Regulatory challenges in the Baltic electricity market(s)

1. 11th Baltic Electricity Market Mini-Forum, 1 October 2010 Regulatory challenges in the Baltic electricity market(s) in connection to development of new nuclear power plant project(s) in the Baltic countries Andres Tropp Jaanus Arukaevu Eesti Energia AS

2. Nuclear developments in the Baltic region • NNPP project in Lithuania • NNPP project in Kaliningrad - Idea to build nuclear power plant in Estonia

3. General situation in the Baltic electricity market • From legal point of view Baltic countries’ electricity markets are still functioninglike three separate entities • EU climate and energy policy objectives require changes in current power generation portfolios • Large-scale base-load power plants (>400 MW) can be built only if investors believe in creation of truly regional market based on fully harmonised legislation - Unprecedented uncertainty in long term energy policy measures on regional level – there have been and still are plans but those have not been fulfilled in time

4. explicit Baltic electricity market by 1.10.2010 NPS Helsinki Single buyer 350 MW implicit Single buyer NPS Estonia Fixed deliveries Balancing deliveries Single buyer 20% explicit 80% implicit explicit implicit Single buyer 100% implicit Baltpool Single buyer Single buyer Kaliningrad

5. Situation after NordPool Spot extension to Estonia -Extension of Nord Pool Spot to Estonia is in general a success story • The system was tested on August 24, 2010 when an “emergency exit” was used • This success can not last unless Latvia and Lithuania will join NPS too

6. Anatomy of the “Euro 2000” problem Setup for the price hike in Estlink price area on 24th of August: - Estonian producers produced more than Estonia consumed during every hour on August 24 • Estlink1 import capacity 350 MW was in full usage • Power generation capacities in Latvia and Lithuania were not in spot market disposal • 80% of EST-LAT cross-border capacities are allocated to NPS Estlink price area. Therefore the demand is encouraged to go to the spot market - Prices in NPS Estlink price area have been usually lower than actual costs of marginal producers in Latvia and Lithuania. Therefore there is a natural interest in Latvia and Lithuania to purchase from NPS Estlink price area - Price-neutral purchasing bids were put up in the spot market (as risks were covered by hedging) What happened: - On August 24 demand exceeded all supply bids due to significant price-neutral purchasing interest from Latvia and Lithuania. Prices hit “the roof”. Conclusions: 1. The price hike was inherently programmed into the setup of the NPS Estlink price area 2. Gravity still works! Market is efficient only if demand and supply can meet each other in natural way 3. If Latvia and Lithuania will not join NPS, Estonia will be enforced to limit the current implicit allocation of EST-LAT cross-border capacities. It will be the signal that regional market has failed.

7. How does it concern NNPP developments? • Baltic countries’ electricity markets are not big enough for NNPP project(s) if they will remain fragmented • For successful development of NNPP project(s) Baltic countries need to establish a well integrated common electricity market and to connect it with the Nordic markets and the Central European markets • As Lithuanian NNPP project is approaching very decisive phase in its development we expect developments on the ground by mid-2011 - Plans are not enough. There is a need for actual developments!

8. Need for mitigation of unfair competition threats from third countries • Russia’s energy policy is differing substantially from the respective policy of EU: • CO2 emissions have no value for producers; • capacity market and electricity market are separated; • single buyer on border - Under current setup there is no possibility to have a fair and transparent competition with producers located outside the EU markets - If the issue of unfair competition will not be handled the NNPP project(s) in the Baltic countries will face severe financing problems - The measures should be applied in all Baltic countries (and hopefully in Finland) in unified manner - Plans are not enough. There is a need for actual development

9. Tasks to do in order to make NNPP project(s) in the Baltic countries happen - Introduction of Baltic countries’ wholesale electricity market within NPS price area by 1 July 2011 • Introduction of measures on non-EEA third country electricity imports by 1 October 2011 • Interconnections to the North and West ready by 2014 and 2018 respectively

10. Thank you for your attentionAny questions?

11. CB trading models at border: Single buyer • Only one trader can decide about CB trades at one side of the border • On one side trader can define trade volume based on actual meter readings Single buyer 100% Trader 2 Trader 1 Trader 3 Trade volume is based on meter reading Trade is based on fixed volumes

12. CB trading models at border: Single buyer Explicit auction • CB capacity can be divided into multiple parallel volumes. • Traders can rent the usage right of CB capacity from open auctions. • Several traders can use their rented share of capacity simultaneously for their own fix-volume trades. • TSO-s will settle deviation between fixed volumes and actual meter reading 50% Trader 3 Trader 1 50% Trader 2 Trader 4 TSO TSO Volume is based on deviation between fixed volumes and meter reading Trade is based on fixed volumes

13. CB trading models at border: Single buyer Implicit auction • CB capacity is allocated to neighbouring electricity markets for fixed trades: • In day ahead markets CB capacity is used for automatic trades from market area with lower price to market area with higher price. • In intraday markets the free CB capacity is provided based on principle “first come first serve” to deliver traded electricity Trader 1 Trader 3 100% Market 1 Market 2 Trader 2 Trader 4 TSO TSO Volume is based on deviation between fixed volumes and meter reading Trade is based on fixed volumes