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“South Stream can, in the long term, be considered a rival to the Nabucco project,” Oettinger stated as an answer to a journalist’s question during the 10th Anniversary of the EU-Russia Energy Dialogue High level conference in Brussels, 22 November 2010. (Novinite.com)
What do you think? How do you perceive the role that Nabucco and South Stream will play on the security of gas supply in Central Europe? And how viable are these projects? This is what the Southern Gas Corridor Survey is setting out to answer.
Take a few minutes to contribute to the survey to find out if this is what energy professionals believe. Is Oettinger right? Your answers are anonymous.
And pass it along to a friend! You only have until December 6th – so do it now!
The idea that people and even companies are locally dependent, and not mobile assets, is now a long established academic debate. This may be at odds with some of the earlier ‘globalization literature’ which classified multinational companies as highly mobile and which seek out the cheapest labor and locations.
Hungary, and more specifically the new Fidesz Government, is now putting this theory to the test. Interestingly, they are applying it to economic sectors that are less mobile than manufacturing. Utilities, retail chains, banks, telecoms, all sectors that require huge amounts of investment over a long period of time and that can not easily dispose of these assets – particularly in the current economic climate.
What I would like to do in this multi-part blog post is to attempt to understand the impact on the utility and energy sector that Hungary’s two extraordinary taxes (extension of the Robin Hood tax and special sectoral tax) will have on the companies and the country in the medium and long-term. And how this affects Hungary as a country that potential investors will invest in.
In this first post, my intent is to just lay down the basics of how the utility sector works with the political/regulatory sphere. This will allow a means to assesses recent changes in Hungary and the medium and long-term impact of tax changes.
The energy, and more specifically the utility industry, is marked by embedded assets. They are stuck to their geographic location. Therefore, it is incumbent upon them to make the place they are located in, a competitive and attractive place to do business.
The role that utilities play in the US, since they are consigned by decades of regulatory oversight, is to act as economic development agencies. They help companies find suitable locations for investments and can act as go-betweens, for interested companies and local governments. They are essential players in the economic development of US states.
Utilities in Europe, while they may not play this essential go-between role (particularly in more liberalized markets, even less-so), they do play an important role as economic development agents by ensuring reliable infrastructure and acting as indicators themselves, for other investors. The utility industries close proximity to political and regulatory decisions can make it a litmus test for the broader economic environment in a country. Utilities are sensitive to the predictability of regulations and long term investment signals governments convey. In addition, utilities and other energy companies, are the economic backbone of a country – and essential for economic development, particularly for manufacturing.
There is a political and economic balance that politicians and regulators take with utilities. There is a margin of profit allowed to monopolistic utilities (and even those operating in a semi-competitive environment) in exchange for good service quality and competitive prices. When the prices become uncompetitive or perceived as too high, it can be shown, that political and regulatory efforts will be taken to reduce the profit levels. This may take the form of altering the market structure (movement from monopolistic to competitive market), imposing special taxes (a Robin Hood tax), or altering specific regulations that impact the profit levels.
These different steps can have long-term and short-term effects on how companies operate. What is essential is that investments continue in order to maintain the competitiveness of the location (upgrading lines and investments into generation and fuel supplies) and to allow a long-term predictable regulatory environment. Disruption of this path, will set back past efforts of providing sectoral stability. This can be seen in how privatizations were conducted and initial conditions agreed to. For example, if respect for these earlier agreements are not honored or acceptable alterations are not reached, then even the reason for privatization (modernization of infrastructure at a lower cost and economic growth) is lost. High market risks are reintroduced and investment decisions are delayed.
Therefore, it is essential that historical commitments are honored, or altered with mutual consent, by politicians and regulators with input from utilities. If continuity of investments is maintained in a stable regulatory environment then this sends a signal to other industries and over the long-term reduces the risk level for a country; with the knock-on effect being lower financing costs and lower prices for household and industrial consumers.
With these basic parameters laid out, in this first part, I’ll apply these to the situation in Hungary. This is particularly important as Hungary was the first country in Eastern Europe, where utilities were privatized and bought by foreign investors. Just a few years ago, a CEO of one of the largest utilities told me, the risk level his company gives for Hungary was no different than for a Western European country. However, a regional banker recently told me energy companies now see Eastern Europe as a high risk investment location with low returns. Making it an undesirable location for business.
These views will be examined in the second part. The recent imposition of extraordinary crisis taxes in Hungary may affect investment plans and the countries investment environment – including assigned risk levels. In the next post, these new taxes will be reviewed and the impact these may have on the utility companies. The final post on this topic will address the medium and long-term impact this has on the country and other industrial sectors.
The quick turn around by the Bulgarian government to support at least one Russian/Bulgarian project was displayed fully on Saturday Nov. 13, 2010. The prime ministers of Russia and Bulgaria Vladamir Putin and Boiko Borisov sat down and agreed to establish South Stream Bulgaria AD to develop the Bulgarian section of the pipeline. Gazprom and the Bulgarian Energy Holding (BEH) will be the main principles in this project. However, as reported by novinite.com in the Russian press, this means little.
“The establishment of a joint company in general does not make the destiny of real construction clearer. This would happen only when an investment decision is made, but the perspectives here are very difficult to forecast,” expert Mihail Krutin points out cited by “Nezavisimaya Gazeta.”
Of course finally getting the Borisov government to agree to a project with Russia didn’t have any impact on current Russian gas prices for Bulgaria. According to novinite.com the Bulgarian PM stated after the Russian PM left town that they would be getting lower gas prices – contradicting Putin’s assertion that these things are not connected.
And finally, according to publics.bg, the visit also produced statements that technical progress is still being made in building Belene NPP and other partners will be joining the project. At a Climate Strategies conference in Budapest this week and the 5th Energy Forum last week, it is clear that despite widespread energy industry perspectives on the future growth of nuclear power (excluding German and Austrian perspectives that were vocalized at the Climate Strategies conference), financing and ownership structures still remain key hurdles to building nuclear power. And Belene is turning out to be the poster child for the difficulty of building nuclear power.
In other Russian interest related news, the Hungarians prove again they have Surgetneftegaz pinned to the mat. According to Portfolio.hu,the Metropolitan High Court of Appeal supported the earlier ruling of a lower court that the MOL was right to bar Surget from being listed in the share registry. Outside this narrow legal ruling, this is also connected to the Hungarian Energy Office not approving participation of Surget in MOL due to it not clarifying the companies ownership structure. Well, the only joke that can come from this ruling is that even if Surgut was now listed as a full owner of MOL, the Hungarian government would no doubt come up with a special tax to apply to Surget.
And in broader EU news, and something that will need to be followed up on in separate post, Bloomberg reports that the EU Commission outlined its energy infrastructure priorities for the next two decades. But specific projects won’t be identified until 2012. So maybe I have two years to write that post.
And finally, not only did the Bulgarian visit have energy as a central focus, but it just may set off a new round of democracy in Russia. Apparently, you can now vote and suggest a name for the dog that PM Borisov gave to PM Putin.
The difficult transition to a low carbon energy sector is strikingly apparent when looking at the Polish market. However, as the participants at the 5th Energy Forum, held this year in Sopot, Poland, displayed – some market actors are more willing to make this transition than others.
The reason that I mention Poland as a challenging place to make this transition is the country’s almost total reliance on coal. Over 90%. The advantage of traveling to another country for a conference is that you can learn a lot about that country’s energy sector. And not just by the statistics, but by talking to the different officials from government agencies and companies. What I took away, whether correct or not, is a strong resistance from established companies and some government institutions about the purpose of moving towards a low carbon economy. In a way, for Poland, under the present energy mix, reductions may seem pointless. That is moving from 94% dependency to 60%, is like switching from a vodka martini to vodka and orange juice. Are you really going to feel the difference in the morning?
I would argue yes, the short term health benefits from the additional orange juice, can lead to further reduction in alcohol over the long term. If you don’t start at some point, then you’ll never make it.
On another note, the organizers of the conference were not only kind enough to invite me but also to have me moderate the session on the Modernization of the Energy Sector in Central Europe. They arranged a great, and diverse panel, which proved really successful in assessing some of the key aspects of the market developments in the CEE region and how some of these aspects can be applied to the Ukraine and Russia. Interestingly for me, Mr. Khotey from the State Property Fund of the Ukraine outlined how the country was preparing to privatize some of its energy companies, and notably distribution companies. I previously did on a study on this topic for USAID examining the efforts in Bulgaria, Romania and Macedonia.
It was also mentioned by one of the speakers that role of the energy regulator was to ensure the interest of the consumer, which for him, is connected to low prices. On this point, I would also have to take issue, as not only is it in the interest of the consumers to pay a fair price, but also ensure that the energy system is transformed over the long term. While there are different regulatory philosophies, ensuring that consumers benefit from low(er) carbon energy sources is essential.
Energy prices and coal are interlinked for Poland. There is no doubt that renewable energy when priced against coal, with no carbon pricing, is more expensive. However, if CCS technology is priced in with the cost of coal, then the opposite is true – coal becomes more expensive than renewable energy. So if Poland is waiting for CCS technology, in order to ensure the place of coal in the country’s generation mix, and to maintain cheap generation, the consumers will be footing an even higher bill in the future. Therefore, as distasteful as it is in the short term, switching to vodka and orange juice, will not only improve your health, but save you money as well.
Have your say! The race to extract gas from Central Asia and send it to Europe is on. But who is going to win? Or rather, which project(s) are actually viable and will be built through the European Southern Gas Corridor. And what is the reason for so many projects? Are they just political or are there solid economic and security of supply reasons behind these? These issues are addressed in this survey. And with your help we can establish what the general consensus is.
I’m seeking your cooperation to establish which of five projects may go forward in the future.
The survey can be found here: Click here to take survey
For better or worse, I excluded White Stream due to both the perceived political and financial backing and the level of general knowledge of the different pipeline projects. So my apologies to the backers of White Stream in advance.
The survey page, with the descriptions of the projects, can be found here.
And I would appreciate it if you could spread the word by email. You can copy this link into your email and spread the word about creating a shared knowledge analysis of the Southern Gas Corridor.
Further explanation of the reasoning behind launching this survey is giving in the introduction. So get busy and fill it out.. The results will be published in December/January.