LIETUVOS RESPUBLIKOS SEIMAS

LIETUVOS RESPUBLIKOS SEIMAS OFFICIAL TRANSLATION SEIMAS OF THE REPUBLIC OF LITHUANIA RESOLUTION ON THE APPROVAL OF THE NATIONAL ENERGY STRATEGY 18 January 2007  No X-1046 Vilnius The Seimas of the Republic of Lithuania, invoking Article 9 of the Republic of Lithuania Law on Energy (Valstybės žinios (Official Gazette), No 56-2224, 2002) and having considered the National Energy Strategy as drafted by the Government, a s s e s s i n g: 1) recent changes in global energy trends, the problems posed by global climate change and the impact thereof on a long-term global energy outlook; 2) the Lithuanian state energy development plans as declared in the previous National Energy Strategy and the mutual commitments of Lithuania and the European Union undertaken on their basis and stipulated in Lithuania’s Treaty of Accession; 3) an explicit support of the Lithuanian population for the continuity of nuclear energy in Lithuania; 4) recent initiatives of the EU member states and the European Commission regarding European Union energy policy; 5) Lithuania’s remaining dependence on the energy resources supplied from Russia, which may grow in the future; 6) the importance of partnership of the Baltic countries and Poland in the area of energy and recent initiatives towards the implementation thereof by specific joint energy infrastructure projects of Lithuania, Poland or the Baltic States region, h a v i n g  r e g a r d  t o: 1) Resolution of the Seimas of 29 September 2005 on the Ensuring of Energy Security of the Republic of Lithuania in Implementing Trans-European Gas Infrastructure Projects (Valstybės žinios, No 122-4369, 2005) and Resolution of the Seimas of 29 September 2005 on the Continuity of Nuclear Energy and Updating of the National Energy Strategy (Valstybės žinios, No 122-4370, 2005);  2) Recommendation of the Seimas Committee on Foreign Affairs of 17 November 2006 on Natural Gas Supply Infrastructure Projects; 3) initiatives of the EU member states and the European Commission regarding European Union energy policy, h a s  r e s o l v e d: Article 1. To approve the National Energy Strategy (appended). Article 2. To repeal Resolution of the Seimas No IX-1130 of 10 October 2002 on the Approval of the National Energy Strategy (Valstybės žinios, No 99-4397, 2002). SPEAKER of the Seimas                                                           VIKTORAS MUNTIANAS APPROVED by Resolution No X-1046 of the Seimas of the Republic of Lithuania of 18 January 2007 NATIONAL ENERGY STRATEGY I. GENERAL PROVISIONS 1. The National Energy Strategy (the Strategy) defines the main targets set by the State and directions for their implementation until 2025 by fully adjusting these targets and directions to growing state needs and the most recent international requirements, having regard to the aspects of efficiency, energy security, environmental and management improvement. The Strategy specifies the ways and means of ensuring the strategic security of energy supply, reducing or neutralising the negative impact of dependence on the dominant supplier of primary energy. A fast development of Lithuania’s economy, growing dependence on the import of primary energy from a single country, the envisaged decommissioning of the Ignalina Nuclear Power Plant (hereinafter referred to as the “Ignalina NPP”) in 2009, substantially increased prices of fossil fuel in world markets and the tension present in them render changes in Lithuania’s energy policy and updating of the National Energy Strategy as approved by Resolution of the Seimas No IX-1130 of 10 October 2002 (Valstybės žinios, No 99-4397, 2002). 2. Over the past decade, Lithuania has made considerable progress towards implementation of objectives of the National Energy Complex Development Plan (the National Energy Strategy) as approved by Government Resolution No 288 of 19 April 1994 (Valstybės žinios, No 30-545, 1994), the National Energy Strategy as approved by Resolution of the Seimas No VIII-1348 of 5 October 1999 (Valstybės žinios,  No 86-2568, 1999), and the National Energy Strategy as approved in 2002 and ensuring of a stable and efficient operation of the energy sector:  the entire energy economy has been restructured in line with requirements of EU legal acts; preconditions for competition have been created by eliminating vertically integrated monopolies; a considerable number of energy generation and distribution enterprises have been privatised by attracting both the local and foreign private capital; a complex of the measures reducing environmental pollution has been implemented; the safety of the Ignalina NPP has been significantly improved; all required conditions have been provided for the final diversification of supply of oil and petroleum products; accumulation of strategic national stocks of petroleum products and oil equalling 90 days’ consumption has been nearly completed; technical conditions have been provided for a free choice of suppliers of oil and petroleum products; production and use of biofuel has been initiated; the system of district heating has been preserved and is being gradually modernised.  The share of renewable energy resources in the national balance of primary energy increased in 2005 up to 8.7%, and in 2010 one of the country’s strategic objectives will be attained – the share of renewable energy resources will increase up to 12%. With the construction of all the wind power plants whose construction has already begun and the power plants working on biofuel, over 7% of electricity will be generated in 2010 by using renewable energy resources.  The efficiency of energy consumption in branches of the economy has improved more rapidly than forecasted. The amount of primary energy consumed in 2005 for the production of a unit of gross domestic product (hereinafter referred to as “GDP”) decreased by as much as 1,9 times compared with 1990; however, for this indicator to approach the current average of states of the European Union (hereinafter referred to as the “EU”), the efficiency of energy consumption in Lithuania needs to be increased by another 50%. 3. Not all the short-term objectives provided for in the National Energy Strategy as approved in 2002 have been implemented: Lithuania’s electricity networks are not interconnected with Poland’s networks, insufficient progress has been made towards increasing the reliability of natural gas supply, modernisation of the heat sector, particularly that of the equipment belonging to consumers, has been too slow, hence excessive amount of energy is consumed for the heating of buildings, the condition of a large number of heat supply pipelines is critical, and the probability of large-scale accidents is high.  A decision on the decommissioning of the Ignalina NPP in 2009 has exacerbated the problem of Lithuania’s energy security. There exist serious problems in the field of energy security which it would be highly complicated or nearly impossible for Lithuania to deal with on its own. Key problems include the long-term reliability of natural gas supply, construction of the prospective new nuclear power plant and integration of the electricity system into EU systems. Implementation of these strategic tasks could be facilitated only by close co-operation with other Baltic countries – Estonia, Latvia and Poland. 4. When drafting this National Energy Strategy, account has taken of the main changes which have taken place in recent years in the economy and energy sector of the country and the region, and use has been made of the experience accumulated and the latest information required for the planning of development of separate energy sectors.  Account has also been taken of the energy development plans of other Baltic States, global tendencies in the markets of the main energy sources, the fields of energy management and environmental protection. 5. Within the framework of the National Energy Strategy, ensuring of energy security is based on the following provisions: 1) energy security is an integral part of national security; 2) ensuring of energy security requires a predictable, reliable, economically acceptable and environment-friendly energy supply; 3) energy security covers the totality of the conditions ensuring the diversity of traditional and renewable primary sources of energy, diversity and security of energy supply and independence from dictate of a monopolistic supplier, availability of energy to the consumer at acceptable prices in a competitive energy market;  4) Lithuania links its energy security to the integration of the country’s energy systems into EU energy systems and with an efficient EU and national energy policy, which should ensure that Lithuania’s energy security is on a par with that of other EU states; 5) The Strategy as adopted by the Seimas by national consensus must ensure a consistent implementation thereof that would be independent of a democratic change of the Government and a reliable energy security of energy consumers and the whole country. II. CHARACTERISTICS OF THE GLOBAL ENVIRONMENT AND CHALLENGES TO LITHUANIA’S ENERGY SECURITY 6. The following global phenomena posing new challenges to energy and national security are characteristic of the contemporary energy environment: 1) depletion of global oil and gas resources accompanied by a growing demand for the resources, which exceeds the rate of reconnaissance, use and development of new fields; 2) extraction of a considerable amount of world oil and gas resources in the countries which are politically unstable or which are governed by undemocratic regimes carrying out nationalisation of the resources and consolidating political control thereof; 3) complex relations of Western democracies with the countries rich in energy resources; 4) a substantially increased geopolitical role of the states exporters of energy resources and a lever to dictate terms to energy-importing countries; 5) a considerably increased political activity of governments in energy markets; 6) the grown influence of the energy lever in shaping countries’ foreign and national security policy as well as identification of energy policy objectives with foreign policy and national security objectives; 7) the growing weight of the political factors which restrict the freedom of the market; 8) consolidation of interaction of the main economies – the United States of America, the EU and China (and, in part, India) – in the markets of energy resources and their interaction with Russia. In addition to common challenges to the energy sector of the EU states as defined in the Green Paper of the European Commission “A European Strategy for Sustainable, Competitive and Secure Energy” (COM/2006/0105 final) (hereinafter referred to as the “Green Paper”), Lithuania is facing the additional problems related to the absence of a common EU energy policy, lack of alternatives in the field of supply of energy resources, the energy exclusion of separate regions and lack of necessary integrational interconnections, especially in the Baltic States region. III. EU ENERGY POLICY GUIDELINES 7. EU energy policy aims at ensuring the reliability, competitiveness and sustainable development of energy supply. Energy security and the creation of the internal market are among EU priorities. In dealing with the issues of energy security, the external EU energy policy and uniform response of the EU states to the current situation in energy markets are of utmost importance. The decisions adopted by the Brussels European Council on 23/24 March 2006 (the Presidency Conclusions, 7775/06, CONCL 1) are a significant step towards formulation of a new energy policy of European countries. They substantially correspond to Lithuania’s interests and create more favourable preconditions for the development of Lithuania’s energy sector. The following provisions of the mentioned conclusions are important to Lithuania: 1) to pay particular attention to the countries and regions largely isolated from the EU energy market; 2) to charge the European Commission with developing a priority Interconnection Plan and facilitating the realisation of priority infrastructure projects; 3) to speed up diversification of supply of energy resources; 4) to present a Strategic EU Energy Review on a regular basis; 5) to draft proposals regarding a common EU energy strategy, in particular maintaining a dialogue with Russia; 6) to aim at making the EU-Russia dialogue more effective and transparent and at the ratification, by Russia, of the Energy Charter Treaty of 17 December 1994 and the conclusion of the Energy Charter’s Transit Protocol. IV. FACTORS INFLUENCING A STABLE FUNCTIONING OF THE ENERGY SECTOR IN LITHUANIA 8. The following key factors influence a stable functioning of the energy sector in Lithuania: 1) prevalence of import of primary energy resources from Russia, dependence of Lithuania’s gas supply and electricity systems on Russia’s energy systems as well as absence of interconnections with Western European energy systems; 2) the decommissioning of the Ignalina NPP in 2009, which has a considerable detrimental effect on the structure of electricity sources, primary energy balance and electricity price in 2010-2015; 3) the construction of a new gas pipeline to Europe under the Baltic Sea bypassing the territory of the Baltic States; 4) the strict environmental requirements set forth to energy enterprises, including restrictions on carbon dioxide (hereinafter referred to as “CO2”) emissions. V. STRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS (SWOT) ANALYSIS 9. Lithuania’s current energy sector has its strengths and weaknesses. It is facing specific threats, but it also has good opportunities of efficient and reliable operation. With more efficient use of available opportunities and existing potential, Lithuania’s energy sector can make significant contribution to the economic growth of the country and strengthening of its competitiveness, protecting against possible threats and avoiding various disturbances. Strengths: 1) a sound existing structure of the balance of primary energy (prior to the decommissioning of the Ignalina NPP), which consists of nuclear energy, oil and petroleum products, natural gas, a growing share of indigenous energy resources and renewable energy resources as well as a possibility to use different types of fuel in the majority of energy enterprises helps to ensure the reliability of energy supply and low environmental pollution; 2) well-developed energy capacities: power plants, an oil refinery, oil and petroleum products import and export terminals, natural gas supply system, district heating systems, etc.; 3) accumulated expertise in the production of biofuels, created capacities for and planned development of production thereof will allow to meet EU requirements relating to replacement of approximately 5.75% of the petroleum products used in transportation in the country’s fuel market by 2010 with biofuels; 5) restructuring of the electricity economy and preparation for integration into a common Baltic electricity market have been completed; 5) highly qualified specialists work in all sections of the energy sector.  The existing system of their training and improvement of qualifications has so far satisfied the country’s needs, and Lithuania’s universities and scientific establishments are capable of preparing qualified specialists for state government institutions, operation of energy enterprises and carrying out of scientific and technical activities. Weaknesses: 1) the decommissioning of the Ignalina NPP, lack of certainty in respect of financing of the measures related thereto and other external circumstances prior to Lithuania’s accession to the EU in 2004 prevented from making efficient use of the surplus of available capacities, timely renovating them and taking specific decisions regarding the further development of the power system; 2) over the period of the last ten years, the efficiency of energy consumption has increased significantly only in the industry and trade and services sector; however, the situation improved only slightly as regards the public sector (schools, universities, hospitals, etc.) and old residential buildings. Therefore, relative energy consumption for the heating of buildings in Lithuania is twice as high compared to developed European countries; 3) Lithuania’s electricity and gas networks do not have any direct links to Western European energy systems; 4) there are no possibilities of joining a common EU electricity market, the reliability of operation of Lithuania’s power system and electricity export and import possibilities depend on Russia’s state energy company; 5) an alternative supply of natural gas is not possible, dependence on a single supplier of natural gas remains (gas accounts for approximately 75% in the production of district heating, for approximately 14% - in the generation of electricity; after the decommissioning of the Ignalina NPP, the demand for gas will increase up to 75%); 6) natural gas prices, which depend on a monopolistic supplier and are growing substantially; actual competition in the gas market is absent;      7) in the past, insufficient funds were invested in infrastructure modernisation, hence the majority of power plants, electricity networks, transformer substations and pipelines, which are physically and morally worn, must be renovated in the near future; 8) considerable quantities of radioactive waste and spent nuclear fuel have been accumulated; however, no strategy of management and disposal of spent nuclear fuel has been developed so far; 9) with heat demand having considerably decreased during the period of transition to the market economy, the majority of district heating systems do not operate under optimal conditions and hence are used inefficiently.  Owing to inappropriate operation and poor quality of construction works, heat supply networks are to a large extent damaged by corrosion. Heat networks are renovated too slowly, hence the probability of accidents in district heating systems is high; 10) the district heating and hot water supply systems of the residential and other buildings constructed before 1990 are worn and are not designed for the rational use of energy. The majority of consumers cannot independently regulate the amount of heat to be consumed; 11) indigenous and renewable energy resources are underused; 12) the State and energy enterprises provide insufficient financing for the scientific research activities necessary for a fast, efficient and sustainable energy development and innovations. Opportunities: 1) the expertise accumulated during the long period of safe and reliable operation of the Ignalina NPP, positive attitude of Lithuanian political parties and the public towards nuclear energy, and determination of governments and energy companies of the Baltic countries to co-operate in the field of energy create favourable preconditions for the construction of a new nuclear power plant; 2) with the completion of restructuring of the entire energy sector, full compliance with the requirements of EU directives and adoption of the main legal acts regulating the functioning of the sector as well as development of a system required to control the activities of energy enterprises, required preconditions for the creation of a competitive environment in Lithuania and a common electricity market of the Baltic States and for future integration into Western and Northern European markets will be finally created; 3) the use of available energy-saving potential will reduce the growth rates of energy demands and capacity of generating sources and hence the amount of imported fuel and will facilitate the solution of environmental problems; 4) the country’s existing main gas pipelines allow a substantial increase in the supply of natural gas to Lithuanian consumers in the future; 5) with the growth of imported organic fuel prices, indigenous and renewable energy resources, which are available, but are still underused (wood, straw, peat, biogas, municipal and other combustible waste, wind and hydropower and raw materials for the production of biofuels) might increasingly contribute to Lithuania’s primary energy balance, reduce dependence on the import of fuel and mitigate detrimental consequences of the growth of organic fuel prices;  6) a new liquefied gas terminal in the Baltic region would substantially reduce dependence on the single source of natural gas from Russia; 7) with the construction of gas pipelines to Eastern Europe from alternative sources (the Caspian Sea region or Norway) and interconnection of gas pipeline networks of Lithuania and Poland, Lithuania would acquire possibilities of alternative gas supply; 8) modernisation of existing district heating systems would make it possible to substantially expand combined heat and power generation, while considerably increasing the efficiency of the use of primary energy resources and strengthening the country’s energy security; 9) development of interconnections with the power systems of Poland and Sweden will increase the reliability of energy supply, enable integration into the Western European electricity market, more efficient use of the Kruonis Hydro Pumped Storage Power Plant (hereinafter referred to as the “Kruonis HPSP”) and other power plants as well as transit of electricity; 10) the new capacities of gas storage facilities permitting accumulation of the gas stocks equalling 60 days’ consumption would increase energy security and ensure uninterrupted supply to consumers in the event of a crisis. Threats: 1) with insufficient own resources of primary energy, Lithuania’s economy depends on the import of these resources (gas from a single supplier) and is vulnerable, especially in the event of disruptions of supply or considerable fluctuations in prices; 2) slow accumulation of expertise and insufficient contribution of the country’s industry to the introduction of the latest technologies of the use of renewable energy resources will prevent from efficiently applying them in the future; 3) if the necessary competitive electricity-generating sources are not constructed and the reliability measures of the energy supply network, especially system interconnections with Poland and Sweden, are not implemented in proper time, the decommissioning of the Ignalina NPP and dismantling of reactors thereof, could pose a grave threat to the stable supply of electricity, while increased energy prices could become a heavy burden for consumers and the country’s economy; 4) lack of the investments required for renovation of the energy transmission network may pose a threat of large-scale system accidents; 5) due to a slow modernisation of district heating systems, the probability of large-scale accidents remains high, which may cause grave economic and social consequences, moreover, this promotes disconnection of a part of consumers from district heating systems; 6) emigration of qualified specialists and the attitude of the country’s youth towards engineering and technical professions as low-prestige ones may complicate the introduction of modern technologies and cause a shortage of qualified specialists in the energy sector as well as in the field of research and development. VI. VISION OF THE ENERGY SECTOR 10. The future energy sector of Lithuania constitutes an integral part of a modern economy that will ensure a reliable and secure energy supply to all branches of the economy at economically justified prices that are affordable to consumers (do not exceed average prices in the EU states). Its capacities not only ensure a sufficient and uninterrupted supply of energy to the Lithuanian economy and consumers, but also provide an opportunity of energy export to foreign markets at competitive prices. The future energy sector does not pose a threat to the environment, creates favourable conditions for further progress of the country, is integrated into EU energy systems, is interconnected with the systems of Western European and Scandinavian countries and has possibilities of energy exchanges with the Eastern energy systems, is competitive in an open international energy market and has ensured an energy security similar to that of other EU states. These are well-coordinated energy sectors based on state-of-the-art technologies, providing appropriate preconditions for further development of society and for rapid economic growth, and using the greatest possible variety of sources of primary energy. VII. MISSION OF THE STATE 11. The main functions of the State and directions of actions which would assist in implementing the desired development of the energy sector are as follows: 1) seeking to attain the strategic objectives of the national energy sector, to implement a complex and sustainable domestic (economic, energy and financial) policy of the country, taking account of the key provisions of EU energy policy and prevailing global energy development trends; 2) to take active part in the development of an efficient EU energy policy based on solidarity and in the drafting of EU energy legislation, to employ EU structures when implementing the projects of importance to Lithuania and increasing its energy security; 3) in renovating, modernising and developing the country’s energy infrastructure, to efficiently and transparently use EU structural assistance; 4) to provide for the most efficient ways and means of implementing the energy policy on the basis of a regular detailed scenario analysis of the sustainable development of the country’s economy and energy sector, optimized calculations and accumulated as well as systematised statistic information, with a view to ensuring the country’s energy security, viability and competitiveness of the economy and minimising the hazardous effect on the environment; 5) to adopt the National Energy Strategy, whose objectives are an integral part of national security and foreign policy objectives, by agreement of the political groups of the Seimas of the Republic of Lithuania thus ensuring a consistent long-term stability of implementation of the Strategy; 6) without reducing support for the development of other types of energy resources, to politically and legally support investments into the construction of a new nuclear power plant and construction of a long-term storage facility for spent nuclear fuel; 7) to develop the strategic partnership of Lithuania and the Baltic States and Poland as well as a closer co-operation in all energy sectors (especially electricity, gas and oil sectors); 8) to develop partnership in the energy sector with Scandinavian countries as well as to participate in EU-Russia strategic partnership; 9) to strengthen the institutions of energy management and regulation, to regularly supplement and timely update existing legislation in light of requirements of new EU legal acts. VIII. STRATEGIC OBJECTIVES OF THE NATIONAL ENERGY STRATEGY 12. In compliance with the requirements for and provisions of Europe’s sustainable, competitive and secure energy as formulated in Lithuania’s Treaty of Accession (Valstybės žinios, No 1-1, 2004), the Energy Charter Treaty of 17 December 1994, EU legal acts and the Green Paper, the following strategic objectives of Lithuania’s energy sector, which are common to all EU states, shall be set:  1) energy security; 2) sustainable development of the energy sector; 3) competitiveness; 4) efficient use of energy. Seeking the common strategic objectives of the energy sector and substantial strengthening of Lithuania’s energy security, the following development objectives of the national energy sector shall be set: 1) to seek comprehensive integration of Lithuania’s energy systems, especially the electricity and gas supply sectors, into EU systems and the EU energy market; 2) to diversify the sources of primary energy by reviving nuclear energy and to rapidly increase the relative weight of renewable and indigenous energy resources, to ensure that the share of the natural gas supplied from a single country and used for the generation of energy would not exceed 30% in Lithuania’s annual fuel balance; 3) to improve the efficiency of energy use and to save energy consumption. 13. Seeking to implement strategic and development objectives as well as assessing results of implementation of the goals as formulated in previous (1994, 1999 and 2002) strategies, the following main tasks shall be set:  1) to complete implementation of the requirements of EU directives with regards to liberalisation of the electricity and gas sectors, taking account of the national interests of energy security; 2) to ensure the continuity and development of safe nuclear energy; to put into the operation of a new regional nuclear power plant not later than by 2015 in order to satisfy the needs of the Baltic countries and the region; 3) to implement EU environmental requirements in the energy sector; 4) by 2010, to accumulate and continuously maintain the stocks of petroleum products and oil equalling 90 days’ consumption; by 2013, to develop natural gas storage capacities and maintain the gas stocks equalling up to 60 days’ consumption; 5) to renovate the power plants, power and natural gas transmission and distribution systems as well as we district heating systems which are physically and morally worn, while increasing their efficiency and reliability; 6) not later than by 2012, to connect Lithuania’s high tension electricity networks with the networks of Scandinavian countries and Poland; 7) to further develop regional co-operation and collaboration seeking to integrate the Baltic States’ electricity market into markets of the EU states, while providing conditions for the efficient use of design output of the Kruonis HPSP; 8) to construct a natural gas storage facility in Lithuania, develop a common regional natural gas storage facility that would be in line with the interests of strengthening of Lithuania’s energy security as well as construct, upon preparing a feasibility study of Lithuania, Poland and Latvia and taking account of the interests of Lithuania’s energy security, a common liquefied gas import terminal in the Baltic region ensuring the promotion of liberalisation of the gas sector by means of these projects; 9) to increase the share of renewable energy resources in the national balance of primary energy at least up to 20% by 2025; 10) to increase the share of the electricity generated by combined heat and power plants during the heating period in the national balance of electricity generation up to 35% in 2025; 11) to increase the share of biofuels in the country’s market of the fuel used in transportation up to 15% in 2020 and up to 20% in 2025; 12) as of 1 January 2008, to save 9% of final energy over the period of 9 years in comparison with the level of final energy consumption in 2005; 13) to further improve the efficiency of consumption of all types of energy so that in 2025 relative energy consumption in buildings, various equipment and devices, technological processes and transport systems would approach the indicators of developed EU states; 14) to improve energy sector management: to maintain a uniform approach to all energy sectors exploiting the strengths and favourable opportunities of the energy sector potential and dealing with problems; to agree the principles of regulation of separate energy sectors; to ensure the practical independence of the National Control Commission for Prices and Energy and its responsibility for the decisions taken; to strengthen institutions in the energy sector by improving the knowledge and skills of specialists of those institutions;  15) to maintain and strengthen the scientific research institutions training energy specialists and working in the energy field so that the development of the country’s energy sector is based on the application of the latest and most efficient technologies; 16) to ensure that the management scheme and operators of new energy infrastructure facilities comply with EU competition criteria and that these operators act as neutral market participants; to seek their free and unhindered access to EU energy networks. IX. LITHUANIA’S INTERESTS AND TASKS IN THE BALTIC REGION 14. Lithuania’s strategic interests in the region include development of co-operation and collaboration with Estonia, Latvia, Poland and Scandinavian countries and creation of a common electricity market of the Baltic countries, drafting, in co-operation with Estonia and Latvia, of a co-ordinated strategy and action plans of the Baltic States for dealing with the following common energy tasks of importance to the region: 1) the interconnection of Baltic electricity transmission networks with the networks of Western European and Scandinavian countries by 2012; a more efficient use of generating capacities and the Kruonis HPSP for the needs of a wider EU region; 2) application of the Baltic States to the Western European Union for the Co-ordination of Transmission of Electricity (UCTE) for the issuance of technical specifications for synchronous interconnection of the Baltic power system with UCTE zone and creation of required technical, legal and organisational preconditions, while maintaining physical interconnections for energy exchanges with the Russian power system; 3) agreement of regulation of the Baltic States electricity market with regulation of the Scandinavian electricity market; 4) construction of a new nuclear power plant in Lithuania to satisfy the needs of the Baltic countries and the region and its inclusion in the electricity market of the region not later than by 2015; 5) development of the natural gas supply system and system interconnections with EU gas networks providing for consideration, in co-operation with Latvian, Polish and Estonian experts, of the expediency of construction of a regional liquefied natural gas import terminal and for preparation in 2007 of a feasibility study indicating therein the capacity of the terminal, construction site and time; 6) joint actions and mutual assistance in the event of energy emergencies. X. LITHUANIA’S INTERESTS AND TASKS IN SHAPING EU ENERGY POLICY 15. Participating in the process of formulation of EU energy policy, Lithuania shall seek: 1) an integrated approach to the issue of ensuring the energy security of the Baltic States; 2) the formulation and implementation of a coherent external policy as the guarantee of competitive and secure energy supply; 3) the widest possible implementation of energy security at EU level by increasing the European Commission’s responsibility for the co-ordination of energy projects; 4) contribution of the EU states to combating the energy exclusion of Lithuania and other Baltic States and increasing their energy security as well as synchronising the country’s power system with the UCTE system; 5) compensation by the EU of the detrimental effect of the early decommissioning of the Ignalina NPP on the country’s balance of generating capacities and diversity of primary energy sources by means of a speedy integration of Lithuania’s electricity transmission network and other infrastructure facilities into EU energy systems; 6) provision by the European Commission in a Priority Interconnection Plan for the interconnections of electricity and gas supply networks as required for combating the energy exclusion of the Baltic States with networks of other EU states as well as for the mechanism of their implementation and granting of required financial support; 7) development of EU-Russia partnership in the field of energy in line with provisions of the Energy Charter Treaty of 17 December 1994 and the Energy Charter Transit Protocol, ensuring the freedom of the market and recognising the right of a third country to unimpeded access to the gas transit infrastructure with a view to creating competitive conditions for the alternative routes of supply of energy resources to the EU from the Caspian and Central Asian regions; 8) creation of an efficient, liberal and competitive EU electricity market; 9) representation of the EU by Lithuania in the process of preparation of a study by the EU and Russia on the possibility of synchronously interconnecting systems of Western Europe (UCTE) and the Baltic States as well as countries of the Commonwealth of Independent States (UPS/IPS), although Lithuania’s power system physically belongs to the UPS/IPS system, and declaration of the issue of synchronous interconnection of Lithuania’s system (and the entire Baltic region) with UCTE as the EU’s internal problem to be resolved with the assistance of the European Commission;  10) active support of EU co-operation and dialogue with Turkey, Ukraine, Georgia, Azerbaijan and Central Asian countries in the field of energy and new energy supply projects; continuity and institutionalisation of this co-operation and efficiency of implementation mechanisms. XI. Economic Development ForecastS 16. In 1995-2004, the growth of national economy was rather fast, with the average growth rates of GDP reaching 5.5%. Such economic growth resulted in the level of GDP produced in Lithuania in 1990 being exceeded in 2005. It is foreseen that the rapid rate of economic growth will persist in the coming two decades and will exceed the rate forecasted in the National Energy Strategy approved in 2002. Three possible development scenarios have been chosen for future forecasts: 1) fast economic growth scenario, 2) basic (most likely) scenario, and 3) slow economic growth scenario. The fast economic growth scenario foresees high rates of economic growth in Lithuania during the period until 2025, i.e. on the average 6% per year (the annual rate of 7% until 2015 and 5% after 2015) assuming that: 1) the expansion of the Lithuanian industry would be particularly fast; 2) the common policy of economic development would be favourable for large-scale investment in the modernisation of the economy and the adoption of new technologies; 3) financial assistance from the EU structural and other funds would be efficiently used. Having realised all the assumptions of this scenario, GDP produced in Lithuania per capita and measured in purchasing power parity terms would achieve the current average of the EU states in 2015. The low annual growth of GDP in Lithuania by 3% on the average (4% until 2015 and 2% in 2016–2025) forecasted in the slow economic growth scenario could be conditioned by a slow pace of the modernisation of the economy, the irrational use of domestic and foreign investment, unexpected economic and political crises, mistaken choices of priorities determining the future of the State, emigration, ageing population, etc. In this case, the current economic level of the EU states could be reached only at the end of the forecasting period, i.e. after 2025. The basic scenario is based on the most likely economic development trends, assuming that a GDP growth rate would be 5% until 2015, and 4% after 2015 (on the average 4.5% during the period from 2005 to 2025). The underlying assumption of this scenario is that the legislative basis, investment-friendly policy and competitive environment create appropriate conditions for the Lithuanian economy to attain the current economic level of the EU states within the next 15 years. XII. ENERGY DEMAND FORECASTS 17. An increase in energy demand is considerably influenced by the dynamics of macroeconomic indicators (GDP growth, structure of branches of the economy, etc.), increasing fuel and energy prices, consumer response to rising income and increasing energy prices, energy efficiency enhancement and other factors. An econometric model is applied in forecasting, describing energy demand at any given time as a function dependent on the key factors determining its changes. With a view to estimating the uncertainty of economic growth and other factors, uncertainty analysis methods were employed for forecasting, which allow analysing changes in energy consumption in economic sectors, taking into account interrelationship between the factors determining consumption, as well as assessing tendencies of their changes. 18. Final energy demand has been predicted by estimating energy saving potential in particular economic sectors in accordance with the National Energy Efficiency Programme for 2006–2010 approved by Resolution No 443 of the Government of the Republic of Lithuania of 11 May 2006 (Valstybės žinios, No 54-1956, 2006). The total increase in energy efficiency has been estimated by taking into account the reduction in energy intensity, i.e. the consumption of final energy per GDP unit. Final energy means the share of primary natural resources (coal, natural gas, oil, etc.) and secondary energy resources (electricity, petroleum products, district heat, etc.) which is directly consumed by final consumers (enterprises in the industry, agriculture, transport, trade and services sectors, individual consumers, etc.) in their equipment. During the forecasting period, final energy demand would increase 1.4 to 2.1 times depending on the chosen economic growth scenario. According to the basic scenario, the consumption of fuel and energy by branches of the Lithuanian economy in 2025 would be 7.4 million toe (tons of oil equivalent), or 77% of the amount in 1990. In this case, the final energy intensity index at the end of the forecasting period would amount to 67%, as against 2004, while energy efficiency according to this indicator would be higher than the current average of the EU states. 19. Although electricity consumption over the last five years showed the most rapid increase as compared to the consumption of other energy forms, at present Lithuania is considerably lagging behind developed European countries in terms of the comparative indicator of final electricity consumption per capita by economic sectors (2230 kWh per capita). In 2005, the average electricity consumption per capita in the enlarged EU was about 2.5 times higher than in Lithuania. According to forecasts, the envisaged modernisation of the national economy could stimulate a fast growth in electricity demand, and its share in the structure of final energy would increase according to all scenarios and in all branches of the economy. During the period until 2025, the basic scenario forecasts an annual average increase in electricity demand in branches of the economy by 3.7%. According to this scenario, electricity consumption at the end of the forecasting period would be about twice as much as in 2004. In the opinion of the experts working in the field of district heating, demand for the district heat supplied to consumers would not rise until 2025, as energy demand could be cut almost by half through the implementation of necessary programmes of the renovation of residential and public buildings (schools, universities, hospitals), and the energy characteristics of buildings under construction are based on the EU standards, hence, total district heat demand in 2025 is expected to be even lower than in 2004. 20. With the final shutdown of Unit 2 of the Ignalina NPP at the end of 2009 and without constructing a new nuclear power plant, demand for primary energy resources would increase only by approximately 25% during the period until 2025 according to the basic scenario, however, total demand for fossil fuel would increase almost 1.7 times within 20 years, i.e. from 6 million toe in 2005 to 10.5 million toe in 2025. Natural gas demand would double – from 2.4 million toe in 2005 to 4.8 million toe in 2025, and the share of natural gas in the national balance of primary energy resources would increase from 28.4% to 45% during the forecasting period. The forecasts predict that the share of indigenous (excluding indigenous oil) and renewable energy resources in the total balance of primary energy resources would grow by up to 20% in 2025, while the share of petroleum products, including orimulsion, would constitute about 35%. Having constructed a new nuclear power plant, primary energy demand would be higher due to poorer energy conversion properties of the nuclear power plant but demand for natural gas and petroleum products would decline and the diversity of primary energy resources would increase. In this case, the share of natural gas in the fuel balance could remain almost steady, i.e. close to 30%. XIII. FORECASTS FOR ENERGY PRICES 21. In 2005, the share of oil and petroleum products constituted 30.8%, natural gas – 28.4%, and nuclear energy – 27.9% in the national balance of primary energy resources. This conditions the heaviest dependence of domestic electricity prices on oil and natural gas prices. The average oil price in global markets was USD 37 per barrel in 2004, USD 55 per barrel in 2005, and it reached the level between USD 63 and USD 71 per barrel in 2006. It seems likely that from 2007-2008 oil prices would stabilise, gradually start going down and fluctuate between USD 50 and USD 55 per barrel after 2010. The natural gas price in Lithuania is virtually dependent on the price of natural gas imports from Russia. In 2005, the price of gas imports stood at about USD 84 per 1000 m3, and it rose from USD 125 to USD 145 per 1000 m3 in 2006. In 2007, the natural gas price in Lithuania will get close to prices in Western Europe and amount to USD 220 per 1000 m3. Since the gas price is related to the price of oil and petroleum products (fuel oil), it seems likely that the stabilisation of oil prices would contribute to the stabilisation of the respective price of natural gas imports. Recent years have seen a marked global upward trend in nuclear fuel prices (the current nuclear fuel price is approximately USD 29 per ton of oil equivalent). Nuclear fuel prices are expected to rise in future; however, they will not have any significant effect on the final electricity price. 22. In 2005, around 70% of the total domestic electricity production was generated by the Ignalina NPP (about 21% – by thermal power plants). In 2005, the average electricity generation cost was about 8.44 Lithuanian cent/kWh (taking into account the public interest component), and the average electricity price for the final consumer – about 23 Lithuanian cent/kWh. Taking into account the decommissioning of Unit 2 of the Ignalina NPP and the forecasted rise in the natural gas price, the average electricity generation cost in 2010 could stand at 16 Lithuanian cent/kWh, and the price for the final consumer could go up by 39% and amount to 32 Lithuanian cent/kWh. A price should remain at similar levels until the planned construction of a new nuclear power plant in 2015. In the current and coming periods, the electricity price should also depend on the establishment of new electricity interconnections with Western European and Scandinavian countries and the level of electricity prices in these markets, as well as on the scope of the use of renewable energy resources in Lithuania. The evaluation of all the circumstances allows making forecasts that the electricity price in Lithuania should be somewhat lower than that in the markets of Western European or Scandinavian countries. 23. For ease of use, natural gas is mostly used for the generation of district heat in Lithuania, and its share in the fuel balance stabilised at around 80% in 2003–2005. While predicting an increase in the gas price and seeking to diversify the risk, heating utilities started using biofuel whose share in the fuel balance increased from 2% in 2000 to 12% in 2005. With gas prices going up, the intensive use of biofuel allowed partially neutralising the influence of gas prices on heat prices, as well as stabilising the latter which fluctuated around 11.5 Lithuanian cent/kWh on the average in Lithuania in 2000-2005. This factor had a decisive influence on a growth in the number of heat consumers in Lithuania as it increased from 0.45 million in 2000 to 0.6 million in 2005. In 2006, heat prices in Lithuania increased by 30% on the average and exceeded the level of 15 Lithuanian cent/kWh. Heat suppliers generating all energy by burning biofuel did not raise their heat prices at all or increased them by several percent. Having taken into account the forecasted further increase in natural gas prices and the fact that the fuel component constitutes about 50% in the heat price, the heat price, with a future increase in gas prices by 30–50%, should rise up to 20% and amount to some 18 Lithuanian cent/kWh. XIV. DEVELOPMENT OF THE ELECTRIC POWER SECTOR 24. The total installed electricity-generating capacity (nuclear and non-nuclear) amounts to nearly 5 000 MW and exceeds the present domestic needs of Lithuania by more than two times, while the main source of electricity in the country is the Ignalina NPP which generates cheaper electricity than thermal power plants using fossil fuel. After the decommissioning of Unit 2 of the Ignalina NPP at the end of 2009, the current generating capacities, including small capacity CHP plants that are planned to be constructed, will be sufficient to meet the national demand until 2013 in all cases of the growth in national economic needs and supply with systemic services necessary for the functioning of the system, but the Lithuanian Power Plant and the existing CHP plants with the lowest electricity generation cost during the heating season should be modernised. After the decommissioning of Unit 2 of the Ignalina NPP, the Lithuanian Power Plant will become the major electricity generating source until the construction of a new nuclear power plant, hence, it is required to carry out the necessary testing and adjustments of the power plant equipment and to ensure its reliable operation with a capacity of at least 1500 MW from the beginning of 2010. However, the price of electricity generated by the existing generating units of the Lithuanian Power Plant using natural gas will not be competitive in the market. It will also be one of the factors determining the price of imported electricity. Therefore, it is necessary to accelerate the development of the capacities of more efficient CHP plants, to enhance the efficiency of the Lithuanian Power Plant and to reduce the price of electricity generated by the Lithuanian Power Plant. To this end, by 2010, the Lithuanian Power Plant should have a combined cycle gas turbine unit with a capacity of up to 400 MW (investment in this unit amounting to approximately LTL 720 million) installed, inefficient units of 150 MW capacity closed, as well as minimise the use of natural gas by substituting petroleum products for natural gas in other units. At the same time, it is necessary to consider the possibility and economic feasibility of constructing a coal-burning power plant with a capacity of about 400 MW in the Baltic region. Having implemented the planned projects, the current electricity generating capacities will be sufficient to meet the demands of domestic consumers until a new nuclear power plant is put into operation; however, if economically feasible, a part of electricity could be imported. It is expedient to consider possibilities of electricity import from Ukraine via Belarus. 25. With increasing capacity demand and subject to economic feasibility, new CHP plants should be constructed in Klaipėda, Šiauliai, Panevėžys, Alytus, Marijampolė and other cities with well-developed district heating systems, as well as in industrial enterprises with high heat consumption, etc. When assessing the feasibility of constructing new CHP plants, the economic appeal of the use of renewable energy resources in these plants should be evaluated on a case-by-case basis because this would help comply with the EU requirements in the areas of “green” energy production and environmental pollution reduction, as well as improve the energy security of the country. With increasing prices of fossil fuel and with electricity demand growing faster than heat demand, the replacement of the existing units by new combined cycle units in Kaunas and Vilnius CHP plants will become more relevant. At the end of the forecasting period, the share of CHP plants in the total electricity generation balance should reach 35%. 26. After the decommissioning of the Ignalina NPP, a new nuclear power plant should be constructed in Lithuania (investments totalling approximately LTL 10 billion) with a view to avoiding heavy dependence on imports of fossil fuel whose prices are difficult to forecast, reducing pollutant emissions into the atmosphere and mitigating related economic consequences. The issue of the management and final disposal of nuclear waste should be dealt with at the same time. 27. Due to a relatively light load of the power system of the Baltic States (about 6 000 MW in 2015), the optimum maximum capacity of one power unit without additional measures would in principle be about 800 MW. Should larger capacity units be constructed, additional generating sources will also be needed to ensure systemic services of the required scope. Having connected the power systems of the Baltic countries to the power systems of Western European and Scandinavian countries until a new nuclear power plant is put into operation, the reserve capacities of Western European and Scandinavian countries could be used. In the event of failure to construct necessary interconnections in time, it may be required to co-ordinate the reservation of large capacity units with the joint power system of Russia. 28. Lithuania will implement its commitments to the EU on the use of renewable energy resources for generating electricity. With wind power plants, small hydropower plants and biofuel burning CHP plants being constructed within the next five years, the share of renewable energy resources in the total electricity generation balance will account for over 7% in 2010, while at the end of the forecasting period their input should increase to 10%. The possibilities of constructing hydropower plants complying with environmental requirements will be considered, exploiting the potential of the River Neris and its basin. 29. Lithuania’s integration into the EU, closer co-operation with the other Baltic States, Scandinavian countries and Poland, as well as the forecasted location of demand and generating capacities call for changes in the structure of the national electricity grid. The three Baltic States should make joint efforts to draw up a strategy for the development of the electricity transmission network and action plans for its implementation, as well as to plan a sequence of actions and financing sources. 30. Electricity transmission and distribution networks in principle can satisfy the current needs of the power system; however, owing to the uneven development of different Lithuanian regions and with a view to connecting to the power systems of other countries, the electricity transmission networks should be substantially upgraded in Klaipėda, Vilnius and other regions, as well as new transformer substations should be built. In order to ensure the reliability of electricity supply in the western part of Lithuania, 330 kV line Telšiai–Klaipėda should be constructed by 2010, and 330 kV line Panevėžys–Šiauliai by 2013 (investments in these two lines – about LTL 170 million). In addition, it is necessary to connect Vilnius and Neris transformer substations by 330 kV line by 2020. A part of the electricity grid and a number of substations have been renovated in the recent years; however, about 60% of the transmission and distribution equipment is more than 20 years old, and one fourth of this equipment is more than 30 years old. Hence, it is necessary to continue the reconstruction and modernisation of the existing transformer substations, to rapidly improve the condition of the transmission grid and distribution networks by complying with the increasing requirements for the reliability and stability of energy supply, especially with a view to creating a stable common electricity market of the three Baltic States. In order to achieve an efficient electricity market, all possible economic and political measures should be aimed at promoting and constructing powerful interconnections with the power systems of Poland and Sweden (investments amounting to LTL 1.5 billion and LTL 1.4 billion respectively) as soon as possible. In future, these interconnections would allow the integration of the Baltic countries into the Western European electricity market. It is also necessary to enhance the reliability of energy supply and to create conditions for competition. 31. With a view to attaining the objectives of the development of the electric power sector, namely, ensuring the strategic reliability of electricity supply and integration into the EU market, the following measures are necessary: 1) to strengthen co-operation and collaboration with the Baltic countries, i.e. to develop a common electricity market and optimally exploit the common opportunities of the power systems of the Baltic countries in neighbouring markets as well as to foresee perspectives of further use of the Kruonis HPSP for the exchange of energy between the Baltic, Central and Western European and Scandinavian markets, following the decommissioning of Unit 2 of the Ignalina NPP and the construction of strategic interconnections; 2) to work out, together with Latvia and Estonia, an action plan for integration into the networks of Western European and Scandinavian countries envisaging better utilisation of available and future generating capacities and the enhancement of the reliability of electricity supply; 3) to construct strategic interconnections with Poland and Sweden by 2012; 4) to implement technical measures by 2015 necessary for the synchronised operation of the Lithuanian power system with the UCTE system; 5) to reconstruct and restore physically and morally worn electricity transmission and distribution networks with a view to serving the increasing loads and complying with the requirements for electricity supply reliability and quality (investments totalling approximately LTL 1.0 billion); 6) to construct 330 kV electricity transmission line Telšiai–Klaipėda by 2010, and 330 kV line Panevėžys–Šiauliai by 2013; 7) to put into operation a new nuclear power plant in 2015 at the latest; 8) to co-operate with the neighbouring countries to provide reserve capacity; 9) to exploit, to a maximum extent, development possibilities and positive features of distributed (decentralised) energy generation. XV. DEVELOPMENT OF THE DISTRICT HEATING SECTOR 32. About 75% of residential buildings in Lithuania’s towns are supplied with heat from district heating systems. The method of district heating, prevailing in Lithuania, is insufficiently efficient due to various economic, technical and social reasons. It is necessary to ensure further development of modern district heating systems by combining them with other methods of heating, as well as to improve and modernize them. 33. With a view to attaining the objective of the development of the district heating sector, namely, ensuring reliable and high quality supply of heat to consumers at minimum costs, encouraging competition between the types of fuel and the methods of heat production within the heat sector, increasing the efficiency of heat production, transmission and consumption, when producing heat, to more widely use indigenous fuel, biofuel and other renewable energy resources, reducing negative impact of the heat sector on the environment, the following meas …