Minister of Economics: MPC as a payment to be made by residents and entrepreneurs must be abolished

08-03-2018

Latvia is not unique in Europe by setting ambitious goals for its energy independence and the production of environmentally friendly energy. Many countries have done that. However, Latvia is one of the few countries that, in the name of its noble goals, i.e., energy independence and the promotion of green energy, without assessing its actual potential or taking a lesson from good examples of other countries, with enviable short-sightedness several years ago was trapped by persons looking for easy profit and the temptation of simplified regulatory solutions. The introduction of the mandatory procurement component (MPC) is a fundamental, national-level, and macro-economic mistake that must be eliminated. The existing mechanisms available to the Ministry of Economics in order to mitigate the impact of the MPC will soon be exhausted, and it's time for the government think about abolishing the MPC as a remnant of history. I have already called on the Prime Minister, Māris Kučinskis, to set up a high-level local and international group of experts whose task would be to find solutions to abolish the old and ineffective MPC system and to create one that meets the future interests of the society.
 

The MPC story started in 1998 with double tariff aid for the small HPPs, and it reached its apogee in the Cabinet of Ministers Regulations approved by Kalvītis’ and Godmanis’ governments allowing to issue more than 1,000 station permissions within seven years. Since 2009, under six governments under the leadership of three prime ministers fighting a powerful industry lobby have barely been able to control genie let out of the bottle. Application of various solutions was attempted: the introduction of the right to cancel quotas, the reduction of the generous aid, the introduction of the tender and the principle of lowest price, until in the end, an agreement was reached at the political level on imposing a moratorium on further permits, limiting the number of operating stations to four hundred.
 

Already in 2012, the MPC subsidized share amounted to EUR 198 million – an amount that could not be financed by the population and businesses, therefore the MPC level was set at EUR 26.79 per megawatt-hour, while the rest of the MPC was funded from the state budget. However, this option, as well as the Subsidized Electricity Tax (SEN), did not help, and the excessive procurement prices and amount of subsidies led to absolute lack of competitiveness of the energy-intensive producers. What does low competitiveness mean for a large producer? Lack of level playing field in the single European market which may result in reconsidering the location of the plant in Latvia. It is in Latvia's interests to maintain industrial growth rather than slow it: the industry is currently the fastest growing sector in the national economy; if the economy grows at the annual rate of 4.5%, then the industry growth rate is 8.5%. The manufacturing industry is also our most export-oriented sector – it generates at least 4.5 billion in Latvian exports, which is one-third of the total export volume in Latvia.
 

Moreover, the industry is developing in the regions, not in Riga, creating jobs, creating a demand for a new housing – the industry is warming up the whole economy, as residents increasingly choose to move to regional industrial centres.  Here we came up with a solution - the MPC differentiation reform which allowed to create the most competitive electricity tariff in the Baltic region for large energy-intensive enterprises. This reform had its negative side effects which have also affected the electricity bill of the general population, but these have already been identified and are being eliminated.
 

Since I became the Minister of Economics, there have been other actions taken to reduce the burden of the MPC, including the allocation of EUR 3.5 million in budget to support the energy-intensive producers, reduced support for TEC-1 and TEC-2 (heat-electric generating plants) which reduced the MPC burden to the population by almost 30%, allowing to redirect the savings of EUR 75 million to health care. Th state aid permits have been cancelled in more than 20 stations which allowed to reduce the future costs by EUR 334 million.
 

Further steps and proposals have been developed in order to reduce MPC burden, however, all of this is insufficient.  There is a political will to change this system and to abolish the MPC. The MPC as a payment to be made by residents and entrepreneurs must be abolished by establishing a mechanism for further development of green energy and renewable energy in the country, and I am ready to engage in the development of this new mechanism with my vision and the team of the Ministry of Economics.

Last update:    01-02-2019