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By Giedra Gureviciute and Andres Doernberg, with inputs from John Morgan, Charlie Zimmermann, Robert Borgstrom, Charlie Smith, Larrr Sutkowski, Donna-Marie Perez, John Bickel, Dennis Meyers and Ruth Cherenson.

U.S. Agency for International Development
Vilnius, Lithuania
March 2000

A MESSAGE FROM THE USAID MISSION DIRECTOR

Since 1992, USAID has been a major supporter of Lithuania’s transition to a vibrant democracy with a free-market economy. USAID has provided assistance in the political, economic, and environmental spheres, significantly contributing to Lithuania’s progress. One of the main areas of economic support for the country was energy sector. The U.S. Government energy sector assistance program was designed to assist the Government of Lithuania in strengthening energy policy and nuclear safety, and addressing issues resulting from the eventual closure of the Ignalina Nuclear Power Plant (INPP) in order to achieve a stable, economically viable, and safe energy supply. Approximately one quarter of the USAID economic assistance funds to Lithuania was provided in the energy sector.

The energy sector plays a pivotal role in the economic development of Lithuania. After the separation from the Soviet Union, Lithuania was left with one of the world’s largest nuclear power plants, with a capacity far exceeding internal needs of Lithuania and the only existing market in the East. Aside from dealing with the market issues, the country had to build a number of institutions to ensure safe and efficient usage of its energy resources, and develop a legislative body to enable smooth operations of the whole sector. Moreover, it had to face problems related to transition to market-oriented economy.

USAID has promptly answered to the needs of the country in building a viable energy sector and concentrated its efforts on nuclear safety, energy sector regulation and restructuring, energy efficiency and Baltic regional energy cooperation. Main partners in this work were the Ministry of Economy, the National Control Commission for Energy Prices and Energy Activities, VATESI and Lietuvos Energija. During nine years of the USAID presence in Lithuania, its energy sector has developed structures for sufficient functioning and has prepared to launch yet new changes to become fully compatible in the region. USAID is proud to have contributed to the process and together with its implementing partners is rejoicing the achieved progress.

The end of the USAID in-country bilateral program in September 2000 marks the beginning of a new-level cooperation between the United States and Lithuania. We believe that the partnership between the two countries continues far beyond the formal projects, and provides a valuable asset in future work. Moreover, the U.S. government will continue assist with regional initiatives, such as the Regional Energy Regulators Network, the Electricity Development Institute, and support for the regional electricity market under the Baltic Council of Ministers.

Principle Government of Lithuania Counterparts During the USAID Energy Sector Assistance Activities

1. Viktoras Valentukeviius, Ex-Viceminister of Economy
2. Saulius Kutas, Head of VATESI
3. Vidmantas Jankauskas, Head of the National Control Commission for Energy Prices and Energy Activities
4. Vladas Paskeviius, Deputy General Director of Lietuvos Energija
5. Jurgis Vilemas, Director of the Lithuanian Energy Institute

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EXECUTIVE SUMMARY

Background

The Lithuanian energy infrastructure was centrally planned to support the energy needs of a highly energy intensive economy in the northwest region of the Soviet Union. Electrical capacity is more than three times the country needs. The sharp reduction in Lithuania’s energy demand in 1991-92 is one result of the closure of many large industrial enterprises, and the rapid increase in energy prices. The combination of inadequate tariffs and payment arrears has been addressed by periodic increases in energy prices and measures such as disconnections and the imposition of sanctions upon budgetary organizations.

Lithuania has one of the world’s largest nuclear power plants, the 2500 MW RBMK Ignalina Nuclear Power Plant (INPP), that provides about 80 percent of the country’s electricity. The INPP plant lacks a containment structure and would not be licensed by nuclear safety regulators in Western countries. As a result, the international community was concerned about the possibility of an accident, and started assisting the Government of Lithuania (GoL) in increasing the safety at the INPP and discussing dates for its closure. These issues influenced the design of USAID’s energy program.

USAID Energy Program

The goal of USAID/Lithuania’s energy program has been to help the GoL to strengthen energy safety and policy. Four main areas have been addressed under the program: (1) Nuclear Safety, (2) Energy Sector Reform, Regulation and Restructuring, (3) Energy Efficiency, (4) Baltic Regional Energy Cooperation.

Nuclear Safety

In 1991, the GoL established a nuclear safety >inspectorate, VATESI, in response to international concerns about the safety of INPP and the lack of a nuclear regulatory process in Lithuania. In 1994, the GoL signed a Grant Agreement with the European Bank for Reconstruction and Development which financed a program of safety upgrades and a Safety Analysis Report (SAR) of the INPP. In 1995, at the request of the GoL, USAID started funding an assistance program undertaken by the U.S. Nuclear Regulatory Commission (NRC) to support the VATESI during the SAR review and licensing activities. At the same time, the U.S. Department of Energy was funded by the U.S. Government to undertake a number of safety upgrades at the plant, including operator training and improvements in procedures, and upgrades to safety equipment. Financial contributions for the SAR and Review of the SAR have been made by a number of donors, and by the Nuclear Safety Account, to which the U.S. Government, through USAID, is a contributor. Greater understanding of the INPP has led to significant safety improvements. Indeed, the INPP is now the most studied RBMK reactor in the world. By 1999, VATESI had engaged the INPP staff on a number of licensing and safety concerns. Advised by a panel of international nuclear safety and regulatory experts, VATESI has evolved in its role as a nuclear regulator. In 1999, the new National Energy Strategy was passed, committing to closure of INPP Unit One by 2005, and a decision on the closure of Unit Two in the next Strategy in 2004.

Sector Reform, Regulation and Restructuring: During the first years of independence, Lithuania moved quickly to create a market economy. To reduce the role of government in managing the monopolistic energy sector,considerable legislative and institutional change was required. To separate energy policy and regulation from the commercial function of energy companies, an independent regulatory body was necessary. In 1995, a new National Control Commission for Energy Prices and Energy Activities (NCC) was created, and USAID initiated a program to strengthen this institution. Assistance to the NCC was provided through direct advisory services, seminars, study tours, training, and policy studies. In four years the NCC has developed into a major institutional player. It has made considerable progress in rationalizing energy pricing, removing subsidies, and bringing prices closer to actual costs. Currently, the NCC is one of the most advanced new regulatory institutions in Central and Eastern Europe.

A second important activity was the Utility Partnership Program (UPP), implemented by the U.S. Energy Association in 1994-1998. Under the UPP, a long-term partnership was established between the U.S. electric utility Alabama Power Company and the Lithuanian power company, Lietuvos Energija (LE). Through exchange visits and seminars, over 100 managers from the LE gained new skills and perspectives, which assisted the company in its transition and enabled it to the new challenges of operating in a market economy. The LE established Public Relations, Telecommunications, Economics, and Finance Departments all key elements leading to privatization of the power sector. USAID also assisted the LE to develop western-style accounting procedures, which helped improve the financial performance of the company.

Energy Efficiency: Increasing energy efficiency is important in the context of improving Lithuania’s balance of payments and economic growth, as well as strengthening the financial position of commercial companies. The development of rational and transparent pricing is critical to establishing incentives for energy efficiency. A factor limiting the impact of price increases is non-payment, especially from budgetary entities such as government facilities, schools, and hospitals. In response, USAID/Lithuania supported a pilot energy efficiency program that brought together a customer with serious non-payment problems, the Santariskiu hospital, with an energy provider, LE. This project demonstrated how a power company can work to enhance customer service and help customers find innovate ways to reduce their arrearages. This project also helped the hospital reduce its energy costs while improving health care.

Strengthening Baltic Regional Cooperation: Regional investment planning is critical for the Baltic countries to help defray the costs of power investments and operate their power generation and distribution systems in a coordinated and more efficient manner. Regional cooperation is also essential to facilitate a joint approach on major issues such as the ultimate closure of the INPP and environmental emissions from the Estonian oil shale power plants. In 1995, in response to a request from the three Baltic countries to assist their power utilities develop a least-cost energy investment planning capability, USAID established the Baltic Regional Energy Development Program (BREDP). Under the BREDP the national utilities of the three countries and the regional dispatch center DC Baltija developed a regional cooperation plan and a program for evaluating and developing power pooling for the Baltics region. It is anticipated that this plan will not only strengthen the economic viability of the region, but also attract foreign investment to the power sector.

Results

The energy sector has changed significantly in the years of USAID’s presence, and now the GoL is ready to launch major new changes in restructuring and privatization of the energy sector. Through a series of events summarized in the following table, laws and decrees have been passed, institutions have been created, and certain management and ownership changes have taken place.

Post- presence activities

After closure of the USAID Mission, the U.S. Government and USAID will continue supporting the following energy programs:

DOE’s Nuclear Safety Program: Working together with the Donor community, the Department of Energy will continue its safety upgrade activities at INPP.

Baltic Regional Energy Development Program: This program will continue supporting restructuring of the power sector, and regional cooperation within the Baltic countries. The project is closely related to the Common Baltic Electricity Market initiative with the Committee of Energy of the Baltic Council of Ministers.

Energy Management Development Institute: All three Baltic countries participate in this legacy mechanism under the Utility Partnership Program. The Institute will continue to support regional cooperation for restructuring the power sector and improved coordination of power sector issues in Central and Eastern Europe.

Association of Energy Regulators: This program will further support the growth and institutional capabilities of energy regulatory organizations in Central and Eastern Europe and the Former Soviet Union.

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I. INTRODUCTION

The United States Agency for International Development (USAID) has played a major role in the economic, political and social development of Lithuania since 1992. The primary goals have been to stimulate the growth of a free market economy, promote strong democratic institutions and a dynamic civil society, improve environmental protection, and strengthen the social safety net. USAID assistance has enhanced Lithuania’s capacity to integrate into Western political and security structures, establish a foundation for economic growth, and achieve democratic reforms which rival most Central and Eastern European countries. By the year 2000, the United States will have provided over $89 million in technical assistance, training, equipment, and investments. More than 300 Lithuanian businesses obtained technical assistance, and more than 3000 Lithuanian specialists received training in the United States.

USAID’s program evolved from an early, more generalized effort involving more than 55 projects, into a focussed program centered in four areas:

• Improving fiscal policy and national budgeting
• Developing a more stable financial environment with better capital markets
• Increasing democratization via enhanced citizen participation
• Strengthening national energy policy and nuclear safety.

The energy sector focus area cuts across many of the goals of the Agency and of United States Government policy towards the Baltic region. Lithuania’s energy infrastructure power stations, electric transmission lines, gas and oil pipelines, the oil refinery, were all centrally planned as part of a high-energy intensive soviet economic strategy, and were built to meet the energy needs of the northwest of the Soviet Union. An important component of this was the Ignalina Nuclear Power Plant capable of producing most of Lithuania’s electricity needs. This large energy infrastructure, out of scale with the needs of a country as small as Lithuania, was fueled by plentiful supplies of Russian oil and gas. Lithuania has no significant primary energy resources. Moreover, in the years leading up to and shortly after independence, Russia did not hesitate to use its oil and gas as a political weapon against Lithuania, which saw supplies cut off for long periods of time. Thus, Lithuania’s political independence requires that it have access to fuel imports from other sources.

The energy sector also includes major opportunities for improvement of environmental health and safety of the population. A multimillion-dollar effort in improving the safety of the two nuclear reactors at Ignalina has been led by the EBRD and the countries that contribute to the Nuclear Safety Account, including the U.S. Government. The need for autonomous nuclear regulator was identified and supported by technical assistance and institution building assistance from the U.S. and other donors.

Finally, the macroeconomic aspects of the energy sector are important, and its unique character (large segments of the sector are made up of what economists call "natural monopolies") make the transition to a market economy particularly challenging. Energy imports have a significant affect on the balance of payments, and energy sector companies have suffered huge losses that continue to be drain on the budget. Yet the components of the energy sector are amongst the most valuable assets to be sold off by the Government. This transition, however, will involve large price adjustments that affect segments of the population that cannot afford the cost of their heating bills. Moreover, it also requires the break-up of existing integrated monopolies in order to introduce competition. A decade after independence, privatization of the electric and gas sectors is yet to be achieved.

It is in this context that USAID designed its technical assistance program in Lithuania, which began in 1992 and ends in 2000. Funding for the energy programs totaled $8.0 million. An additional $12.0 million of U.S. government funds went to the U.S. Department of Energy for nuclear safety programs in Lithuania.

This report describes the USAID energy program in Lithuania, including its rationale, its goals, and the results achieved.

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II. BACKGROUND

Before independence, the energy infrastructure of Lithuania was centrally planned to support soviet energy needs. Electrical capacity, for example, is more than three times the needs of Lithuania. It includes the 2,500 MW INPP and the 1,800 MW oil and gas-fueled Lithuania Power Plant in Elektrenai. INPP produces about 80 percent of the electricity generated in Lithuania. The Lithuania Power Plant and the Combined-Heat-Power (CHP) Plants are run at extremely low levels of utilization, primarily during the planned outages of INPP.

Following independence in 1990, Lithuania’s energy demand declined dramatically, with the closure of many large industrial enterprises. Between 1990 and 1996, energy demand in Lithuania fell by 58 percent, from 10.7 million tons of oil equivalent, to 4.5 million.. Consumption of oil and gas, all imported from Russia, fell between 1990 and 1996 by 63 percent and 44 percent respectively. Electricity use has fallen from 16.5 twh in 1990 to 7.7 twh in 1998, after bottoming in 1995.

Exports of electricity declined from 16.5 twh in 1990 to 9.3 twh in 1996 and to 6.5 twh in 1998, a reflection of the reduced economic activity of Lithuania’s neighbors. Exports are currently even lower due to the inability of Belarus, the largest importer, to pay for its purchases.

The transition to a market economy has turned household energy (mainly heat and electricity) into the largest consuming sector, increasing from 18 percent to 30 percent of total energy. At the same time, industry, the largest under the old economic system, decreased from 36 to 28 percent. This dramatic change has had significant impact upon the prices paid for energy by consumers, who in the past could be cushioned from price increases through payments by industry.

These decreases in energy consumption leave large unutilized capacities in refineries, pipelines, electricity generation and district heating systems. Many of these facilities are deteriorating, due to the lack of financing for adequate maintenance and essential rehabilitation. Further, over-capacity results in excess employment and higher production costs. Currently, the Lithuanian economy is in the middle of a major financial deficit, which has political repercussions.

The situation is most crucial in district heating systems, which are likely to continue facing those problems for many years. District heating systems have large investment needs, have weak mechanisms to enforce payments (especially by governmental entities), and face declining demand due to competition from alternative sources of heat (gas and electricity). Additionally, control of the district heating systems has been transferred to their respective municipal governments. These local governments lack the resources for effective financial and operational management of their new acquisitions, a situation exacerbated by overall government pricing controls for energy.

Lithuania has one of the world’s largest nuclear power plants, the 2500 MW Ignalina Nuclear Power Plant, that provides about 80 percent of its electricity. The most serious of many safety problems is the lack of a containment structure. Nuclear safety regulators in Western countries would not license such a plant. As a result of this, and risk analyses that have been conducted, the international community is concerned about the possibility of an accident, and has encouraged the GoL to close INNP as soon as practical. In addition, Lithuania lacked a western-styled nuclear safety culture and nuclear regulatory review process.

Restructuring the energy sector can bring essential capital, and improve efficiency. With the exception of the state-owned INPP, the energy industry is organized around Joint Stock Companies (JSCs) for electricity (Lietuvos Energija), gas (Lietuvos Dujos) and several petroleum refining and distribution companies In late 1999, a one-third interest in the refinery, Mazeikiai Nafta, was sold to a U.S. oil firm, Williams Company. Privatization of a portion of the electricity and gas sectors will be pursued more actively - with a tender for a financial advisor for LE in early 2000. The financially plagued gas company is also being considered for a privatization tender in 2000. Privatization of district heating companies is expected to move forward under EBRD funding.

Energy companies have made significant progress in addressing the problems of inter-company debts and financial losses caused by the arrears in payments from customers, largely government and municipal entities ("budgetary agencies"). The government has had to make up for losses in LE and in 1997 took over some of its debts. The combination of inadequate tariffs, especially heat, and of payment arrears, has been addressed by periodic increases in prices of heat and electricity and measures such as disconnections and the imposition of sanctions upon budgetary organizations. These issues influenced the design of the USAID energy program in the country.

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III. PROGRAM ACTIVITIES

III.1 Energy Regulation

Background

During the first years of independence, the GoL moved quickly to create a market economy. In the energy sector, the GoL began to introduce competition and attract new investment by restructuring vertically integrated monopolies, and creating a regulatory environment to ensure that the price of energy recovers costs of operations and provides an incentive for private sector participation. The USAID program in Lithuania supported the legislative, institutional and organizational changes that were required to position Lithuania’s energy sector for the implementation of market reforms.

The first National Energy Strategy, approved by the GoL in 1994, supported the separation of energy policy from the commercial function of energy companies, the gradual abolition of subsidies, and the introduction of economically justified energy prices and tariffs. This strategy also called for enacting an Energy Law that would create an independent energy regulatory body.

In 1995, the GoL created an independent Energy Price Commission. It did not have permanent staff nor offices, and was only able to recommend tariff changes to the GoL. This was, however, still a first step in restructuring the energy sector. Later that year, responding to a GoL request, USAID provided technical assistance to build the institutional capability of the newly created Energy Pricing Commission (later The National Control Commission for Energy Prices and Energy Activities, NCC) in the areas of market liberalization and energy tariff development.

Program description

Since the inception of the USAID program in 1995, assistance focused on establishing a comprehensive energy policy, one that implemented transparent energy pricing methodologies and institutionalized public participation in the process. Under contract to USAID, Bechtel Consulting was selected to provide direct technical advisory services, seminars, study tours and policy studies. The following are major elements of the assistance program from 1995 until the present:

• Recommendations were provided to the GoL on the organization and functional structure of the new energy regulatory commission including a list of the duties the commission should perform. The consultants prepared a report describing the regulatory structure and functions in commissions of other European countries.
• Over the period 1995-2000, a multi-disciplinary team of U.S. technical advisors regularly visited Lithuania to assist the NCC in analyzing and developing tariff methodologies, advising on the need for implementing international accounting standards, developing strategic plans, developing energy licenses and other regulations, guiding the development of energy policy with respect to sector reform and restructuring and making recommendations for the creation of an information management system to collect and analyze energy pricing data. It also procured computers, software, and other office equipment.
• Beginning in March 1998, a long-term advisor position was created to enhance the program by providing daily, on-site consultations to the GoL and the NCC on energy policy, legislation, pricing, and tariff implementation and procedures. The Bechtel advisor has been effective in coordinating the USAID program with those of other donors and, therefore, in focusing a broad range of assistance programs on the singular goal of energy sector reform.
• In-country and US-based training was provided to NCC staff members in the areas of tariff setting, public relations, strategic planning, etc. Through training, tariff methodologies reflecting full economic costs and the concepts of incentive tariffs were introduced to the staff.
• As part of the public education in regulation of the energy tariff setting process and in a joint effort with the EU, Bechtel consultants made presentations to the Parliament of Lithuania on Energy Sector Restructuring and Energy Pricing Reform topics.

Results

• In 1997 the NCC was established by Presidential Decree as a permanent body, and authorized to review and set power tariffs.
• Professor Vidmantas Jankauskas, an eminent energy expert with the Lithuanian Energy Institute, who had participated in USAID-funded training and study tours, was appointed head of the NCC.
• Tariff methodologies have been developed and refined through joint work with U.S. consultants. The methodologies are published on the NCC web site for use by energy sector companies.
• In 1997, the Lithuanian Energy Law was modified and a variety of reform initiatives were implemented. These actions followed the GoL decision to separate electric utility and district heating operations for the purposes of enabling transparent accounting procedures, saving energy, rationalizing prices, and encouraging private sector participation.
• Since 1997, the NCC has been approving new tariffs for electricity, gas and district heating.
• The NCC has cooperated in regional issues through participation in the regional meetings of energy regulatory commissions from Central and Eastern Europe and the New Independent States, and in various other international conferences and seminars on energy regulatory issues.
• In 1999, GoL separated LE’s distribution, generation and transmission functions, which lead to further privatization of LE. The NCC has been reviewing tariff structures to determine consistency with the LE structural changes.
• In 1999, NCC increased tariffs for the sale of electricity from the INPP. It also increased LE’s sales tariffs, and Lietuvos Dujos’ natural gas sales and transmission tariffs, enabling the gas sector to introduce third party access and liberalization of the market. These were the first major tariff increases in the gas and electricity sectors since 1995.
• In 1999 the responsibilities of the NCC were expanded to include pricing in new sectors of the economy unrelated to energy, such as transport and water. The commission is also increasingly being asked to participate in governmental deliberations regarding the privatization of LE, and its role in a regional energy market.

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III.2 Utility Partnership Program

Background

From 1991-1998, the United States Energy Association conducted the Utility Partnership Program (UPP) for Central and Eastern Europe. This period of time revealed dramatic changes in the electric power sector in each of the ten countries where the UPP was active: Poland, Hungary, Czech Republic, Slovak Republic, Bulgaria, Romania, Former Yugoslav Republic of Macedonia, Latvia, Lithuania, and Estonia. The primary focus of the UPP was to assist the electric power sector in CEE as it transformed its management and operational procedures and long-term business strategies to function effectively in a market economy.

Lithuanian UPP, Description and Results

The Lithuanian partnership between LE and the Alabama Power Company (APCO) lasted from 1994 to 1998. Four years of collaboration have built a strong foundation for the partnership between these two companies.

Over the life of the partnership, over 100 specialists from Lithuania participated in different activities such as exchange visits, study tours, internships and in-country seminars. Training covered the following priority topics: human resources management, general utility management, customer service, contract negotiations, hydropower and finance and rehabilitation, rate making, telecommunications, transmission and distribution, financial management, public relations, power pooling, regulation, and restructuring and privatization.

In addition, Lithuanian electric sector officials were actively involved in the Regional Program for the Baltic Countries. Regional symposia provided a forum for regulators and utility managers from Baltic countries to hear from each other about new developments, and to solidify relationships that could be helpful as the region moves towards a more unified approach to market-based integration and compliance with EU conditions for accession.

As a result of the activities under the UPP program, significant management and organizational changes were implemented at LE. Described below are representative highlights of the program’s accomplishments:

Public Relations: Senior managers at APCO assisted LE in the establishment of the company’s first public relations department. LE senior managers attended APCO press conferences, and used this experience for their own press briefings and other public relations documents. LE senior executives also established an extensive internal communication department that today publishes an employee newsletter and maintains a web site focused solely on employees.

Telecommunications: Telecommunications experts at APCO and LE discussed various telecommunications management technologies utilized by the electric power industry in the U.S. Using this experience, LE created a telecommunications department and developed the company’s internal telecommunications network. LE subsequently implemented a fiber optic ring around the territory of Lithuania, using standard, direct high voltage lines in the transmission system. In addition, LE upgraded the entire system for improved management and reduced long-run costs by installing integrated voice/data switches for the distribution of data among different types of users. The National Dispatch Center has completed the SCADA/EMS system, which improved customer service and reduced costs, while positioning LE for network integration with other countries in the region and in so doing, with Western Europe as well.

Financial Management: The lack of standard financial management tools and expertise has been one of LE’s most acute problems, especially with regard to securing international sources of financing. The UPP program helped to establish of the Economics and Finance Department within the company, which now functions as the company’s treasury department. Throughout the year, the department accomplished key milestones in the process of transitioning from state-owned to a jointly owned stock company. For example, LE obtained a credit rating for the company at the beginning of 1998, which enables prospective investors to judge the relative risk of investments in the company. Company also achieved the ability to borrow without a sovereign guarantee. LE completed and obtained a formal appraisal of its assets, establishing a benchmark for firms interested in evaluating the company’s relative worth in an open market. LE also organized its corporate accounting system separately from its treasury functions, acknowledging company debt. Finally, LE can now accurately project treasury requirements for company operation, and has made investment decisions based on the actual availability of funds. All of these achievements have deepened and improved LE’s relationship with key banking institutions, and have afforded the company with a comfort level in dealing with finance and accounting issues.

Other Areas: LE implemented new, updated management and policy procedures. In addition, the department developed revised qualification requirements and employee selection and evaluation processes, as well as new training guidelines and requirements for specific positions. LE also utilized its relationship with APCO to expand its capabilities in the field of information technologies. New hardware systems were purchased in addition to the installation of project management software, the ORACLE data base management system, and a geographical information system. Using APCO computer models as a guide, LE submitted a rate calculation methodology to the Lithuanian Energy pricing Commission. Major components of this methodology have been adopted for the preparation of rates and tariffs.

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III.3 Customer Service Program and Demonstration Energy Efficiency Project

Background

During the Soviet period, energy tariffs were set below economic costs and energy use was highly inefficient in Lithuania. After the collapse of the planned economy, energy prices started to rise to reflect market conditions. Significant efficiency improvements became cost-effective and necessary.

The program was designed to demonstrate the value to the power company of assisting its customers to become more energy efficient and improve bill collections.

Program description

The USAID contractor, Electrotek, and its sub-contractor, Central Maine Power International, implemented a program in support of the newly created Customer Service Department at Lietuvos Energija (LE).

Another activity was to implement a pilot energy efficiency project at the Santariskiu hospital in Vilnius, in order to provide LE with experience on Demand Side Management (DSM) investments. This project brought together a customer with serious arrearage problems, the hospital, with an energy provider, LE. An agreement was reached between the hospital and LE for the hospital to pay down its arrears to LE in exchange for LE support and assistance in helping to develop the project. Under this project a high efficiency heat recovery ventilation system was installed at the cardiac surgery unit which reduced the heating and cooling costs and the re-infection rates at the hospital. The project was implemented with cost sharing from the hospital.

Results

Customer Service Department: A Statute and staffing-resource requirements plan was designed for a newly established Customer Service Department (CSD). A CSD Customer Service Plan was developed and implemented. Major elements of the plan include:

• CSD developed brochures on energy-efficiency measures for customers, which were distributed through local networks, regional customer service centers, payments agencies and banks.
• A teacher training course on energy efficiency conducted in cooperation with the Ministry of Education, which resulted in the development of an energy efficiency curriculum for Lithuanian schools and became an integral part of the overall training program at the Lithuanian Teacher Training Institute.
• Load research programs were developed and implemented.
• Training programs to complement existing staff capabilities were developed and implemented.
• A strategy for DSM programs and their marketing was developed.

Energy Efficiency Project at Santariskiu Hospital: The heat recovery and air conditioning unit for two operating rooms on the second floor of the surgical wing was budgeted at $106,000, and its installation and retrofit of the surgical wing was budgeted at $96,000. The USAID grant covered the equipment and the hospital paid for the retrofit of the wing and the installation. The unit went into service in September 1999. Estimated savings are about 12,000 Litas ($3,000) per year, and re-infection rates should be reduced by two-thirds.

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III.4 Baltic Regional Energy Development Program

Background

The activity was designed in response to the request of the Baltic Council of Ministers in their Letter of Intent of April 5, 1994 that led Estonia, Latvia and Lithuania to develop the Baltic Regional Energy Development Program (BREDP). Two memoranda of Understanding were signed in June 1995 by a Steering Committee made up of the heads of the three Baltic power systems and DC Baltija, as well as representatives of USAID, EBRD and the World Bank.

There are significant benefits to the Baltic countries for creating a common regional energy development strategy. The electricity systems of each Baltic State are small, and are interdependent with each other and their neighbors. Together the three countries have reasonably well balanced electricity demand and supplies and are also large enough to allow for market liberalization, with sufficient numbers of stakeholders (producers and consumers) for real competition. Most importantly, a least-cost energy planning capability at the regional level is desirable to evaluate system’s requirements as a result of the closure of the Ignalina nuclear power plant.

Estonia has an indigenous energy resource, oil-shale, which provides about 90 percent of its power. The existing capacity is sufficient to meet its energy demand and to export, but the country is in need of peak generating capacity.

Latvia has national power production based on hydro power plants and co-generation plants using imported gas and heavy fuel oil, but needs to import electricity to meet its needs.

Lithuania has no domestic energy resources. Yet it has a surplus of power generation from the Ignalina Nuclear Power Plant (INPP), plus thermal power plants with both conventional and CHP units, and hydro and pumped storage power plants. The fuel for the INPP and thermal power plants is imported primarily from Russia.

The Baltic countries as a whole have a strong power system with a well developed transmission network, a broad range of power generation types suitable for regional control and efficient operation. A regional least-cost plan is also vital to securing the participation of the EBRD and the World Bank in future energy facility investments.

The objectives of the BREDP are to introduce modern planning methods to the Baltic power systems, to develop a least-cost energy planning capability in the Baltic region, and to enable the Baltic States to develop and regularly update a common least-cost plan.

Program description

This activity is jointly implemented by Eesti Energija of Estonia, Latvenergo of Latvia, Lietuvos Energija of Lithuania, the regional dispatch center DC Baltija in Riga, and Electrotek Concepts, Inc. (USA), under the guidance of the Steering Committee.

Electrotek Concepts brought together the power systems of all three Baltic States, and the regional dispatch center, to introduce advanced planning methods. Electrotek worked with each of the utilities to accurately model their electric systems, and with the group as a whole to conduct regional planning exercises, including load forecasting and expansion planning. Major elements of assistance include:

• Load forecasting, expansion planning, and power system simulation software
• Training and technical assistance for load forecasting, expansion planning, optimal power flow models, and transaction scheduling software
• Load flow, short circuit and transient/steady state analysis of the transmission system, to determine the impact of regional operation on stability and integrity
• Transmission pricing and ancillary service cost studies to demonstrate cost allocation techniques
• Extensive on-the-job training and advanced formal training programs in the U.S. in regional planning and operations techniques.

The BREDP is ongoing, and part of the USAID post-presence activities in Lithuania. Its technical assistance will focus on the creation of a Common Baltic Electricity Market.

Results

• The three power companies and the regional dispatch center have established and staffed permanent planning departments, which have developed professional planning capabilities
• The three power companies and the regional dispatch center produced the "Baltic Regional Energy Development Program 2000-2015" (June 1999), that identifies cumulative investments in power plant rehabilitation and new power plants accounting to $1.0-1.4 billion (depending on the date of closure of the two units of the Ignalina power plant). This helps the system to meet European environmental emissions standards
• The three power companies and the regional dispatch center are creating the capability for regional power system operations using state of the art capacity scheduling software. This is vital for the future operation of an open, competitive regional market for electricity
• In October of 1998, an Agreement on Co-operation in the Energy Sector was signed by the Baltic Ministers of Economy
• In April of 1999, a Baltic Energy Strategy was approved by the Baltic Council of Ministers Committee of Energy that seeks to create Common Baltic Electricity market. The BCoM Committee of Energy signed a Memorandum of Joint Intentions on a Common Baltic Electricity Market.

The implementation of the above decisions by the Baltic governments depends on cooperation and collaboration among the three Baltic utilities and the dispatch center DC Baltija. In great measure, this working relationship was developed within the framework of the BREDP.

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III.5 Nuclear regulatory and Licensing Assistance Program

Background

The Ignalina Nuclear Power Plant (INPP), consisting of two Soviet-designed RBMK-1500 reactors, was originally built to be part of a four-unit station providing power to the northwest sector of the Soviet Union's Unified Power Grid. The units are sited just within the northeastern border of Lithuania, near the town of Visaginas. The first two units went into service in 1983 and 1987. Construction of the third unit was halted in 1989. Despite being newer and approximately 50 percent larger than the other soviet RBMK's, a number of safety studies (which should have been carried out and independently reviewed in the design stages) were never completed at the time the units went into commercial operation.

The Republic of Lithuania, which declared independence from the Soviet Union in 1990, had no national nuclear safety oversight function with regards to INPP. After the collapse of the Soviet Union in 1991, INPP came under the jurisdiction of the Government of Lithuania (GoL), which had to rapidly assume responsibility for both the operation and regulatory oversight of the two operational units. At the time the GoL assumed this responsibility, it lacked a formal regulatory infrastructure and the technical support organizations to carry out these roles. This included:

• Lack of sufficiently trained personnel to carry out the functions of a regulatory body
• Lack of national legislation dealing with responsibilities and oversight functions associated with nuclear power facilities
• Lack of national nuclear safety and licensing regulations, nuclear standards, safety and licensing review plans, independent safety inspection and verification programs
• Lack of a formal network of technical support organizations.

These problems were compounded by the financial crises of the early 1990's, which made it difficult to obtain spare parts, foreign nuclear equipment, and nuclear-related services. Concerns developed within the United States and other European governments that under these conditions, the potential existed for a serious nuclear accident, with radiological releases outside Lithuania's borders.

In 1994 the GoL signed a Grant Agreement with the European Bank for Reconstruction and Development, which financed a program of safety upgrades and a formal Safety Analysis Report (SAR). As a condition of this grant, the GoL agreed to conduct a formal safety and licensing review, and not to operate the first unit of INPP beyond the point at which the closure of the Graphite-Pressure Tube Gas Gaps would reach "dangerous levels." The Ignalina SAR and its independent review were completed in 1997. The independent SAR review indicated a number of technical weaknesses in the Ignalina design, and revealed gaps in information provided in the SAR, which needed correction prior to the issuance of a formal license. The GoL accepted the results of these studies and commenced work to address the shortcomings. At the same time, requests were made to the U.S. and European governments for technical assistance to VATESI to improve its capabilities as an independent safety regulator.

Program description

In 1995 the U.S. Nuclear Regulatory Commission (NRC), with funding provided by USAID, initiated a comprehensive seven-point program to support the safety promoting and licensing activities of the Lithuanian Atomic Energy Safety Inspectorate (VATESI). This program has consisted of technical assistance and training in the following areas:

• Review of national nuclear safety legislation and the development of nuclear safety regulations
• Development of nuclear standards and documents providing regulatory guidance
• Development of safety and licensing review plans
• Transfer of selected computer codes and data bases used for assuring nuclear safety
• Technical training of VATESI staff
• Performance of technical reviews of critical safety issues by VATESI.

A unique facet of the execution of this program is the integration of U.S. assistance efforts with those of European organizations. In 1996, NRC joined with Sweden, Germany, France, U.K. and Finland in the formation of the Lithuanian Licensing Assistance Program (LAP). LAP provides a forum for coordination to assure that support requested by VATESI is provided efficiently and without duplication.

Results

The safety and regulatory oversight functions of VATESI have improved significantly compared to the conditions, that existed in 1990. The major accomplishments include:

• Law on Nuclear Energy approved in 1996 by the Parliament, with technical comments and reviews provided by the NRC Office of General Counsel
• Lithuanian Nuclear Regulatory Regime, based extensively on NRC principles, issued in 1997
• General Regulations for Nuclear Power Plant Safety (VD-B-001-0-97) based on modifications to the Russian OPB-88 Standard issued in 1997
• Regulations for Reactors at Nuclear Power Plants (VD-T-001-0-97) based on modifications to the Russian PBYa-89 Standard issued in 1997
• A complete review of the Single Failure Analysis of the Reactor Control and Protection System performed in 1997, and a complete review of the under-voltage and under-frequency logic in the INPP Onsite Power System performed in 1998-1999
• Sub-Tier Regulations dealing with Incident Reporting, Maintenance, and Fire Protection developed and issued in 1998
• Inspections on Quality Assurance Program Implementation, and design Modification Processes, carried out by VATESI in 1999, based upon training concerning NRC regulatory inspections
• A complete independent assessment of the data and an independent projection of the point at which Unit 1 shut-down would be required according to the Grant Agreement with EBRD, completed in March 1999
• VATESI developed a formal list of required actions and safety case submittals for issuance of a license for Ignalina Unit 1, leading to the issuance of the first western-style Safety Evaluation Report and License by VATESI in July 1999.

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III.6 Nuclear Safety Program

Background

The RBMK type Ignalina Nuclear Power Plant (INPP) provides about 80 percent of Lithuania’s electricity. The most significant difference between the RBMK design and most of the world’s nuclear power plants is the RBMK’s lack of a massive steel and/or concrete containment structure as the final barrier against large releases of radiation in case of an accident. This type of design would not be licensed by regulators in Western countries. In the aftermath of the 1986 Chernobyl disaster, a series of other safety issues were identified. An international effort was launched to develop a probabilistic safety analysis and a safety analysis report for the Ignalina nuclear power plant. As a result of these analyses, the international community became concerned about the possibility of an accident.

Program description

The United States Government program began in 1992 with commitments to support an international agreement to provide immediate safety assistance to older Soviet-designed nuclear power plants. The U.S. Department of Energy (DOE) initiated a technical assistance program at the INPP to address some of the key safety deficiencies. DOE projects were coordinated with the U.S. Department of State, USAID, and the U.S. Nuclear Regulatory Commission. The projects involved U.S. contractors, U.S. National Laboratories, as well as Lithuanian contractors and organizations, including the Lithuanian Energy Institute. The projects included upgrades to safety systems, improvements to analytical capabilities, and refined procedures.

A U.S. expert participated in an international Nuclear Safety Commission, which met periodically to review the safety status of the plant, and to advise senior Lithuanian officials on nuclear safety matters.

The near-term safety upgrades were carried out without encouraging long-term operation of the plant. The U.S. activities supported the EBRD/Lithuania agreement to close Unit One at the point where major reactor overhaul work would be required to extend its life.

Results

The DOE projects resulted in specific and significant safety improvements at INPP. A series of nuclear safety projects have been completed, examples of which include:

Control and protection system upgrade project (DAZ): This project involved designing and installing a circuit to correct deficiencies and to improve the reliability of the control and protection system. The upgrade was completed at Unit One in 1999, and at Unit Two in 2000.

Electronic safety control modules: This project helped build in-country manufacturing capability, plus three hundred electronic safety control modules. These new modules replaced aging ones, thereby minimizing the risk of upsets to the plant, and improving the reliability of the control and protection system.

Training system support: U.S. experts provided equipment and technical support to improve training courses for plant operators and instructors. Well-trained operators are essential for the safe operation of nuclear power plants.

Symptom-based emergency operating instructions (EOIs): This project provided technical support for the development of EOIs for the plant operators. When finalized and implemented by the plant, these will be a significant improvement to current event-based procedures.

Operational safety: A series of operator exchange visits were conducted, so that INPP personnel could observe safety approaches at U.S. plants. A series of technical exchange meetings were held to share specific ways to improve numerous procedures, such as log keeping and watch turnover, at INPP.

Configuration management: This project ensures that documents and drawings are carefully managed and systematically revised as needed, so that the plant systems are well understood, and so that no changes are made which could reduce the level of safety. The project includes computer systems, procedures and training.

Safety analysis capability: This project helped build capacity for in-country safety analysis, including computer modeling of plant thermal hydraulics and core neutronics, and safety assessments of plant upgrades and procedures.

Safety maintenance technologies. Up-to-date tools and training for maintenance workers was provided to INPP, to reduce equipment malfunctions. Tools included valve-seat resurfacing equipment, pipe lathe/weld-preparation machines, vibration monitoring and shaft alignment systems, infrared thermography equipment, and insulation analysis equipment.

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IV. CONTINUED SUPPORT

After closure of the USAID/Mission in Lithuania, USAID and the U.S. Government will continue funding the following programs:

DOE’s Nuclear Safety Program: Working together with the Donor community, the Department of Energy will continue its safety upgrade program at INPP. The aim of the program is to continue strengthening nuclear safety at the INPP, before its decommissioning.

Baltic Regional Energy Development Program (BREDP): This program will continue to support restructuring of the power sector, and regional cooperation within the Baltic states. USAID initiated the BREDP in 1996, at the request of the Baltic Council of Ministers. An early result of the BREDP was an extensive study on power system expansion requirements on a regional basis. The first milestone was achieved in 1998, with the Agreement on Co-operation in the Energy Sector signed by the three Baltic Ministers of Economy. This was followed by a Baltic Energy Strategy approved by the Baltic Council of Ministers Committee on Energy in 1999. This includes a Memorandum of Joint Intentions on a Common Baltic Electricity Market, given political backing at the February 18, 2000 meeting of the three Baltic Prime Ministers. USAID, through the BREDP, will support the Working Groups established to create the regional electricity market.

Energy Management Development Institute: In 1999, USAID/Washington established the U.S.-CEE Electricity Management Development Institute (EMDI), as an outcome of the Utility Partnership Program. The EMDI is funded by USAID, other donor organizations, and participants themselves. It conducts courses for managers of generation, transmission, and distribution companies, ministries, regulatory bodies, and other energy-related organizations. The activities take place both in the CEE and Baltics. Lietuvos Energija will continue to be an active participant in the EMDI program. The EMDI’s future goal is to become self-sustainable, supported entirely by participating institutions.

Regional Association of Energy Regulators: In October 1998, the U.S. National Association of Regulatory Utility Commissioners entered into a three-year cooperation agreement with USAID to implement a program of coordination and exchange among new utility regulatory commissioners in Central/Eastern Europe and Eurasia. The thirteen countries in the region with independent energy regulators, among them Lithuania, participate in the program. At the third Annual Meeting, held in Budapest in December 1999, an agreement was reached take the first steps towards a permanent Regional Association of Eastern European and Eurasian Commissions.

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ACRONYMS

APCO Alabama Power Company

BCoM CoE Baltic Council of Ministers Committee of Energy

BREDP Baltic Regional Energy Development Project

CBEM Common Baltic Electricity Market

CEE Central and Eastern Europe

DOE United States Department of Energy

DSM Demand Side Management

EBRD European Bank for Reconstruction and Development

EOI Emergency Operating Instruction

EMDI Energy Management Development Institute

NCC National Control Commission for Energy Prices and Energy Activities

EU European Union

INPP Ignalina Nuclear Power Plant

GoL Government of Lithuania

LAP Lithuanian Licensing Agreement Program

LE Lietuvos Energija

LEI Lithuania Energy Institute

NRC Nuclear Regulatory Commission

RBMK Reactor model of INPP (Russian acronym)

SAR Safety Analysis Report

UPP Utility Partnership Program

USAID United States Agency for International Development

USEA United States Energy Association

USG United States Government

VATESI Lithuanian Atomic Energy Safety Inspectorate

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List of References

1. Bechtel Consulting, "Final Report March 1995- December 1998, Eastern Europe Regional Energy Efficiency Report", 1999.
2. Jankauskas, Vidmantas, NCC, "Unbundling, Privatization and Tariff Reform in the Energy Sector". Presentation at USAID Conference "Lithuania: From Transition to Convergence". Economic Research Center, Vilnius, 1999.
3. Joint Stock Company Lietuvos Energija "1998 Annual Report". Vilnius, 1999.
4. Lithuanian Energy Institute, "Energy Capacity, Production and Technical and Economical Productivity in the Energy Subsectors – the 1990 Trends". Report prepared under contract with USAID/Lithuania. Vilnius, October 1998.
5. Lithuanian Energy Institute, "Cost Functionalizing Policy Review Assistance for the Energy Pricing Commission". Report prepared for USAID/Lithuania. Vilnius, 1999.
6. Lithuania Ministry of Economy, "National Energy Strategy". Vilnius, 1999.
7. Nuclear Regulatory Commission "U.S. Nuclear Safety and Licensing Assistance Program for the Lithuanian Atomic Energy Safety Inspectorate (VATESI)". Report to USAID/Lithuania, 1999.
8. Valentukevius, Viktoras (Lithuanian Ministry of Economy), "Key Strategies for Encouraging Energy Sector Growth, Efficiency and Conservation". Presentation at the USAID Conference "Lithuania: From Transition to Convergence", Economic Research Center. Vilnius, 1999.
9. Vilemas, Jurgis, LEI, "The Economics, Politics and Safety Dimensions of Ignalina Nuclear Power Plant Operation". Presentation at the USAID Conference "Lithuania: From Transition to Convergence", Economic Research Center. Vilnius, 1999.
10. U.S. Department of Energy "Lithuania Nuclear Safety Program, Report to USAID/Lithuania", 1999.
11. United States Energy Association, "Utility Partnership Program: Final Activity Report", 1998.
12. World Bank, "Lithuania, An Opportunity for Economic Success", Volume 1: Main Report; Volume 2: Analytical Background, Washington D.C, 1998.

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