Latvia’s electricity consumption is modest but growing, driven by income growth and service sector expansion, with per capita consumption remaining low compared to the EU average. The country relies heavily on local generation, primarily hydroelectric power (56%), supplemented by other renewables (wind, solar, biomass) and natural gas (24%), but still faces an annual production shortfall of 1 TWh covered by imports. This green mix enhances energy security and supports the green transition, yet high renewable reliance necessitates balancing mechanisms due to hydro generation's seasonal variability. Integrating Latvia further with the EU grid is crucial for maximizing the benefits of expanding renewable capacity, particularly inshore wind farms, where Latvia holds a competitive advantage.
Latvia’s electricity prices and volatility remain above pre-pandemic levels, close to the EU average, with marginal gas prices significantly impacting electricity costs due to the EU’s marginal spot pricing mechanism. The lack of market integration leads to price disparities across neighboring countries, as seen in instances of negative prices in one area while adjacent zones had positive prices. Closer integration would enhance price correlation, reduce the need for expensive backup capacity, lower price volatility, and decrease fossil fuel burn, while also fostering economic growth and investor confidence.
High electricity prices and volatility impose macroeconomic costs, including reduced competitiveness for energy-intensive industries, hindered investment, lower household consumption, and reduced excise tax revenue. Empirical analysis using firm-level data shows that a 10% increase in electricity price levels reduces manufacturing employment by 2.5%, with greater impact on sectors like beverages, pharmaceuticals, and transport equipment.
To unlock the full benefits of a unified energy market, Latvia should strengthen interconnections with other European power grids, coordinate policies and investments at the EU and national levels, pool resources with neighboring countries for shared grid infrastructure, and streamline domestic permitting processes to accelerate interconnections and renewable development. These actions would enhance energy security, lower prices, and support economic growth, aligning with Latvia’s Energy Strategy 2050 goals for a greener, more secure, and efficient energy supply.
