We know from the theory that to stay competitive the economies must have adequately skilled and cost-effective labor among the factors of production. However, with internal consolidation and falling labour costs this might not be a sufficient condition. In addition to that, the economies also need a stable capital inflow – technology related investments today to keep a competitive edge tomorrow. A good example could be a case of the Baltic States with lower labour costs and ambitious energy strategy underpinned with massive investments and lower energy costs for the economies in the Baltic region.
Decades ago, the electricity systems of the Baltic States (Lithuania, Latvia and Estonia) were designed as an integral part of soviet led IPS/UPS electric grid. Lack of power links with Scandinavian countries and with Poland added up to the isolation of Baltic electricity market and after the closure of Ignalina Nuclear Power Plant (NPP) in 2009 made it fully dependent on gas from Russia as a single source for power generation.
Today, over 60 % of electricity in Lithuania is imported from third countries – this makes Lithuania as a leading country on import dependence. If, in addition to that, we will include imported natural gas for production of electricity, the energy dependency would make up to 75 % in total of what is consumed domestically (nb. as a rule an import dependency should stay below 10-15 % of what we consume on energy).
Facing the challenges of energy dependence, the three Baltic Prime Ministers in 2006 have signed a memorandum on Baltic energy strategy and a construction of new NPP. After a while, in July 2011, Lithuania in a tender procedure has chosen a consortium of Japan’s Hitachi (leading partner) and General Electric of the US, as the strategic investor for the construction of new NPP in Visaginas (a city in Lithuania, built next to now closed Ignalina NPP). Less than one year after, in March 2012, Lithuanian Ministry of Energy, the project company and the strategic investor Hitachi Ltd initialed the concession agreement.
The construction of new 1350 MW ABWR type third generation NPP reactor in Visaginas will be crucial to have an independent, reliable and high-capacity electricity producer. This will create a stable environment and favourable conditions for the integration of Baltic energy systems into the West European synchronisation standard (Entso-E/ Nordel). It will give a primary generation reserve to the stability and independence of the Baltic electricity systems and will make possible the disconnection from the old soviet design standard.
Next to energy independence, the construction of the NNP in Visaginas will also have a real impact on Baltic economies and financial stability in the region. The contracting works alone will inject up to 1.5 billion euros into three economies, making a third of the total investment in the region – 4 billion euros over the next ten years. It will also have substantial gains on the electricity price as the production costs will reach an upper limit of 5.2 euro cent/kWh, of which up to 3.2 euro cent/kWh will make capital costs in first 8 to 12 years of operation. In the decade after, the production cost will stay close to 2 euro cent/kWh.
In 2011, up to 0,5 billion euros were spent in Lithuania alone on electricity and gas imports and were added up to the current account deficit. A reverse scenario of power generation by new NPP would create favourable conditions to accumulate more domestic savings, improve trade balances and create industry led growth with more tax incomes to the state budgets. In 2025, the energy deficit in the Baltic region will be equal to electricity consumption of today’s Lithuania. This deficit will be perfectly matched with the new production capacity of NPP and would cut trade deficit in the region by 1 billion euros per year adding to potential savings and lower debt.