New SSE Riga/BICEPS occasional paper by A. Vanags, M. Kālis (BICEPS), A. Paalzow (SSE Riga), I. Indriksone, E. Balode-Buraka (RGSL).
Abstract. Global energy demand continues to grow. Crude oil production is stagnating, coal’s production cost is rising fast on the back of carbon pricing, electricity generating capacity is getting old and nuclear power has its own environmental and political issues. In addition there is the concern about climate change where the man-made CO2 emissions are the primary source of global warming. The need for more electricity and the environmental concerns drive the focus towards the renewable energy sector. Furthermore, countries are concerned about energy security, and countries urge to diversify supplies, both in terms of generation type and of geographical source. This is especially true also for Latvia that, due to its limited domestic energy resources, is one of the most dependent countries on imported energy resources with the European Union. Domestic production of primary energy in Latvian accounts for 35 per cent of total production, with the remaining 65 per cent being imported. Furthermore, oil and gas-fuelled power stations count for more than 60 per cent of the total domestic production and hence representing the largest source of primary energy in Latvia and the gas and oil supplies are fully imported.
In addition to the energy security and energy independence aspects, Latvia has, based on the European Parliament and Council Directive 2001/77/EC, also committed itself to increase its share of renewable energy in electricity consumption to 49.3 per cent. To do this, the Government of Latvia plan to gradually increase wind power share to 1.48 per cent in 2007 and 5.37 per cent in 2010. However, the capacity of wind power plants in Latvia has remained at 26.9 MW since 2003.
Taking into account the potential of wind energy and Latvia’s vulnerable position in terms of energy security and energy independence, this report analyzes the legal, economic and political aspects of further development of the wind power sector in Latvia. The findings of the show that, from a legal perspective, Latvia has properly implemented the EU law governing wind-energy production into Latvian legislation and that the current legislation contains more or less all the formal pre-requisites to encourage investments into the windgenerated energy industry. There are, however, still some question marks when it comes to the administrative practices.
The economic analysis indicates that the tariff set by the Energy Department of the Latvian Ministry of Economics in the current tender to purchase electricity from wind farms is high enough to attract investment in wind power production provided that the bureaucratic burdens of the procurement process are not perceived as too heavy. Calculations show that investment in wind-power will yield an internal rate of return of between 7.2% and 9.8% depending on what is assumed about future price developments. Of the two tariff alternatives, the fixed tariff scheme seems to be the more attractive from the investor’s perspective – hence creating the strongest incentives to invest in wind energy. The analysis also underlines the crucial role played by the state-owned energy company Latvenergo. Because of the irregular and difficult-to-predict volumes of wind-power generated electricity, the Latvenergo-owned hydroelectrical power plants and their ability to store energy have to be employed in order to balance the variation in wind-power energy generated.
Although the necessary legislation is in place, this does not necessarily imply that windgenerated power plants will be built in Latvia – there is a need for a political will and vision as well. While having a strong support among the general public, the support for and interest in renewable energy including wind energy is, with the exception of the Greens and Farmers Union, fairly weak in the current coalition government.