Although Latvia has a large stock of non-fossil energy resources, the country’s energy balance still relies heavily on imported fossil energy resources. The total energy supply in Latvia in 2021 was 4.45 million tonnes of oil equivalent (Mtoe), with self-sufficiency standing at 61%. All the country’s oil, gas and coal needs are imported, and one of the main factors contributing to the country declaring an energy crisis until the end of 2022 as international energy supply markets faced turmoil. Moreover, Latvia banned imports of Russian natural gas from 1 January 2023. Out of the total consumption of primary energy sources, consumption of primary solid biofuels (mainly local fuel woods) accounted for 1.70 Mtoe in 2021, second only to oil.
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
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Latvia
Energy resources and market structure
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
Natural gas is the main resource for generating heat energy and electricity. The largest consumers of natural gas are CHPs owned by the energy utility Latvenergo (Riga CHP1 and Riga CHP2) and district heating companies, industries, and other consumers. The natural gas market became fully liberalised as of April 2017, with transition measures in place until 2019. Nevertheless, the natural gas market is dominated by Latvijas Gāze AS, which owns and provides gas transmission, distribution, storage, and sales of natural gas. One major change in the gas supply market was the development of a united gas market for Baltic countries – Latvia, Lithuania, Estonia – that also started operating in Finland as of January 2020.
In 2021, Latvia received over 90% of its natural gas imports from the Russian Federation (hereafter, “Russia”). However, in response to Russia’s war of aggression against Ukraine, Latvia announced ceasing imports of Russian origin gas from 1 January 2023. Due to insufficient resources and heavy reliance on imported natural gas, Latvia continued to buy Russian gas from the time of the ban decision in July to the end of August 2022. This was only paused by Russian state-owned Gazprom’s suspension of services to Latvia from 30 July 2022 to 4 August 2022, with Gazprom’s rationale that Latvia violated contractual conditions.
The Latvian electricity market opened for free trade in July 2007. Nowadays, besides the largest state-owned utility Latvenergo, there are 15 suppliers of electricity in Latvia with some offering natural gas as well. Since 1 November 2012, all commercial energy consumers (representing 75% of electricity consumption) can choose their own supplier. Households representing the remaining 25% of electricity consumers were given this option as of 1 January 2015. Feed-in tariffs are in place for renewable sources.
The Latvian oil market is privately owned and fully open to competition. Latvia does not have a petroleum refinery industry; the only refinery in the Baltic states located in Mazeikiai, Lithuania. The main suppliers of gasoline and diesel fuel in 2018 are Lithuania (61.3% and 66.1%), Finland (16.6% and 28.9%) and for diesel fuel Belarus (10.3%) and the Russian Federation (9.9%).
Energy prices and taxes
The Mandatory Procurement of Electricity (MPC) is a government-set support mechanism for electricity producers who use CHPs or renewable energy sources for production of electricity. To limit MPC impacts on electricity consumers, a “subsidised electricity tax” was set in force from 1st January 2014 until 31st December 2017 funded by contributions from electricity companies. The rates of the tax were 15% for fossil-fuel generated electricity and 5% for high efficiency CHPs using fossil fuel equipment with set power until 4 MW. From 2018 onwards, the MPC contains two parts: (i) a fixed component for CHP producers of electricity (EUR 0.00434/kWh) or from renewable sources (EUR 0.01029/kWh) and (ii) a variable component for end users (EUR 0.00805/kWh on average). Additionally, an electricity tax on consumption is set at EUR 1.01 per MWh, with exemptions for electricity used by domestic public transport and households. The Latvian government has passed a proposal by the Economy Ministry to reduce the mandatory procurement component (MPC), which forms part of the price of electricity, by 23% in 2021. This meant a reduction of the price of the MPC from EUR 22.68 down to EUR 17.51 per megawatt hour. In 2021, this will be covered with EUR 20 million taken from the dividends of the Latvian national energy company Latvenergo. However, in the following years, it is planned to reduce the MPC rate to EUR 16.38 per megawatt hour in 2022 and to EUR 13.25 per megawatt hour. In 2023, the Conceptual Report prepared by the Ministry of Economy "Complex measures for solving the problems of the compulsory procurement component and the development of the electricity market" was considered, and the government conceptually supported the proposal of the Ministry of Economics for the compulsory procurement component of electricity; to set the average rate at 0 euro/MWh, covering the costs of mandatory procurement support from JSC Latvenergo dividend income. At the same time, the government instructed the Ministry of Economy to develop amendments to the Law on the Electricity Market.
Crude and refined oil products are subject to excise taxes ranging from EUR 15.65 per tonne of heavy fuel oil to EUR 594.00 per 1,000 litres of leaded petrol. As of January 2020, excise tax increased for unleaded petrol, diesel fuel, petroleum gas, kerosene as well as diesel fuel for agricultural use. Due to the excise taxes and VAT at 21% that apply to fossil fuels in Latvia, their prices are twice as high as those in neighbouring Russia and Belarus, contributing to intensified fuel smuggling activities around these areas. Natural gas is subject to an excise tax of EUR 1.65 per MWh for use as heating fuel, EUR 0.55 per MWh for industrial purposes and EUR 9.64 per MWh for use as motor fuel, with the rate for motor fuels down to EUR 1.91 for a period of 5 years, 2021-2025, before a planned increase to EUR 10 from 2026.
Figure 2. Total tax rebates and support for fossil fuels in Latvia
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Recent developments and trends in support
About two-thirds of the support measures identified in Latvia were introduced before 2010, most of them are still active, and all but a few are energy tax or excise exemptions. The values of the exemptions remained relatively stable over the monitored period, while the estimates of mandatory procurement of electricity produced in CHP generation from natural has continued to decline beginning 2014.
In response to the changing energy market due to restrictions on Russian oil, Latvia has worked to establish alternative forms of supply through LNG. Additionally, fossil fuel support measures were implemented, providing reduced, regulated, or capped average energy prices and/or budgetary support. Examples include price caps for heating, compensation for natural gas cost increases for households above 221 kWh, and a temporary compensation of the natural gas trade service fee from January to end of April 2022.
The fiscal cost of support measures for fossil fuels in Latvia was estimated at EUR 233.03 million in 2022 (Table 1). Seventy-seven per cent (77%) was directed at end user beneficiaries, as opposed to 22% directed to firms. Support was mainly given out in the form of tax expenditures (EUR 122.84 million) accounting for 53% of the total fiscal cost of support measures. Direct transfers amounted to EUR 110.19 million.
The fiscal cost of support measures for fossil fuels has increased by 5% since 2017. Since last year, tax expenditures have increased by 11%, from EUR 110.90 million to EUR 122.84 million and direct transfers increased by 167%, from EUR 41.99 million to EUR 110.19 million. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 1. Fiscal cost of support measures for fossil fuels (in millions of national currency)
|
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|---|
|
Tax expenditures |
98.840 |
102.065 |
105.417 |
113.200 |
110.904 |
122.839 |
|
Direct transfers |
122.775 |
57.500 |
58.452 |
40.770 |
41.993 |
110.193 |
|
Total |
221.615 |
159.565 |
163.869 |
153.970 |
152.898 |
233.032 |
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Table 2. Selected support measures for fossil fuels with a large fiscal cost (in millions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
||||
|
Excise Tax Exemption for Diesel used in Agricultural Transport |
47.209 |
36.213 |
10.996 |
|
|
Excise Tax Exemption for Oil Products Imported from non-EU Countries by Individuals for Own Consumption |
25.668 |
25.729 |
-0.061 |
|
|
Excise Tax reduction for Oil Products for Industrial Consumers and Excise Tax Reduction for oil used for Heating of individual users |
20.605 |
8.983 |
11.622 |
|
|
Direct transfers |
||||
|
Compensation of natural gas trade service fee |
27.000 |
(Started 2022) |
27.000 |
|
|
Compensation for the increase in heat costs for households (50% over 68 euro MWh) |
26.400 |
(Started 2022) |
26.400 |
|
|
Guaranteed Payment (Power Component) for Installed Capacity of Riga CHP1, CHP2 and Imanta CHP Using Natural Gas |
23.912 |
90.714 |
-66.803 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 3. Description of selected support measures for fossil fuels
|
Excise Tax Exemption for Diesel used in Agricultural Transport |
Diesel used as fuel for transport in agriculture is subject to the excise tax exemption until 1 July 2015. The benchmark against which this tax expenditure from 2010-2012 is calculated is the standard diesel excise tax rate. From 1 July 2018, the tax rate for diesel fuel used in agriculture attracts shall be calculated in the amount of 15% of the rate set for diesel fuel - EUR 55,8 per 1000 litres. From 2020 the tax rate accordingly is EUR 62,1 per 1000 litres. This is 15% of the standard for diesel fuel. |
|
Excise Tax Exemption for Oil Products Imported from non-EU Countries by Individuals for Own Consumption |
Oil products that individuals import for their own consumption from non-EU countries are subjected to excise tax exemption, within the limit of one full vehicle standard fuel tank and one additional portable fuel tank per vehicle containing no more than 10 litres. Since 1 January 2012 individuals are subject to excise tax exemption of the allowed amount once every seven days instead of every day as it was before. State Revenue Service has estimated the illegal sales and average annual amount of oil products imported by individuals and it has been used as basis for calculations. The benchmark against which this tax expenditure is calculated is the excise tax rate on unleaded gasoline. |
|
Excise Tax reduction for Oil Products for Industrial Consumers and Excise Tax Reduction for oil used for Heating of individual users |
Data for both tax reduction are combined since the annual amounts of oil products used for industrial customers and heating are reported in the annual oil product movement reports as one common figure and data. The benchmark against which this tax expenditure is calculated is the excise tax rate on diesel oil. In Latvia this fuel used for heating tax rate is reduced – EUR 56.91 per 1000 litres. If the rapeseed oil or rapeseed oil derived biodiesel content in the final product is at least 5% of the total quantity of product, then tax rate is reduced – EUR 21.34 per 1,000 litres. From 1 July 2021 both reduced rates of excise duty are increased to EUR 60 per 1000 litres. |
|
Compensation of natural gas trade service fee from 1 January 2022 to 30 April 2022 |
In order to reduce the cost of natural gas for those households that use natural gas for heating with a consumption of more than 221 kWh/month or 21 m 3 /month, the state covered the tariff increase, namely the difference between the current PUK tariff and the tariff for the second half of 2021 during January - April 2022. This support was also available to the owner or manager of a multi-apartment residential building, which transfers natural gas for use by households in a multi-apartment residential building, or the natural gas was used for heat production, and the heat is transferred to these households. It should be noted that owners and managers of multi-apartment residential buildings were obliged to apply the fee reduction in settlements with households of multi-apartment residential buildings by applying to the natural gas dealer for a fee reduction no later than the last date of the relevant month from which the fee reduction is applicable, by submitting a certificate of multi-apartment residential buildings households and their consumption. |
|
Compensation for the increase in heat costs for households (50% over 68 euro MWh) |
Gas users whose average monthly consumption of natural gas over a period of 12 months is more than 221 kWh/month or 21 cubic meters/month, will receive compensation of 50% of the price increase. Given that the estimated difference in natural gas prices between the previous and the next heating season is EUR 70, the aid for the next heating season should be EUR 35 per megawatt-hour (MWh) or EUR 0.035/kWh without VAT. The aid will apply from 1 July 2022 to 30 April 2023. |
|
Guaranteed Payment (Power Component) for Installed Capacity of Riga CHP1, CHP2 and Imanta CHP Using Natural Gas |
Annual guaranteed payment for installed capacity or power component for CHP plants using natural gas are accepted by the Public Utilities Commission. Starting 1 January 2005 these CHP plants with installed electric capacity greater than 4 MW receive a guaranteed payment that depends on installed electric capacity and is determined in Cabinet of Ministers Regulations Regarding Electricity Production and Price Determination in Co-generation. Since 1 January 2014 for co-generation units with installed electric capacity greater than 4 MW but less than 20 MW, the capacity component is EUR 153 527/MW-year, for co-generation units with installed electric capacity greater than 20 MW, but less than 100 MW, the capacity component is EUR 119 237/MW-year, but for co-generation units with installed electric capacity greater than 100 MW the capacity component is EUR 102 304/MW-year. The support for CHP plants with installed electric capacity greater than 4 MW is guaranteed for 15 years from the day when the capacity of the cogeneration unit or individual cogeneration installation of such unit has been put into service according to an authorisation issued by the system operator for connecting the cogeneration unit or individual cogeneration installation of such unit to the system. |
Data sources
Note on the Methodology
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.