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Cablegate: Estonia Paves the Way for Second Major Electricity Link To

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RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHKW RUEHLA RUEHLN
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DE RUEHTL #0060/01 0331414
ZNR UUUUU ZZH
R 021413Z FEB 10
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC 0386
INFO EUROPEAN POLITICAL COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 TALLINN 000060

SIPDIS
DEPARTMENT FOR EEB/CBA
DEPARTMENT FOR EUR/ERA
DEPARTMENT FOR EUR/NB
COMMERCE FOR ITA

E.O. 12958: N/A
TAGS: ENRG PGOV EFIN ECON EINV PREL EN
SUBJECT: ESTONIA PAVES THE WAY FOR SECOND MAJOR ELECTRICITY LINK TO
FINLAND BY OPENING ITS ELECTRICITY MARKET

1. (SBU) SUMMARY: On January 28 the Riigikogu (Estonian
parliament) passed amendments to the Electricity Market Act which
will open 35 percent of the electricity market on April 1 and fully
open the market on January 1, 2013. Finnish transmission grid
company Fingrid has been waiting for this development before making
its investment decision about the proposed 650 megawatt (MW)
Estlink 2 cable between Estonia and Finland. The Finnish Embassy
lobbied hard for the passage of the bill and does not foresee any
more obstacles for the Estlink 2 project. The Russian government
was also apparently waiting for this bill, and opened a branch of
its state energy trader (Inter RAO UES) in Tallinn in late January.
The course of this bill, from inception to approval, had been
bogged down by parliamentary demands to reduce generous renewable
energy subsidies and concerns that major electricity consumers
would see sharp price increases. With the passage of this bill,
however, Estonia and Finland will be helping to improve the EU's
diversity of energy supplies. Both Estonian and Finnish officials
are confident the EU will confirm this year its EUR 100 million
contribution to the construction of Estlink 2. END SUMMARY.

OPENING THE MARKET

--------------------

2. (SBU) According to Estonia's new Electricity Market Act, as of
April 1, about 300 large consumers (35 percent of Estonia's
electricity market) will have to buy electricity on the Nord Pool
Spot electricity exchange (which currently trades electricity
between Norway, Sweden, Finland and Denmark). The market would
open for the rest of the consumers on January 1, 2013. At present,
all of Eesti Energia's (Estonian Energy) major clients buy
electricity at a price set by the Competition Authority rather than
the free market. Major electricity consumers lobbied heavily to
postpone the opening of the electricity market since they believed
this would increase the price they pay for electricity (Note: Nord
Pool Spot prices are usually higher than current Estonian prices.
End Note.)

3. (U) On January 28 Russian state electricity provider Inter RAO
UES announced it had opened a branch in Estonia, Inter RAO Eesti.
The Estonian office is a subsidiary of Inter RAO Lietuva, the
Lithuanian branch of the company, and was set-up expressly to
facilitate the sale of Russian electricity in Estonia when the
market opens.

4. (U) Responding to an EU directive, the bill also codified the
separation of the main grid company, Elering, from the production
and sales activity of Eesti Energia. Despite becoming a separate
company, Elering will also remain state-owned. The bill further
confirmed state support for the proposed construction of two new
oil shale-burning power generating units expected to be completed
between January 2013 and January 2016. (Note: The U.S. company
Foster-Wheeler sold the last two oil shale boilers purchased by
Eesti Energia and is considered to be the front-runner for the next
two units. END NOTE.)

IMPACT ON ESTLINK 2

------------------

5. (SBU) The opening of the electricity market from April 1 has
been one of the preconditions for the Finnish transmission grid
company Fingrid to make its investment decision about the
construction of Estlink 2, the proposed 650 MW undersea cable
between Estonia and Finland. (NOTE: The 350 MW Estlink became
operational in January 2007. END NOTE.) Fingrid must make its
decision by October for the project to be eligible to receive EUR
100 million in EU Recovery Funds.

TALLINN 00000060 002 OF 002


6. (SBU) Nina Nordstrom, Counselor at the Finnish Embassy in
Tallinn, told EconOff the Finnish Embassy lobbied hard for the
passage of the bill and that she was certain the Estlink 2 project
would receive backing by Fingrid and the EU. The Finnish DCM added
that the GOF's energy czar was visiting Tallinn February 2. The
trip had been planned to lobby for opening the electricity market,
but after passage of the bill has turned into "a friendly visit."

7. (SBU) COMMENT: The opening of the electricity market and
construction of Estlink 2, like accession to the euro zone,
demonstrate the GOE's commitment to make sacrifices to achieve
long-term economic and energy security objectives. Although it is
far from certain, most experts predict the opening of the market
and joining Nord Pool Spot will cause Estonian electricity prices
to rise. However, the GOE is willing to pay this price in order to
further integrate with its northern and western neighbors and
increase its diversity of supply for energy.
POLT

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