but Expects Little from Baltic
Energy Meeting

Ref: (A) State 38591
(B) Riga 224
(C) 08 Tallinn 349

Classified by: CDA Karen B. Decker for reasons 1.4(b/d).


1. (C) SUMMARY: The Government of Estonia (GOE) and
Eesti Energia are hopeful the discussions at the April 27
Baltic Prime Ministers' Council will be positive, but
they don't expect concrete results this weekend. Eesti
Energia feels the new Lithuanian government does not
grasp the complexity of the joint Visaginas nuclear power
plant (NPP) project. The MFA says the three prime
ministers will issue a joint declaration after the
Council meeting that will have a "nice statement on
Visaginas that says nothing." The declaration will,
however, call for accelerated action on Swedlink, Estlink
2, a Polish-Lithuanian interconnector, and regulation of
third-party electricity imported into the EU. Estonian
energy policymakers agree that Russia's role in the
region is unhelpful, and speculate "it will take a
crisis" to jolt the Baltics into serious cooperation on
energy diversification. Estonia wants to cooperate
closely with the United States on nuclear technology,
including a possible USTDA Orientation Visit. END
SUMMARY.

Vilnius Summit: Hopeful, but Not Expecting Much


2. (C) On April 24, Econoff delivered Ref A points to
Estonian MFA Director for Energy Mati Murd, who
highlighted three agenda items for the upcoming Baltic
Prime Ministers energy meeting in Vilnius. The PMs will
discuss opening the Baltic electricity market - which
will require Estonia to increase access to its market by
35 percent. They will also try to reach agreement on
whether the proposed Swedlink cable should be an
'infrastructure' project (owned by the state transmission
companies) or a 'commercial' project (owned by the
private power generation companies). Finally, they will
call for a common policy to regulate electricity imports
from outside the EU (i.e. Russia). Explaining the first
point, Murd said the GOE's reluctance to lift electricity
price controls is based on fear that an increase in
energy prices in the short term could push Estonia's
inflation over Maastricht limits and derail its bid for
Euro accession by 2011. Nevertheless, Murd said, Estonia
will open its electricity market by 35 percent in early
2010 at the latest.


3. (C) Murd noted that the EU's High Level Group on
Baltic Energy has been "very constructive and very
helpful." Going into the April 26-27 summit, the GOE is
"hopeful for progress on Visaginas, but not expecting
agreement" on concrete details. He expressed skepticism
about the independence of other Baltic countries' energy
policy. While there is a clear divide in Estonia - with
the GOE focused on long-term security and Eesti Energia
on profitability - in Latvia, he said, "it seems
sometimes that Latvenergo is setting the government's
energy policy."


4. (C) Murd provided Econoff with an advance copy of the
working draft of the PM's Joint Declaration - to be
released after the Prime Ministers' meeting (emailed to
EUR/NB and Embassies Riga and Vilnius). The final
declaration will call for:

-- an open, transparent integrated Baltic-Nordic
electricity market no later than 2013;
-- implementation of a Baltic-Swedish interconnection
project - without delay;
-- acceleration of the Estlink 2 project;
-- an environmental impact assessment, plus financing
plan, for a 1000MW Polish-Lithuanian electricity
interconnection by March 31, 2010, with the link operable
by 2015;
-- an increase in the share of renewable energy;
-- continued cooperation on the Visaginas Nuclear Power
Plant (NPP) and
-- preparation of a joint policy on electricity imports
from third countries.


5. (C) Murd commented that the point on Visaginas "...is
very nice, but says nothing." The final item on
regulation of third-country electricity imports, he
noted, still needs EU-level agreement and faces problems

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with WTO compliance as well. On the all-important
practical questions surrounding Visaginas - including
choice of a business model and identification of the
rights and obligations of partner countries - Murd said
he was doubtful the three countries will reach an
agreement "...that will not be changed in a few months
like the last one was." (Note: This refers to deviation
from the February 2006 Trakai Declaration.)

Energy Security for the Baltics


6. (C) At an Embassy-hosted roundtable on energy
security earlier in April, Eesti Energia's Head of
Nuclear Power Programs, Andres Tropp, asserted "the new
Lithuanian government has no understanding of how
difficult building a new NPP will be." As a result,
Estonia continues to pursue other options, including
building its own NPP. The GOE is currently training
several nuclear engineers in Sweden this summer, and
hopes to send them to the U.S. in 2010. This spring,
Estonia will do geological studies for possible domestic
site locations. However, Tropp noted, Estonia still
believes it has a 2-3 year window before it must commit
to either Visaginas or a domestic NPP. In that time, the
GOE will continue to lay the legislative and regulatory
groundwork, and see how serious Lithuania really is about
a joint project. Tropp also said he does not believe the
GOLi's stated goal of completing a new NPP by 2018 is
realistic.

Looking Back: "Letting Gazprom In Was a Mistake"


7. (C) At the same roundtable, the GOE also stressed that
Russian involvement in regional gas and electricity
markets seriously hampers diversification efforts. The
Ministry of Economy's Deputy Director General for Energy,
Einari Kisel lamented the significant share Gazprom got
in Baltic gas markets during the privatization of the
sector in the early 1990s. At that time, Russia
effectively forced many central and eastern European to
give Gazprom a stake in their markets or do without its
gas. While Estonia has not suffered cutoffs in gas
supply, Kisel asserted that "letting Gazprom in was a
mistake." Gazprom's stake in national utility companies,
(it owns 37 percent of Eesti Gas) and as owner of the gas
in Latvia's Inchulkans underground storage site, now
complicates regional efforts to diversify away from
Russian influence. Although Russia periodically talks
about investing in new infrastructure projects such as
gas pipeline interconnections or a nuclear plant in
Kaliningrad, it never actually does anything to move
these projects forward. Kisel felt that such discussions
are simply intended to discourage any serious local
efforts on such projects. Commenting generally on the
lack of Baltic energy cooperation, Tropp of Eesti Energia
said the Baltics will "need a crisis to spur action."

DECKER