Hydro pump storage PP in Estonia

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Energy sources in Baltics

Content Content

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Overview Primary energy sources in Baltics (2009)

Oil shale91%

Natural gas7%

Other2%

Other3%Natural

gas20%

Imports30%

Hydro47%

Other3%

Hydro3%

Natural gas15%

Nuclear79%

Baltic electricity markets inherited powerful North-West Russian electricity system and are still largely isolated power markets from the rest of the EU

The trading in the Baltic electricity market is carried out by bilateral contracts between large utilities, not via spot-market, wholesale market practically non-existent

Estonian oil-shale based electricity production, albeit with relatively low energy efficiency, is a dominating energy source

Due to its environmental risks, lower competitiveness and limited amount1, the key issue is to reduce its consumption at the expense of renewable energy alternatives

By virtue of the electricity full liberalisation market program announced in 2007, 35% of Estonian energy market was set to be opened from 1 January 2009 and full opening is scheduled for 1 January 20132

Cost-based electricity pricing will be converted into market-based pricing

In Latvia electricity is generated mostly by three Daugava hydro power plants

Lithuanian energy production is substantially dependent on decommissioning of Ignalina nuclear power plant (INPP)

After the decommissioning of INPP Lithuania to rely heavily on local gas PP and electricity import, this is further exacerbated by lack of viable interconnections with Poland, Sweden and Finland

According to the EU directive, the remaining INPP unit 2 has to be decommissioned by the end of 2009

Source: Freenergy, Eesti Energia1) At the current extraction level of 40-50 million tonnes per year, it is estimated to last about the next 50-60 years2) Latvian and Lithuanian electricity markets are opened from 1.07.2007

Three distinctive modes of electricity generation represented on a large scale

Baltic electricity market

Primary origin of energy sources: Estonia – local oil-shale, Latvia – local hydro, imported energy and natural gas, Lithuania – nuclear and imported

Total annual gross power consumption amounts to around 29 TWh/year:

Estonia – 9 TWh/year

Latvia – 8 TWh/year

Lithuania – 12 TWh/year

Due to environmental reasons and physical amortization there will be shutdowns of several major power plants in Baltics

Lithuania to shut down Ignalina nuclear plant in 2009

Estonia to shut down ca 41% of capacity of oil shale power plants by 2016 (4x250 MW + 2x200 MW remains out of existing 2,380 MW)

Agreement on the construction of flue gas desulfurization installations on 4 Eesti Power Plant’s units was signed in March 2009

Although the new plants are planned to be developed, these will require large-scale investments and will not be probably completed before 2016

It is estimated that there will be a substantial gap between production and consumption capacities in Baltic states amounting to as high as 2,500 MW by 2017

In addition, 1,500 MW of capacities will be based on natural gas imported from Russia, being therefore with limited reliability and having upwards price pressure

Importance of the issues of “energy security” and “energy independence” is increasing

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6,000

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8,000

9,000

10,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MW

Peak demand Installed capacity

Overview Energy production capacities and future imbalance, 2007-2015

Shutdown of Elektrenai Lithuanian Power Plant, 2007

Shutdown of Ignalina Nuclear Power Plant, 2009

Shutdown of old energy blocks in Narva Power Plants, 20151

Gap tp be filled

Source: Freenergy1) All old pulverised combustion boilers have to be closed by the end of 2015 according to EU Directive on the limitation

of emissions into the air from large combustion plants

Peak load is foreseen to grow at 4% per annum

Estonian electricity market full liberalisation, 2013

Production capacity shortage in the wake of worn-out infrastructure

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Interconnections in the Baltics

Content Content

Estonia

Latvia

Lithuania

Russia

Finland

Sweden

Belarus

Poland

Russia

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Overview Grid connection in the Baltic states and actual power flow in 2007

650 MW350 MW

800 MW

400 MW

1,000 MW

1,000 MW

2,000 MW

2,000 MW

1,000 MW

700 MW

1,000 MW

Electricity system of all three Baltic countries is connected only to the IPS/UPS interconnection based on agreements with eastern neighbours Russia and Belarus, with the exception of Estlink (350MW), which is the only interconnection with EU network

Estlink 2 (650 MW) is planned to be built by 2013

Governments of the three Baltic States decided to work on the integration of the Baltic electricity market into CEE regional electricity market, UCTE

After decommissioning of Ignalina in 2009, the trading and thus, the usage of pan-Baltic electricity connections is expected to increase considerably

Baltic transmission capacity is limited to around 900-2,200 MW, implying 300-750 MW import capacity per country from third countries

From 2010 the grid capacity becomes insufficient if no new power plants will be built. Such a situation might lead to disruptions in electricity supply and limitation on power imports within the Baltic countries

In order to adjust to the changing environment, especially the closure of Ignalina, besides the new links to neighbouring countries, additional links are considered

Planned new interconnections:2010 Fennoscan 2: Finland-Sweden 500/800 MW2011-2013 Estlink-2, 650 MW2013-2016 Lithuania-Poland, 1000 MW2015-2016 Lithuania-Sweden, 700MW Possibly additional Latvia-Sweden and/or Estonia-Sweden links will be built

Existing grid connection

Planned grid connection

Exported: 707 GW

Imported: 442 GW

Net export: 265 GW

Exported: 3 GW

Imported: 478 GW

Net export: -475 GW

Exported: 2,016 GW

Imported: 19 GW

Net export: 1,997 GW

Exported: 1,524 GW

Imported: 195 GW

Net export: 1,329 GW

Exported: 376 GW

Imported: 200 GW

Net export: 176 GW

Exported: 2,001 GW

Imported: 3,603 GW

Net export: -1,602 GW

Exported: 1,392 GW

Imported: 3,239 GW

Net export: -1,847 GW

Exported: 1,978 GW

Imported: 852 GW

Net export: 1,126 GW

Source: Baltso

Transmission capacity to outside Baltics is limited

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Balancing capacities needed

National Electricity Development Strategy sets the target of wind energy installed capacity of 900 MW by 2018

Significant share of wind energy in the country’s electricity balance leads to the eminent need for wind farms’ balancing capacities

The Strategy envisages building up 1 800 MW of reserve and wind parks’ balancing capacities by 2018

Wind balancing: 900 MW

Peak-load reserve: 300 MW

Emergency reserve: 600 MW

Possibilities to balance wind energy with other countries’ electricity systems are limited due to insufficient grid connections

Need for internal solution for balancing and maintaining the reserve capacities

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Overview Need for reserve and balancing capacities in Estonia

1 700 MW of reserve and balancing capacities to be built

MW

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Balancing electricity prices

Significant fluctuations in Estonian balancing electricity prices

Average price of the most expensive 1 000 hours in 2009 was EUR 59/MWh, while the average price of the cheaperst 1 000 hours was EUR 15/MWh, meaning the spread of 44 EUR/MWh

As wind energy will play more importnat role in country’s electricity generation, the respective spread is projected to increase due to fluctuating nature of wind energy production

Limited interconnection capacity of the Baltics with UCTE and the start of free trading with electricity should contribute to the increase in the spread

Large and even increasing in the future spreads in electricity prices would support the business model of hydro pump storage power plant that would sell electricity when prices are high and buy it when prices are low, thus generating profits on the price spread

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Balance electricity price fluctuations in Estonia (2009)

Source: Elering

Average price of the most expensive 1 000 hours EUR 59/MWh

Average price of the cheapest 1 000 hours EUR 15/MWh

Spread EUR 44 /MWh

Electricity price spread to increase in the upcoming years

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Hydro pump storage power plant

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Hydro pump storage power station – most efficient way for balancing wind farms

Projected 500 MW installed capacity

Upper reservoir is the Baltic sea, while the lower reservoir is a granite mine

Synergy created with granite mining

The power plant is projected to be commissioned by 2017

Geological studies, EIA and preliminary design

To set up a granite cluster in cooperation with Estonian Road Administration

Need to agree the subsidy scheme with the government

ǺF carried out pre-feasibility study

LOI signed with the Port of Tallinn regarding the land plot

Efficient logistic site for granite realisation

Upper reservoir would be Gulf of Finland

Port territory is industrial land according to the detail plan

Seawater intake scheme design completed

Ideal solution for provision of balancing power to wind energy

Pump storage sells electricity at high prices

Hours in a year

Sp

rea

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Distribution of electricity pricesProject snapshot

Activities so far

Next steps

Pump Storage power plant design

Pump storage buys electricity at low prices

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Hydro pump storage power plant

Need for wind energy balancing capacities in the region

Ideal solution for balancing of wind farms and as a reserve capacity station due to short start-up times

Low investment per MW due to low cost of reservoirs

Synergy arising from granite mining

No reliance on imported resources, no gas

Strong project with positive impact on the environment

Strong bussiness concept Positive impact on the environment

Realisation of the hydro pump storage would allow reducing production of energy from oil shale, meaning significant reduction of CO2 emissions

Expected CO2 reduction per annum: 1,5 MT of CO2

Hydro pump storage with contemplated capacity of 500 MW would allow1,5 TWh production of wind energy per annum

No CO2 emissions and no related expenses

Preliminary design

Upper reservoir

Lower reservoir

Maintenance tunnelHigh pressure pipe

Low pressure pipe

Turbines

Electrical grid tunnel Lift

Management centre

Sub-station Entrance to maintenance tunnel

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Hydro pump storage power plant

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Planned location of the station is Muuga Port

Good grid connections in the planned location

Preliminary land agreement with Port of Tallinn signed

Contemplated location

Location on the Baltic sea coast with good grid infrastructure

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Project developer: Energiasalv

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Vardar Eurus

35% EBRD

65% Estonian private investors

70% Vardar A/S

30% NEFCO

Freenergy

25% 25%

Inve

stor

s

Management of 4E50%

4 Energia is focused on developing renewable energy projects and operating wind parks

Vardar Eurus AS, a company registered in Norway, is 70% owned by Vardar, a Norwegian power company, and 30% by NEFCO, the Nordic Environment Finance Corporation

NEFCO is an international finance institution established by 5 Nordic countries with operations in CEE countries, Russia, Belarus and Ukraine, its portfolio comprises nearly 300 small and medium-sized projects in different sectors

Organizational structure

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Hydro pump storage project Developer

Voolu Energia

Competence in granite miningCompetence in development and management of renewable energy

projects

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Experienced project development team

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Martin Kruus(CEO of 4 Energia)

Education: Tallinn Technical University - Thermal Engineering

Previous employment:Eesti Energia, Director of Business Unit of Renewable Energy. Main responsibility was to establish and run

power plants using renewable energy sources – wind, hydro, biomassMinistry of Economic Affairs, Department of Management of State CompaniesEstonian Privatization Agency, Project Manager for IPO’s

Main accomplishments: Renovation of Estonian biggest hydro power plant – Linnamäe HPP Building of Estonian first wind park – Virtsu wind parkSeveral feasibility studies and project management about CHPs

Lembit ValiEnergiasalv CEO

Kalle Kiigske(CFO of 4 Energia)

Education: Estonian Business School – Banking and Financial Management

Previous employment:United Partners Group, Pan-Baltic investment bank, Partner, responsible for merchant banking and investmentsAS Hansa Capital – leading asset-based finance company in the Baltics, Russia and Ukraine with total assets over EUR 1,7 billion, Hansa Capital is the industry’s largest company in Eastern Europe and among top 50 in Europe, Member of Board and Head of Factoring and Trade Finance Several positions in Factor Chain International (Amsterdam, the Netherlands) - Member of the Communication Committee, Member of the Internal Audit

Education: Tallinn Technical University – Electrical Engineering

Previous employment:Elering, Estonian national grid company – CEOEstonian Energy – Technical Director, a member of the management boardNarva Elektrijaamad (Narva Power Plants) - CEO

Main accomplishments: Extenstive experience in power industry since 1973Worked on top management positions in energy sector for 18 years

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Hands-on experience in renewable energy and granite mining

Peep SiitamVoolu Energia CEO

Education: Tallinn Technical University- M.Sc. in civil engineering Estonian Business School - MBA

Previous employment:Vool - Co-founder of of the company having majority shareholding in Maardu Granite MineMerko Mines - Chairman of the management boardEstonian Energy Technology Program - Program Manager

Main accomplishments: Chartered Engineer since 1998Substantial experience as a member of top management in the Baltic leading construction companies

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