Market Report Baltic Gas Association 2007

2007-05-22

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Content
Introduction ...........................................................................................3 Estonia...................................................................................................4 Finland...................................................................................................6 Germany ................................................................................................8 Latvia...................................................................................................13 Lithuania..............................................................................................17 Poland..................................................................................................20 Sweden ................................................................................................23

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Market Report 2007 - Introduction

Baltic Gas is working on issues related to the development of an integrated gas market in the Baltic Sea Region.
The Market report 2007 has the aim to reflect the business environment country by country according to the position of Baltic Gas described in the Position Paper of Baltic Gas 2005 and in addition giving some basic figures regarding the gas market in respective country.

1. Possible or decided new infrastructure project and their effect on the gas markets
New gas infrastructure projects are required in the Baltic Sea Region in order to develop new and existing gas markets. Investments in transmission pipelines are necessary to connect the isolated gas markets in the region with each other and integrate them to the Pan-European gas pipeline network.

2. Plans or decisions on new storage facilities

Investments in gas storages are important to improve both the security of gas supply and a further development of gas as an energy source.

3. Changes in the business frame work affecting the gas business

Fair, harmonized and predictable business framework and conditions in the Baltic Sea Region are prerequisites to develop the gas market in the region.

4. The regulation regime in the country including allowed rate of return

In order to attract investors to invest in new gas infrastructure the economical viability of new investments must be comparable to other similar investments in the society. A sufficient and reasonable rate of return on investments in new infrastructure projects must therefore be accepted.

5. The development of the harmonization of the regulation between countries

In order to improve the conditions of the cross border pipeline investments the harmonization of regulations like concessions, licensing and technical standards is vitally important.

6. Basic figures regarding gas consumption

The report includes some basic statistics regarding use of gas during 2006.

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Report Estonia 2007

2007-05-22

Market Report 2007 Estonia

1. Possible or decided new infrastructure projects and their effect on the
gas markets The gas supply systems of the three Baltic States are not directly connected to the European gas supply system, and Russia is the only one who supplies gas to all the three Baltic States. The gas networks of the Baltic States are connected solely with each other and with the Russian gas supply system and therefore the Baltic States can be classified as an isolated natural gas market. The natural gas supply system in Estonia exists via two routes the Russian border station Vrska and the Latvian border station Karksi in the southern part of Estonia As a result of the completion of the natural gas pipeline to Prnu (high pressure pipeline 58 km from Vndra to the town Prnu and including Prnu County) the gas consumption in the towns of Prnu and Sindi as well as in the immediate areas surrounding these towns started in October 2006. Our customers in the towns of Rapla and Pssi started to consume natural gas as well. The company also started the sale of natural gas to the first filling station using natural gas as car fuel. 751 new customers were connected to the natural gas network in 2006 and the company had 51 thousand customers as of December 31, 2006. Today, with Gasum OY, we are developing a new interconnector between Estonia and Finland. First stepconstruction of a gas transmission network to the town of Paldiski. The new Government (after the Parliament election in March 2007), an alliance between three parties, has launched the energy policy priorities: - regional development focused on local fuels, oil-shale utilization, - concerning natural gas it has been stated: security policies and security of supply aspects have to be considered within a framework an increasing dependency from one supplier.

Infrastructure and Sales 2006

1.01 0.79

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Report Estonia 2007

2007-05-22

2. Plans or decisions on new storage facilities No plans exist concerning additional storage facilities in Estonia. The gas reserve up to 1/3 billion m3 belonging to the company is stored in the Latvian Inchukalns underground gas storage. 3. Changes in the business framework affecting the gas business In compliance with the requirements laid down in the Natural Gas Act of the Republic of Estonia (approved on March 9, 2007), which have been harmonised with the European Directive on the natural gas internal market, AS Eesti Gaas established a subsidiary, AS EG Vrguteenus, operating as from January 1, 2006 and rendering natural gas transmission and distribution service through the natural gas network. In addition to that, AS Eesti Gaas its reorganised subsidiary AS EG Ehitus. The principal activities of the company include the construction and renovation of gas networks and the construction of heating systems. Since January 1, 2006 the main field of activity of AS Eesti Gaas, as mother company, has been the purchase and sale of natural gas. Due to a significant increase in fuel prices in the world as well as the Estonian fuel markets the company had to amend its natural gas purchase and sale agreements concluded with its customers. 4. The regulation regime in the country including allowed rate of return The Estonian regulatory system also includes an ex post decision compared to ex ante system in most European countries. The regulatory authority has announced an allowed rate of return on 8.0 percent nominal before tax. 5. The development of the harmonization of the regulation between countries No such activity to be reported from Estonia 6. Basic figures regarding gas consumption in Estonia Natural gas production in Estonia: no production of natural gas. Natural gas imports to Estonia and only from Russia (2006): 1 010 MNm3 or 12.4 billion kWh gross calorific value. Remarkable is the growth of natural gas consumption and that the consumption of natural gas in Estonia exceeded one billion m3 for the first time in the period after Estonia regained its independence. Hence, the goal set several years ago has been achieved. Share of the primary energy consumption: 16 percent. The net turnover of AS Eesti Gaas in the 2006 fiscal year totalled EEK 1,711 million. The natural gas sales amounted to 793 million m3 in 2006, while the sales in 2005 were 778 million m3. The natural gas consumption in Estonia totalled 1,010 million m3 in the fiscal year, i.e. 1.4 % more than in 2005.

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Report Estonia 2007

2007-05-22

Market Report 2007 Finland

1. Possible or decided new infrastructure project and their effect on the gas markets
In its own operations Gasum is working to create the prerequisites for increased natural gas consumption. To ensure the availability of natural gas, Gasum is currently studying three alternatives. When implemented, the Baltic connector linking the networks of Finland and Estonia would offer the possibility to optimise the transmission of natural gas to Finland and the Baltic States; besides forming a connection to Latvias gas reserves, the new pipeline would open up the possibility to subsequently begin the importation of liquefied natural gas (LNG) as a joint venture carried out among the regions gas companies. The joining of Finlands network to the Nord Stream pipeline, that when completed will transmit 55 billion m3 of natural gas each year from Russia to Germany, would also improve the reliability of natural gas deliveries for Finland. What is however most important from the Finnish perspective is the maintenance and strengthening of existing import channels, as well as the construction of new compressor stations when necessary. It would then be possible to increase the capacity of the two transmission pipelines coming from St. Petersburg according to Finlands future needs. The decisions to expand the natural gas pipeline in the Turku region and Western Uusimaa can be made during 2007 if natural gas users are ready to commit themselves to a sufficiently ample level of natural gas consumption.

2. Plans or decisions on new storage facilities

No plans exist concerning storage facilities in Finland.

3. Changes in the business frame work affecting the gas business

There are no major changes in the business frame work. A feed-in tariff for peat fuelled electricity production has been introduced. The Emissions trading scheme has a strong affect on the gas market. The price volatility on the emissions allowances market has affects the development on the electricity market. Thus about 2/3 of the natural gas is used in CHP-plants this affects the gas business very strongly.

4. The regulation regime in the country including allowed rate of return

Finland being not directly connected to the interconnected system of any other Member State and having only one main external supplier may derogate from legal unbundling and TPA. According to the Natural Gas Market Act, the Energy Market Authority will issue decisions confirming the methods that network operators must follow when determining the rate of return of natural gas network operations and the charges to be collected for distribution services during the regulatory period.

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Report Estonia 2007

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The first four-year regulatory period started at the beginning of 2006, and it will expire at the end of 2009. The Energy Market Authority issued its first network operator-specific confirmation decisions in May-June 2005. The confirmation decisions define, e.g., the valuation principles for the capital invested in network operation, the determination principles for an acceptable rate of return on the capital invested in network operation, the method of determining the result of network operation and correction of the profit and loss account and balance sheet as required by the method.

5. The development of the harmonization of the regulation between countries

No such activity to be reported from Finland.

6. Basic figures regarding gas consumption in Finland

Natural gas production in Finland: no production of natural gas. Gasum sold a total of 45.2 TWh of natural gas in 2006. The use of natural gas in 2006 was up by 8% compared to 2005. The higher consumption was primarily the result of cold weather at the beginning of the year and an electricity price that remained high for an extended period. Natural gas meets around 11% of Finlands energy balance. Combined heat and power (CHP) production, where natural gas is primarily used, increased by more than 5% in 2006 compared to the previous year. Natural gas was used to generate 33% of district heating and combined production electricity. The share decreased by six percentage points compared to the previous year. Electricity consumption in Finland in 2006 approached 90 TWh, 6.5% more than in 2005. The growth was quantitatively greater than any previous level. Natural gas accounted for 10.9% of electricity procurement.

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Report Germany

2007-05-22

Market Report 2007 Germany

1. New infrastructure projects which are possible or have been decided and their effect on gas markets
New pipelines in Germany (VNG & E.ON Ruhrgas) The largest infrastructure project for E.ON Ruhrgas in 2006 was the completion of the East-West transport system to Belgium/UK by the section from Porz to Stolberg (85 km and compressor station). It is planned to complete two pipelines to continue the Nord Stream pipeline by 2010/2013 as a joint project of E.ON Ruhrgas and Wingas. It is planned to construct a pipeline to connect the planned LNG terminal in Wilhelmshaven and additional gas volumes (implementation of import options/diversification; increasing export options/transit to Netherlands, Belgium, UK). Nord Stream pipeline through the Baltic Sea From 2010, about 27.5 billion m of natural gas per year are to be delivered to Europe via the Nord Stream pipeline. The later expansion will allow for a capacity of 55 billion m of natural gas per year. This pipeline will carry additional natural gas to satisfy growing demand in Europe. Liquefied natural gas (LNG) In addition to infrastructure expansion projects and the conclusion of long-term gas purchase contracts, LNG will make a growing contribution to the security of gas supplies in the future. A basic agreement concerning cooperation in the LNG sector was concluded between E.ON Ruhrgas and Sonatrach of Algeria in November 2006. At the same time as gas purchasing activities, specific activities in the field of LNG unloading and regasification were pursued. Germany currently has no LNG terminals. Deutsche Flssigerdgas Terminal Gesellschaft (shareholders: E.ON Ruhrgas; BEB Erdgas Transport GmbH & Co. KG, VNG Verbundnetz Gas AG) plans to construct a terminal at Wilhelmshaven. Design work is proceeding rapidly. The commissioning of the terminal, with a probable capacity of 10 billion m/year, is scheduled for 2010 (total investment approx. 600 million). Other terminal projects in Great Britain and the Northern Adriatic are also being pursued.

2. Plans or decisions on new storage facilities

Existing storage: Germany is the country with the fourth-largest storage capacity after USA, Russia and Ukraine. The storage facilities can be expanded thanks to favourable geological conditions. Storage working gas volume amounts to 19.1 billion m at the end of the 2006 with a maximum withdrawal rate of 463 million m/day. In mathematical terms, storage capacity is sufficient to cover demand for more than 80 days. 44 gas storage reservoirs are in operation: 21 cavern (working gas volume: 6.7 billion m) and 23 porous rock (working gas volume: 12.4 billion m) storage facilities. These storage facilities are operated by a number of companies (the largest include: E.ON Ruhrgas, Wingas, VNG-Verbundnetz Gas, RWE DEA, BEB Transport und Speicher Service GmbH and Gaz de France).

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Report Germany

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New projects: Expenditure on the development of new and expansion of existing storage facilities will continue to increase. 16 underground storage projects with a maximum working gas capacity of 3.1 billion m are currently planned or under development.

3. Changes in the business framework affecting the gas business

The business framework and the market environment were chiefly characterized by a number of initiatives and measures for the further intensification of competition within the sector and by the regulatory activities of the Bundesnetzagentur (BNA Federal Network Agency). Legal framework/regulations

When the Energiewirtschaftsgesetz (EnWG Energy Industry Act) came into force on 13 July 2005, the BNA and the state regulatory authorities assumed regulatory responsibility for the electricity and gas industries. A key topic in connection with the regulation of gas networks was the implementation and configuration of the network access model under the Energy Industry Act, with simplifycation of network access based on an entry-exit system, new trading possibilities and comprehensive cooperation between network operators from the beginning of the new gas year on 1 October 2006. In mid-November 2006, the BNA decided that the two-contract model, with only one entry and one exit contract would be the only binding network access basis in the German gas industry from October 2007. Under Section 20, Para. 1b, EnWG, network operators are obligated to cooperate comprehensively on the implementation of this model. On the basis of this model, the German gas industry drew up a cooperation agreement at short notice. By 1 October 2007, all existing gas transmission contracts must be converted to the two-contract model. Gas supply contracts which are affected must also be converted correspondingly. The adaptations required in connection with these changes represent a significant challenge for the German gas industry. Under the two-contract model, a gas shipper only needs to conclude one entry and one exit contract with the network operators in order to supply gas to final customers. The entry contract grants the shipper access to the market area and allows it to transport gas to the market area in line with the capacities booked. The exit contract allows the shipper to supply gas to final customers in the market area. The shipper takes the gas for supply to the final customers at the virtual trading point (VTP). From there, the gas is transported under the exit contract irrespective of the actual number of network operators involved. In order to allow gas shipment via the entire transmission and distribution chain with only two contracts, the network operators involved must carry out internal capacity reservetions on a bottom-up basis to the VTP of the market area. On this basis, the downstream operator in each case must book the maximum exit capacity to be made available at the network interface station with the upstream network operator in each case. In the two-contract model, there are therefore three delivery points: the entry point (e.g. import point), the exit point (point where gas is supplied to the final customer and metered) and the virtual trading point (point where gas is transferred between balancing districts or traders).

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Report Germany

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Regulatory authority

The Federal Network Agency (BNA) is responsible for regulation and holds the requisite powers except where these responsibilities and powers are assigned to the regulatory authorities of the individual German states under the Energy Industry Act (EnWG). The state regulatory authorities are responsible for the regulation of energy suppliers with gas or power networks to which fewer than 100,000 customers are connected, provided that these networks do not extend beyond the boundaries of a federal state. The key task of the Federal Network Agency is to create the basis for functioning competition on upstream and downstream markets by unbundling and regulating power and gas networks. Its regulatory functions include ensuring non-discriminatory network access and supervising the network access fees charged by energy suppliers. Other tasks include supervision to prevent abuse of position and compliance with the regulations concerning network unbundling and the system responsibility of network operators.

Network charges

At the regional distribution level, the regulatory authorities in some cases required significant reductions in the cost-based network access charges applied for by network operators. These reductions ranged from 1% to 28% of the charges applied for. In some cases, the decisions of the Federal Network Agency have placed the companies concerned under considerable pressure. At the gas transmission level, discussions are in progress with the Agency to determine the right system for calculating the tariffs.

Incentive regulation

With respect to the configuration of the incentive regulation of power and gas networks required by the Energy Industry Act, the BNA submitted a report to the federal German government in good time on 30 June 2006. Incentive regulation will affect network operators previously only subject to cost-based price regulation, who will be converted to a system of incentive regulation in the future (originally as of 1 January 2008). In mid-November 2006, the Federal Ministry for Economic Affairs and Technology laid down key points for a regulation in this area.

Against the backdrop of these significant economic and regulatory changes, German gas companies have taken concrete measures to intensify competition on the gas market. The comprehensive activities and initiatives that have been implemented aim to ensure greater transparency, simpler network access and improved opportunities for changing suppliers, increased liquidity in short-term trading and the removal of obstacles to cross-border deliveries.

Competition initiatives in detail: Under the cooperation agreement in accordance with Section 20, Para. 1 b) EnWG signed between German network operators in July 2006, gas transmission companies assumed the role of network operators with market area responsibility for their respective

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Report Germany

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market areas. Market areas not only include the pipeline system of a gas transmission company but also the networks of downstream network operators within the areas concerned. Capacities are now only booked under the two-contract model. Under this model, gas transmission within the market area is ensured on the basis of one entry and one exit contract, irrespective of the number of networks involved. Gas is shipped via the virtual trading point. As a result of the establishment of virtual trading points in the market areas, a highly liquid market has already developed within a very short space of time (over-the-countertrading, trading as Choice Market via broker platform or phone). The number of active traders and the volumes traded are increasing rapidly. In accordance with legal requirements, the German gas suppliers have taken appropriate measures for the publication of key standards conditions for storage access and information on their various storage facilities on the Internet. Internet platforms covering the systems of more than one company have also been initiated for secondary trading in gas storage and transmission capacities. These platforms form a meeting point for sellers and buyers of unused capacities, Gas release programme also contribute to more liquid markets. In total, more than 200 billion kWh of natural gas are offered in six separate annual auctions. E.ON Ruhrgas AG has already successfully completed five auctions. From 1 July 2007, it will also be possible to trade natural gas on the Leipzig European Energy Exchange (EEX). This exchange will take the E.ON Ruhrgas northern market area together with the BEB region as a reference point for exchange trading in Germany.

Taxes

On 1 August 2006, a new Energy Tax Act came into force, replacing the previous Mineral Oil Tax Act, which had also governed the taxation of natural gas. Among other things, the new Act implements the provisions of the EU Energy Tax Directive in national law. It is now possible, as is normally the case in Europe, for natural gas to be used in power generation with full exemption from input tax without any time limit. In addition, under the new act, the tax concessions for natural gas and LPG used as automotive fuels are now due to expire in 2018. Furthermore, the new Energy Tax Act has introduced a systematic change with respect to the question of where tax liability arises. Previously natural gas was taxed when produced or imported and the natural gas tax was passed on along the supply chain. Now, the liability to pay natural gas tax only arises when gas is taken from the network for use.

4. The regulation regime in the country including allowed rate of return

For the purpose of attracting companies or network owners to invest in new gas infrastructure, the economic viability of such investments must be comparable to other similar investments in the business sector. An adequate rate of return on investment in new infrastructure must be approved. From 2009 a new incentive-based regulatory approach (Anreizregulierung) is planed to be introduced. A first proposal has been published by the ministry. In this proposal the most efficient network operator will be the benchmark for all other market operators. The BNA will impose the price charged by the most efficient network operator on all market players. In

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Report Germany

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addition, all operators will have to increase their productivity by 1.5 % each year. After four years, a new regulation period will begin.

5. The development of the harmonization of regulations between countries

As members of Gas Infrastructure Europe (GIE), German energy suppliers are intensively involved in efforts to harmonize access conditions for neighbouring networks in Europe. German gas transmission companies also participate in the Gas Regional Initiative of ERGEG which aims to harmonize network access conditions in European regional markets.

6. Basic figures regarding gas consumption in Germany

Natural gas consumption At about 346 million tonnes of oil equivalent (mtoe), primary energy consumption in Germany in 2006 was about 1.2 % or 4.3 mtoe above the level for 2005. In 2006, German natural gas consumption rose 1.5% to 78.8 mtoe (= 88.3 billion m). As in the previous year, the share of natural gas in primary energy consumption belief was almost 23 %. At 9.24 C, the average temperature was 0.2 C higher than in 2005. Natural gas consumption by private households and the commercial and service sector remained at about the same level as in 2005, with slightly higher temperatures. The number of homes with natural gas space heating rose by about 200,000 to 18.2 million (= 48 % of the total number of homes). With industrial production at high levels, industrial natural gas consumption rose about 2 %. In connection with the commissioning of a number of new cogeneration plants and the low availability of wind in the first quarter, about 4 % more natural gas was used for power generation. The share of natural gas in fuel use for power generation was 11.5 %.

Natural gas supplies Total natural gas supplies and natural gas imports in 2006 remained at about the same level as in 2005. German production fell slightly by 1 %. The structure of natural gas supplies by sources only changed slightly including 15 % from German production and 85 % from imports. The main supplier country in 2006 continued to be Russia, with a share of 35 % in natural gas supplies. The share of Norway rose to 27 % (2005: 25 %), while the Netherlands contributed 18 % (18 %) of the gas used in Germany. The remaining 5 % (7 %) came from other countries, especially Denmark and Great Britain.

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Report Latvia

2007-05-22

Market Report 2007 Latvia

1. Possible or decided new infrastructure project and their effect on the gas markets
The gas supply systems of the three Baltic Countries are not connected to the European Unions gas supply system, and Russia is the only one that supplies gas to all the three Baltic States. The Latvian gas supply system is connected only to the Russian, Estonian and Lithuanian gas supply systems. The gas networks of the Baltic States are connected solely with each other and with the Russian gas supply system, and they are not directly linked to the joint gas system of the other EU member countries and therefore the Baltic Countries can be classified as an isolated natural gas market. At the moment there are no real projects in pipeline that will change this situation. In the last country review by the EC it was admitted: In the longer term, new pipelines through Poland or in the Baltic sea, or LNG terminal could provide alternative supply of gas. In short term the Russian gas is the only viable alternative. At the same time, JSC Latvijas Gaze is implementing ambitious investment program within the country, including construction of new pipelines and connection of new customers. Since year 2000 the company is constructing around 150 to 200 km of pipelines annually. Last year 160 km of gas pipelines have been commissioned and number of customers increased by 4.3 thousands and reached 437.2 thousands.

2. Plans or decisions on new storage facilities

There are no real plans on construction of the new storage facilities, however, the decision is passed regarding launching of the feasibility study on potential Dobele storage facility and its connection to the North Stream project. This study will be financed 50% from EU funds and 50% by the state. In existing Incukalns UGS working gas volume gradually have been increased and in 2006 reached 2.325 BCM comparing to 1.9 BCM in 2000. The study performed by OAO Giprospecgaz confirms possibility of expansion of Incukalns UGS up to 3.2 BCM of working gas.

3. Changes in the business frame work affecting the gas business

In 2006 the trend of gas purchase price increase continued. It is expected that gas suppliers OAO Gazprom and SIA Itera Latvija will continue to increase gas purchase prices in 2007, but in 2008 they will reach European level, and then will depend only on fluctuations of HFO since calculation of price in Latvia is based on average semi-annual HFO price in Amsterdam region. At the same time, all businesses, including gas business, were affected by high inflation, which in 2006 in Latvia reached 7%. On June 27, the government approved the document of energy policy planning Basic statements of energy development for the years 2007-2016. The basic statements include government policy, goals of development and both mid-term and long-term priorities in the field of energy. The statements mentioned in the document can also affect the economic activity of Latvijas Gaze in future.

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The main principles of energy policy defined in the basic statements are:

improvement of safety and durability of supply; diversity of ways and sources of resource supply; active usage of resources; retention and increase of considerable share of renewable and local resources in the balance of primary resources and energy supply; regional cooperation and coordination with countries around Baltic sea, especially Lithuania and Estonia; environment protection and participation in reduction of climate changes.

Overall, the purpose of state policy of renewable energy resources is to promote to their usage, respecting the environment and attaining reduction of CO2 emissions. The main goals of renewable energy resource policy are as follows: power obtained from renewable energy resources in 2010 comprises 49.3% of the total amount of produced power; proportion of renewable resources in the total balance of energy resources is at least 37%; proportion of bio fuel in power-intensity of all transport fuel commercialised in 2010 comprises at least 5.75%. The goal of government policy is to attain balance between power demand and potential of supply from the power stations of Latvia in 2011-2012. For reaching this goal, there will be maximum promotion to events of effective power usage and supply from power stations using local fuel and renewable energy resources in high-efficiency cogeneration network. The remaining part of the necessary supply capacity will be diversified to other types of fossil fuel in order to prevent excessive domination of natural gas.

Division of installed capacities in the supply structure recommended in the basic statements, MW
2005 Hydro power stations Cogeneration power stations Condensation power stations (gas/heavy fuel oil) RES power stations1 Solid fuel (coal + RES) condensation power station Import 1535 310 220 63 0 700 2010 1535 450 220 180 0 500 2015 1535 650 220 280 400 0 2020 1535 650 220 350 400 3002

Promoting to the development of cogeneration stations and production of energy from renewable energy sources the potential of power capacities will be increased both in transmission and distribution system. For this purpose two supporting instruments have been chosen: compulsory purchase for a specific price which will show as payment of all power consumers of Latvia proportionally to their consumption; there is an earmarked subsidy planned to promote to development of cogeneration power stations using renewable energy resources for investments for construction of such power stations, using the resources of EU structural funds for this purpose. For better usage of renewable energy resources and development of biomass-using cogeneration stations, it is planned to attract resources from ES Structural funds and Cohesion funds. The strategy
1 2

- including RES cogeneration stations - taking into account the new Ignalin APS.

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of use of renewable energy resources is closely related to implementation of energy efficiency measures, therefore an integrated approach to issues of energy efficiency has been included in the policy of renewable energy resources. State support in energy will be given only to projects which are related to modernization of heat supply systems according to environment requirements and improvement of energy efficiency in producing, distributive and end user side, supporting reconstruction of heat supply systems, as well as reduction of heat units and other heat-regulating devices, and thermal loss in buildings. In the basic statements, both the amount of necessary funds and sources of financing are given.

Sources of financing, million LVL

2007 State budget Self-government budget Private financing European structural funds ES TEN-E program TOTAL incl. during ESF period 2007-2013 16.40 7.16 6.51 8.48 0.24 38.79 2008 19.55 7.57 9.97 10.56 0.32 47.98 2009 36.49 8.38 97.20 12.41 0.55 155.03 2010 36.29 8.38 97.20 12.41 0.32 154.60 193.97 55.82 56.82 533.91 2011 42.29 8.38 130.89 12.41 2012 21.44 8.88 12.39 13.11 2013 21.53 8.88 13.00 13.41 20142016 118.81 116.25 119.74 179.11 Kop 312.79 173.88 486.91 261.91 1.43 1236.92 82.80

4. The regulation regime in the country including allowed rate of return

In Latvia a unified public utilities regulation system on central and local government levels was established in autumn 2001. Utilities in the state-regulated sectors, namely, energy (except heat supply), telecommunications, post and railway are regulated by the Public Utilities Regulation Commission (PUC). While household waste management, water supply, sewerage and heating industries are regulated on local government level by institutions established by the respective municipalities. To reach these goals the regulator carries out the following functions: sets the tariff calculation methodology, approves tariffs for utilities, issues licences and supervises implementation of the set conditions, supervises compliance of utilities with requirements for quality and environmental protection, technical regulations, standards; performs dispute out-of-court settlement, etc. In gas sector, the PUC elaborates and approves methods of calculation of gas transmission, distribution and storage service tariffs, as well as elaborates and approves method of calculation of the end users tariffs. The PUC approves also all the tariffs. There are eight customer groups in Latvia depending on annual consumption, and PUC approves all tariffs for all groups of customers (including, the largest industrial and power producers). Tariff ceiling method is used to set the tariffs. According to the method of calculation of tariffs approved by PUC the rate of return is calculated by the following formula: P = RAB * WACC where: RAB Regulated Asset Base value at the beginning of the base year of the tariff review cycle, WACC the weighted average rate of return on capital (%). 15(25)

Report Latvia

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5. The development of the harmonization of the regulation between countries

No such activity to be reported from Latvia.

6. Basic figures regarding gas consumption in Latvia

Natural gas production in Latvia: no production of natural gas. Natural gas sales in Latvia in 2006: 1 719.56 MNm3 Share of gas in primary energy consumption 31%.

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Report Lithuania

2007-05-22

Market Report 2007 Lithuania

1. Possible or decided new infrastructure project and their effect on the gas markets
The gas supply systems of the three Baltic Countries are not connected to the European Unions gas supply system, and Russia is the only one that supplies gas to all the three Baltic States. The Lithuanian gas supply system is connected to the Latvian, Byelorussian and Russian (Kaliningrad region) gas supply systems. The whole Lithuanian gas demand is supplied via Byelorussia. Lithuania also does the gas transit to Russian enclave Kaliningrad region. The gas networks of the Baltic States are connected solely with each other and with the Russian gas supply system, and they are not directly linked to the joint gas system of the other EU member countries and therefore the Baltic Countries can be classified as an isolated natural gas market with the only viable supply source Russian Federation. Although a possible construction of Polish/Lithuanian gas connector, LNG import terminal and underground gas storage within the country is widely discussed (the plans to launch feasibility studies for the first two projects and to finish the investigations for the construction of UGS are also included in the National Energy Strategy), at the moment there are no real projects in pipeline that will change the situation in a short term. Meanwhile, AB Lietuvos dujos continues investments into the development of national natural gas system. During the year 2006 ~280 km of new gas pipelines have been commissioned and ~5.1 thousand of new consumers connected to the gas grid. As part of implementation of the National Energy Strategy, in 2007-2010 AB Lietuvos dujos plans to construct a transmission pipeline from akiai to Klaipda, which would complete the ring connection of Lithuanian natural gas transmission grid. The pipeline will allow to connect new consumers of the towns alongside the pipeline, ensure a stable gas supply to the western part of Lithuania and improve the security of energy supply, especially after decommissioning of Ignalina NPP projected in 2009. In addition, a construction of compressor station at Jauninai (near Vilnius) is planned to maintain a necessary gas pressure for sustainable potential gas supply to Western Lithuania and increasing transit to the Kaliningrad region.

2. Plans or decisions on new storage facilities

Government of Lithuania (GoL) had initiated establishment of the 0.5 bcm working gas capacity UGS in Syderiai, North-West part of Lithuania. Very preliminary investigations show the potential structure. The special purpose company, where State will hold 51% and the rest distributed between the gas companies and major consumers, for further investigations, construction and operation of UGS will be established.

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3. Changes in the business frame work affecting the gas business

In 2006 the trend of gas purchase price increase continued. It is expected that OAO Gazprom will continue to increase gas purchase prices in 2007, in 2008 they should reach European level, and then will only depend on fluctuations of HFO since calculation of price in Lithuania is based on average semi-annual HFO price in Rotterdam. In the beginning of the year 2007 two important legal documents affecting natural gas business in Lithuania were adopted. On January 18, the Parliament approved the National Energy Strategy the period until 2025, indicating national strategic goals of energy development, main interests and goals of Lithuania concerning energy development in the Baltic region and EU energy policy, basic guidelines for government policy and specific actions for particular energy sector development. In connection to natural gas sector, the National Energy Strategy provides for the following priorities: Increase of security and reliability of supply (including investigations on construction of potential underground gas storage and LNG terminal and means to assure a necessary capacity for increasing transit volumes); Integration of Lithuanian natural gas systems to the EU natural gas grid (in particular construction of Lithuanian/Polish connector in order to get access to the diversified EU gas supply sources); Expansion of internal natural gas market (increasing security of supply in the western Lithuania).

On March 20, 2007, after almost 3 years of disputes, Lithuanian Parliament finally adopted a new Law on Natural Gas, transposing the provisions of the EU Directive 2003/55/EC and other legislation regulating the market of natural gas to the legislative framework of the Republic of Lithuania. However, considering a monopolistic supply situation the new law provides for a commodity natural gas price regulation for all consumers, which may negatively affect the results of the gas companies working in Lithuanian natural gas sector and prevent new players from entering the market. As a lot of shortages and gaps in the law were left some amendments of the law will follow in the nearest time.

4. The regulation regime in the country including allowed rate of return

According to the new Law on Natural Gas, the prices for transmission, liquefaction, storage, distribution and supply shall be regulated by setting their caps and prices for connection (for household customers) and system balancing services shall be regulated by setting concrete prices. At the moment the price caps of natural gas transmission and distribution services and the caps of natural gas prices for the regulated customers (consuming up to 15 MCM of natural gas annually) are fixed by the National Control Commission for Prices and Energy (NCCPE) in accordance with the Methodology for the Natural Gas Price Caps Calculation approved on 29 April 2005. Hence fixed caps of prices stay in force for a three-year regulation term. The price caps are adjusted on the annual basis considering the inflation, the efficiency rates set by the NCCPE, changes in the gas consumption volumes and any other developments beyond the Companys control.

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Report Lithuania

2007-05-22

Gas companies, on an annual basis, sets the actual transmission and distribution tariffs, not exceeding the price cap. The prices are applied following the post stamp principle irrespective of the distance between transmission and distribution points. The prices for consumers are differentiated according to the annual consumption volumes. The price caps for the regulated customers are adjusted on a semi-annual basis considering the changes in the natural gas purchase price. According to the Methodology for the Natural Gas Price Caps Calculation the rate of return for transmission and distribution prices are calculated using the following formula:
P RAB

n r , where
100

RAB - Regulated Asset Base value at the beginning of the base year of the tariff review cycle; n average annual interest rate of 3 year term Government securities in the course of previous 12 months; r investment risk factor (up to 3%). At the moment the profitability rate for transmission operations comprises 5% pre-tax, for distribution 6% pre-tax. It should be noted that only the value of economically justified assets are included. The transmission and distribution prices are build on the costs + principle, however, only 70% of actual depreciation costs were accepted by Regulator. Following the Law on Natural Gas, new Methodology for the Natural Gas Price Caps Calculation shall be established where the new price caps for the 5-yeas regulatory period will come into the orce since January 1, 2008.

5. The development of the harmonization of the regulation between countries

No such activity to be reported from Lithuania.

6. Basic figures regarding gas consumption in Lithuania

Natural gas production in Lithuania: no production of natural gas. Natural gas consumption in Lithuania in 2006: 3032 MCM Share of gas in primary energy consumption 28.3% (2005).

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Report Poland

2007-05-22

Market Report 2007 Poland

1. Potential or decided new infrastructure projects and their impact on the gas market. The main goal of constructing the LNG Terminal in winoujcie is to ensure the energy security by diversification of natural gas supplies to Poland and to cover the increasing natural gas demand. In 2006, a feasibility study was undertaken for the project of importing the LNG into Poland. On the basis of the study the Management Board of PGNiG S.A. made a decision to locate the terminal in winoujcie harbour. The first deliveries of LNG to the terminal are planned for the year 2011. The regasification capacity of the terminal will be developed by stages to reach the target capability of receiving up to 7.5 bcm of natural gas per year from the terminal by the year 2020. In 2007, the initial phase of the Project was launched. The plans for this phase include organization of the tender process for engineering design , selection of the general contractor of the terminal, contracting the LNG supply, securing the funding, and obtaining of the necessary legal and formal licenses and permits for the execution of the project. PGNiG set up a dedicated company - Polskie LNG (PLNG) - to build the terminal and, subsequently, to provide the re-gasification service. The company is based, in winoujcie and is controlled by PGNiG S.A. 2. Plans or decisions on new storage facilities PGNiG has a task to build or enlarge four underground gas storage facilities: Mogilno, Wierzchowice, Strachocina i Kosakowo: - Mogilno enlarging by two caverns (start of the investment in 2007, completion by 2012) Enlarging the working capacity to 0,44 bcm

- Wierzchowice Enlarging the working capacity up to 1.2 bcm start of the investment in 2007, completion date 2011,

- Strachocina Enlarging the working capacity up to 0.330 bcm, start of the investment in 2007, completion scheduled for 2011, - Kosakowo development of the working capacity up to 0,25 bcm,

All of the mentioned above programs are part of the operational program approved by the Cabinet of Ministers on the 1st of August 2006 Energy Security. 20 (25)

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We are planning to increase the working capacity of underground gas storage facilities from 1.6 bcm up to 2.8 bcm in period 2008 2012.

3. Changes in the business environment affecting the gas business

A predictable business environment is crucial for gas infrastructure investments. Currently, there are discussions on the future DSO unbundling, which will affect the willingness of the companies to develop the grid. 4. The regulation regime in the country including allowed rate of return According to Polish law, the energy sector companies, operating in the area of: production of gas fuels storage of gas fuels in storage facilities, transmission or distribution of gas fuels, trading gas fuels, are obliged to obtain a license. License-holding gas companies are obliged to set their gas tariffs, which are afterwards approved by the President of the Energy Regulatory Authority. The tariffs are set according to the relevant licensed activity, such as: trading gas fuels, transmission activity, distribution activity, storage activity.

When setting the tariffs and prices for the above-mentioned activities, companies are allowed to include a profit at a level based on analysis of cost of the projects included in their plans. Currently, the law does not specify the rate of return on assets. The President of the Energy Regulatory Authority sets it on a case by case basis. Only in gas storage activity, the minimum rate of return on assets has been specified which should not be lower than economic rate of return of 6%.

5. The development of the harmonization of the regulation between countries

In April 2006, ERGEG launched its Gas Regional Initiative. The goal is to create three regional energy markets (REMs) for gas in Europe. PGNiG takes part in the work of two of REMs: South-South-East (SSE) and North-West (NW). The Regional Initiatives are specifically designed to unite stakeholders, including the EC and the governments of the Member States within each region to tackle barriers to trade and market integration in each region. The regional approach offers a pragmatic and realistic way of delivering step-wise progress towards competitive single European energy market by establishing regional energy markets. Each REM, under the leadership of the regulators, has prioritized the key impediments to trade and market integration and have developed action plans to address these problems. Priorities of the REMs are as follows: 21 (25)

Report Poland

2007-05-22

NW: Transparency, Gas hub development, 1ary and 2ary interconnection capacity, Gas balancing, Gas quality, Regulatory coordination including investment issues SSE: Transparency, Gas hub development, Interconnection, Practical transportation cases, One stop shop.

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Report Sweden 2007

2007-05-22

Market Report 2007 Sweden

1. Possible or decided new infrastructure project and their effect on the gas markets
Today a single supply rout exists to Sweden via the Danish border station Dragr to the southern part of Sweden. Several projects regarding new supply routs have been or are being studied. The consortium Baltic Gas Interconnector (E.ON Sverige, DONG Energy and VNG among others) has been granted permission for a new interconnector between Sweden and Germany. No final investment decision has yet been taken. The planned capacity is approx 3 BCM/a

The Skanled project would connect Sweden to the Norwegian gas sources. The pipelines would run from Krst in Norway to the east part of Norway and then to the Swedish west coast. Within the same project also Denmark and Poland could be connected to the Norwegian gas sources. The planned capacity in the transport system from Krst is 20 Mm3/d. A final decision regarding the investment is scheduled for late 2009.

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Report Sweden 2007

2007-05-22

When the Nord Stream project will be realised a spur connecting the Swedish gas market to Nord Stream could become a possibility. No decisions regarding new supply routes to Sweden has been taken. Today the Swedish gas market is limited to the south west part of the country. Plans are made to develop the Mid Sweden gas market, i e east and center of Sweden covering some areas with a number of base industry plants. The estimation of the market potential indicates volume in these areas of at least 15 TWh. The new Government (after parliament election Sept 2006) is an alliance between four parties. The Alliance has launched a common energy policy as a guideline. Concerning natural gas the following is noted: Natural gas, a fossil and unsustainable fuel, may have importance during a transaction period. Political incentives and EU environmental framework will probably lead to the use of natural gas mainly for combined heat and power generation and to substitute oil and coal in existing industrial production plants. Aspects of security politics and security of supply has to be considered with an increasing dependence of gas. An extension of the natural gas grid has to be made by commercial conditions and there will be no state support or subsidies.

A new supply from Norway will probably be accepted. The aim is a regional development focused on the supply to petrochemical industries and viewed as a means to improve the utilization of the existing grid. Still, a connection of Sweden to Norway has the potential of doubling the market.

2. Plans or decisions on new storage facilities

No plans exist concerning additional storage facilities in Sweden.

3. Changes in the business frame work affecting the gas business

The single most important factor is the taxation on different energy sources. Indications on long term stability in this area are not foreseen so far in Sweden.

4. The regulation regime in the country including allowed rate of return

The regulatory regime regarding allowed rate of return on gas infrastructure is a severe problem in Sweden. The regulatory authority has announced an allowed rate of return on 7.8 percent nominal before tax (year 2005). This is considered by the network owners being to low and thus unreasonable due to economical risks. The Swedish regulatory system also includes an ex post decision compared to ex ante system in most European countries. An ex post regime complicates investment decisions in general and especially combined with a low rate of return and long term uncertainties.

5. The development of the harmonization of the regulation between countries

No such activity to be reported from Sweden.

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6. Basic figures regarding gas consumption in Sweden

Natural gas production in Sweden: no production of natural gas. Natural gas imports to Sweden (2006): 923 MNm3 or 11.2 billion kWh gross calorific value (10.1 billion kWh net cal). Share of primary energy consumption: 1.6 percent.

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