Robert Anderson in Stockholm -

Lithuania has finally established the national energy holding that will take part in the pan-Baltic project to replace the obsolete Ignalina nuclear power station, but an agreement with Poland over the shareholdings in the proposed €7bn plant is still some way off.

On Monday, February 4, the economy ministers from the Baltic states and Poland could only agree that their national energy utilities should continue negotiations and report back to their political masters by July 1.

Lithuanian Prime Minister Gediminas Kirkilas had said before the meeting he hoped a joint project company would be formed this autumn, with construction beginning in two to three years. But Anicetas Ignotas, undersecretary at the Lithuanian economy ministry, admitted to bne afterwards that only a draft agreement is possible by autumn, while a final division of shareholdings will have to wait until early next year when an environmental impact assessment determines how large the plant could be.

The Soviet-era plant - the only nuclear power station in the Baltic states - has to be closed down by the end of next year under Lithuania's accession treaty with the EU. Under the original plan drawn up in 2006, Ignalina's replacement should be operational by 2015; this is already completely unrealistic and 2020 is now seen as a more likely date. Unless the dispute over the national shareholdings can be settled before the environmental impact assessment is completed, the project will be even further delayed, creating the risk of power shortages and making the Baltic states even more dependent on imported Russian electricity and gas.

Ignalina's second unit represents one-third of current Baltic power generation. Ignalina produces around three quarters of Lithuania's power, while Latvia imports some 30-35% of its needs. Estonia, on the other hand, is a power exporter - with substantial, though polluting, capacity from oil shale burning plants - and has a power bridge to Finland. When the second 1,300-megawatt (MW) unit closes in 2009, the booming Baltic states will face an estimated shortfall of 1,170 MW in power generation. This could force them to import more power and gas from Russia, when they are already worried about the way Moscow is using its energy exports to exert diplomatic pressure on importing countries.

Three's company, four's a crowd

The shareholding dispute stems from Lithuania's decision to invite Poland to join the project. The prime ministers of Lithuania, Latvia and Estonia agreed in February 2006 to build a plant, but then Lithuania allowed Poland to join the project in December 2006. "The Lithuanians are always trying to bring the Poles in," says one Estonian diplomat. "It destroys the (Baltic) family feeling."

Lithuania, as the host country, has demanded a 34% stake, while Poland insists on earmarking 1,200 MW of the plant's capacity for itself. Lithuania's government ignored a joint letter from the other partners and pushed a bill through parliament last June giving it 34% and them each only 22% in the project. Poland then demanded 1,200 MW of the plant's capacity or it would withdraw from the project and cancel plans for a power bridge to Lithuania, connecting it to the rest of the European Union. At the February 4 meeting, Lithuania and Poland said they had agreed to sign the delayed deal to build a power link between their two countries later in the month.

The Balts have already agreed to accommodate the Poles by doubling the size of the proposed plant to at least 3,200 MW, from which it will have the right to more than one-third of the power. This laid the basis for a potential settlement as Latvia and Estonia are seeking much less power - Estonia, for example, only wants some 500 MW in capacity. However, this size of plant would cost a massive €7bn to build and could cause environmental problems because of the volume of water needed for cooling the reactors. "Only after the environmental impact assessment can we discuss the capacity of the plant," says the economy ministry's Ignotas. He points out that this will delay any final agreement on shareholdings, though he insists the project remains on schedule.

Negotiations on the national shareholdings have also been held up by the change of government in Warsaw. The Balts are now hoping that Donald Tusk's new administration will prove more accommodating than its predecessor, which had notoriously prickly relations with other EU member states.

In implicit recognition of the project's likely delay, Lithuanian officials have stepped up their lobbying of the European Commission to try to postpone Ignalina's closure. PM Kirkilas has said that if the partners reach an agreement on the project, the Commission might be open to a postponement. However, the Commission has repeatedly quashed any such hope. "The Commission trusts Lithuania to fully honour its EU Accession Treaty obligations with respect to the closure and decommissioning of the second Ignalina nuclear unit in 2009 and will continue its financial support to mitigate the consequences of the closure," a spokesman for Andris Piebalgs, EU energy commissioner, said in February.

More disgruntled partners

Lithuania finally removed the other main obstacle to the project in January by establishing the state-owned energy national champion Leo LT that will be a partner for power utilities Latvenergo of Latvia, Eesti Energia of Estonia and PSE of Poland.

Last June, the Lithuanian parliament passed a controversial law creating a Lithuanian national champion that would hold the shares of Lietuvos Energija, the national grid, as well as RST and VST, the eastern and western distribution companies. On February 1, Lithuania's parliament approved the division of shares that was agreed between Lietuvos Energija and VST's owners in December. Vilniaus Prekyba, a private Lithuanian group, will give up its dominant stake in VST (via NDX Energia) in return for 38% in the holding, while E.On Ruhrgas of Germany will be made an offer for its 20% stake in RST. Afterwards, the holding will be listed on the stock exchange.

However, the large stake granted to Vilniaus Prekyba sparked a walkout by the opposition in parliament, leaving the legislation to be passed by a bare quorum of deputies.

E.On Ruhrgas is also unhappy with its role in the new energy market structure. It now is faced with either remaining a minority investor in RST - a company it eventually hoped to acquire - or being bought out.

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