Coal expected to become most energy efficient fuel for electricity production next year, as gas prices in the Baltic states are set to rise 40-50pc.

As Russia liberalises natural gas prices, coal will become the most cost-effective fuel for electricity production as of 2008, said Igor Kozhukhovsky, an executive at state-controlled utility UES.

Russia's unified energy system (UES) department manages the generators, distributors and suppliers of most of Europe's gas supplies.

"As the price of gas grows by 30 percent we will hit a turning point where coal will become the more attractive fuel. We see this happening next year," said Kozhukhovsky, who heads the economic policy department of UES, or Unified Energy System.

By 2020, coal will make up 38 percent of the electricity sector's fuel balance, up from 25 percent today, he told a power conference on Monday.

A state programme passed earlier this year calls for the gradual liberalisation of domestic gas prices by 2011. They are now capped at 10-20 percent of prices in Europe.

The power sector is the largest consumer of Gazprom's gas on the domestic market, where the export monopoly sells more than 300 billion cubic metres of the fuel every year.

A shift in the power sector's fuel balance toward coal would free up supplies for Gazprom's export markets, particularly Europe, which counts on Russia for a quarter of its gas needs.

Kozhukhovsky said Russia's demand for power would increase by between 2.5 and 3 times before 2020.

Electricity prices for industrial clients are also being liberalised over the next four years, allowing generators to offset the growing cost of fuel.

UES, Russia's former electricity monopoly, is now in the process of selling off all of its assets by July 2008 with the aim of attracting investment and opening the power market to competition for the first time.

Gazprom also announced last week that it is to raise prices by 40 to 50 percent for Latvia next year and all Baltic states will pay the same as western European nations, an official at the company was quoted as saying on Friday.

Latvian daily Dienas bizness quoted Alexander Miheyev, Gazprom's first deputy head for oil and gas marketing and deputy chairman of the Latvijas Gaze gas company, said the price rise will be linked to the price of heavy fuel oil.

"Taking the current situation into account, the price could rise by between 40 and 50 percent," he told the newspaper.

"We have raised the price of gas by three or four times, but it is still not at the level of average European prices," he told the newspaper.

He said the price rise next year would probably be the last large increase for Latvia and that further changes would depend on the price of other energy sources.

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Sources: http://uk.reuters.com

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