Renewable energy in Lithuania – new incentives under the market premium model

​In a nutshell:

According to a bill drawn up by the Ministry of Energy the Lithuanian RE funding system will be governed by a market premium model in the future. The market premium amount will be determined based on competition by way of energy source-independent auctions. All market players have been explicitly invited to participate in the legislative initiative and to submit proposals for this new incentive model.

After a long period of stagnation and only some move-ment in the area of already existing projects or projects under construction renewable energies (RE) in Lithuania will finally receive new political support: On 16 May 2018, the Ministry of Energy published the draft of a new incentive model for renewable energies.

More competition and no fixed funding anymore

The proposed amendment to the Renewable Energy Law (RE Law) provides for an entirely new system of support for the production of electricity from renewable energy sources. The aim is to increase the production of electricity from RE sources up to at least 3 terawatt hours (TWh) by 2020 (by comparison: today, slightly more than 2 TWh of electricity are generated in renewable energy plants). Moreover, it is planned to increase the market integration of renewable electricity producers.

What are the major differences to the present model?

The current incentive system in Lithuania is based on a long-term fixed approach where funding is granted for 12 years from issuing the energy production licence. So far, the Lithuanian subsidy instruments have been characterised by competition between the individual types of energy production and capping of incentives under a quota regime. The quotas were allocated at technology-specific state auctions. But those incentives were exhausted already about 3 years ago and no new auctions have been held since then.

By contrast, the new incentive model will be technology-neutral, i. e. the contract will finally be awarded to the project offering the lowest price, irrespectively of the type of energy production. As previously, the intention is to offer operators of RE plants the possibility to receive a calculable return from their investment by granting them extensive funds. But the fixed feed-in tariff would be replaced by a market premium which would be added to the market price – as previously, this incentive should be paid for the maximum period of 12 years (cap) (should the cost of the plant be amortised earlier, the incentives would be capped earlier as well).

There will also be reductions in the grid connection costs. So far, in most cases, they have been borne by network operators. In the future, this obligation will rest with power producers. The scope of tasks of power producers will also be increased by their mandatory inclusion in the mechanism of balancing electricity supply and demand. However, the very lucrative feed-in priority applicable so far to renewables will be maintained.

What is the procedure for calculating the feed-in tariffs?

The already mentioned market premium is to be deter-mined competition-based by way of auctions. These auctions will be held for certain energy volumes to be produced, independently of the type of RE. An entirely new feature of this concept is that subject to certain conditions also projects launched in other EU member states will be allowed to participate in these auctions based on bilateral agreements to be signed for this purpose.

Crucial for the calculation of incentives are the following factors:

Reference price

• is basically calculated according to the pro-cedure of the National Commission for Energy Control and Prices in due consideration of the price at the Nord Pool power exchange;
• is independent from the type of technology;
• applies throughout the funding period (until the costs of the plant are completely amor-tised but no longer than for 12 years);

Market price

• is (currently) calculated based on the average hourly electricity price for the region of Lithuania at the Nord Pool power exchange;

Maximum price

• is basically calculated according to the pro-cedure of the National Commission for Energy Control and Prices;
• this fixed amount may not be exceeded in bids for a market premium.

Calculation method

• If market price > reference price = maximum price - market price is paid;
• If market price < reference price = total market premium is paid;
• If market price > maximum price = no market premium is paid;
• If market price ≥ 0 = no market premium is paid.

Alternative option: Purchase of plants on the
secondary market

In Lithuania, apart from constructing new plants, investors have the possibility to purchase, on the secondary market, plants (regardless of whether completed, still under construction, or in the planning phase) that already enjoy a feed-in tariff under the present funding model. In such a case, a purchaser receives the so far applied guaranteed feed-in tariff over the remaining period determined in the permit and, thus, earns a calculable return.

Conclusion

As regards the expansion of RE, apart from reducing CO2 emissions, Lithuania‘s declared focus is on regaining energy independence which it lost in 2009 when the nuclear plant, Ignalina, was shut down and dismantled.

In presenting the legislative bill, the Lithuanian Ministry of Energy has acknowledged that the development of renewable energies, which has been stagnating in the past years, needs a new stimulus – in particular in view of the country‘s aspiration to regain energy independence. However, the planning of the new funding model is currently still in infancy: The amendment of the RE Law, if adopted by the Lithuanian Parliament, will probably become effective as of 1 May 2019.

In any case, the bill promises the long-awaited new tailwind for the Lithuanian RE sector and this might open up new opportunities both to construction companies and producers.

For many years, Rödl & Partner has been a pioneer in providing consulting services in the renewable energy sector in the Baltic states. In this attractive market for energy projects we have built a reputation among im-portant international investors and plant manufacturers as one of the leading legal and tax specialists. Should you therefore wish to receive more information on this topic, our interdisciplinary experts will be glad to help and assist you.