Drinking my retirement away

Well, I wouldn’t say that I’m profiting from the Hungarian Government’s crazy economic policies. But after they nationalized the private pension funds and stole took all the money that pension holders have been paying in, the government was kind enough to return the profits to the people. So I just picked my retirement profits up from the Post Office (as I work during the day to pay for my pension – and thus not at home to receive the money from the Postman when he does his rounds during the day).

Now, I wasn’t expecting much, but I did get a fair chunk of money considering my amount of time and money that I’ve paid into the private pension system, which was around 8% of my pay for the past few years.  So I received the profit that was made off of that (with the government keeping the rest to pay BKV debt and the like), and I would say I’m fairly pleased. Essentially, if the money had built up during the next 30 years I would have been in a good condition. But now – under the new regime – I will have to ‘trust in’ the Hungarian economy and population growth. Well, hopefully I won’t be retiring in Hungary.

What to do when your pension is taken away? Watch trams and drink at Moskva ter. It was proposed to take the pension money and pay the debt of BKV. So it is better to drink your pension profits while watching your pension roll by.

So what to do with my windfall profit? Well, my first reaction is (and was) to drink it all away. So I’m writing from the Moskva ter Bistro while drinking the magical  Bistro Beer – only 380 ft. This place is significant (ok, it is also my local) as the Budapest City Council, in keeping with the radical magyarization of the country, has renamed it Szell Kalmen ter. Which coincidentally also the name of the current economic plan that is meant to be rescuing Hungary. Anyone that has been to Moskva ter can tell you (and who also has followed the fallen promises that this main transport hub will be fixed up), can tell you, DO NOT name your economic plan after the name of this ter. And sure enough, the plan is failing and the country is entering another recession. The simple explanation is that it is failing because they stuck the name on Moskva ter – the horribly planned and dated Communist hub that it is (ok, so maybe their plan is appropriately named.) So what is there to do when you get unexpected money in a failing state? Drink a few beers.

My pension money should buy these guys a few beers

My other thought, in connecting my wind fall profits to government policy, is to go and gamble and see if I can increase my future retirement money. Call me chicken, but I don’t have the ‘bravery’ of PM Viktor Orban, to gamble my future away on risky financial moves. Call me conservative, but I’ll probably have another beer and then invest my money someplace safer than Hungary – probably the US, and that isn’t saying much these days.

Now I know how those large international investors feel. ‘Hungary or another country?’ I’m now voting with my money and moving it far away where Viktor Orban can’t touch it. Who knows what type of creative tax or nationalization of assets will pop up in the future.

Visions beyond flat-earthers: Providing leadership on low carbon energy

I sometimes wonder if those top people that fly in and fly out for conferences ever actually remember what they say. The top CEO’s and politicians for events must give the same speech 20 times before they begin to alter it. Well, while I don’t discount this practice, I was struck by Ferdinando Beccali-Falco, the President and CEO of GE Europe and North Asia. This time I heard him at the 21st Economic Forum in Krynica Zdroj, Poland on September 9, 2011.

Getting tired of waiting for the future energy system

Mr. Beccali-Falco was also at the Energy Forum that took place in 2008 in Budapest. The main topic was about regional energy markets. There I remember him, and others, made a good case for the need to increase regional coordination in the energy sector. Although not much has happened since. This year, he even referred to his previous speech in the region and the need to increase economies of scale. He laminated on the lack of progress since then. He places this down to the lack of political will along with not enough vision and understanding that a new energy system can bring. For him, we are hitting the roadblock for implementing policies, with politicians and bureaucracy central in this roadblock.

The speakers at the Economic Forum – generally – could be divided into two groups. The first group had the vision and knowledge that a more integrated, low carbon, and smart energy system can provide – at around the same cost as the current system. The second group, were grappling with old arguments of price and uncertainty that an integrated energy system with high levels of renewable energy sources brings. Thus the second group views gas as an essential element to bridge to a low carbon energy system. Although this is a false view, as enough technologies exist to begin to strongly re-invent the energy system.

My contribution to the conference was in the form as a commentator to the panel discussion on ‘After Fukushima: Europe’s future energy mix.’ Lacking on the panel was someone that represented the renewable energy sector, and while they were present in other sessions, I focused my comments on the strong need to reduce energy use, increase RES and quickly begin the transition to a post-carbon energy system. According to the European Climate Foundation, to make the transition happen within a moderate investment climate, it must begin within the next five years. The inability of governments, regulators and energy companies to cooperate in the CEE region, fails to provide the foundation for this long – but fruitful – transition. (see my earlier post on the necessary cooperation).

Overall, the conference was informative and inspiring. There is widespread agreement, at least in the energy industry, that the smart grid and demand reduction are essential for the future energy system. Both Schneider Electric and Alstrom had strong speakers describing the benefits that a smart grid bring. The political tension that previously marked energy conferences, has given way to more practical and technical issues. However, it can expected that this aspect will emerge again. One of the essential elements of a smart grid is complete market transparency in the electricity system. For those like, Mr. Beccali-Falco who are calling for regional integration and rolling-out new technologies at a large scale, it is distrust and vested interests into nationally controlled energy markets, which remain as the primary barriers for the emergence of the smart energy system of today.

 

Energy investment in the CEE/SEE region suffers from political piracy

Vacations are great. A time to get away and forget about work. Time to spend with the family, to be outside and even meet new people. So while my kids were learning how not to drown in Lake Balaton this year (they are still small), they became pirates and commandeered an inflatable boat from a Romanian family.

The owner of the boat, was also the father of the two boys my kids were playing with. We began to talk. Not so much about work, but rather about the unease – or rather slipping of Hungary and Romania and the lack of economic growth and opportunity. Maybe it was just more middle age settling in for both of us, but the hope and excitement – the vibe, that ran through the CEE region the past two decades, for both of us, has leaked out.

Don't let CEE/SEE politicians sink your energy investment. Get a beer cooler that floats!

Part of my assessment of the region is based on this ‘feel.’ Living and working in Budapest. Traveling around the region is essential for ‘knowing’ what is going on. I am now preparing for my panel discussion next week at the 21st Economic Forum and so I’m putting together my thoughts on what a post-Fukushima energy investment  environment looks like for the CEE/SEE region. While reading the daily headlines, I came across this analysis from Reuters, ‘Analysis: Energy investors should look to East Europe.’

“Oh shit”, I thought could I be wrong, because this goes against my current analysis for the region. It is the feeling that was confirmed by hanging out in Lake Balaton and my experience analyzing and researching the regulatory and political environment and the markets in the CEE/SEE region.

Reading the article, and the ‘opportunities’ that exist in Eastern Europe, I failed to see significant investments and realizable opportunities for companies. There is a lack of widespread and fundamental change in the region to create a broad based reinvigorated investment environment.  Not because the need isn’t here, but rather, because uncertainty and lack of a deep change in mindset that can attract long-term, low risk, investments.

Sure the infrastructure is old and being pressured with the integration of wind power and other RES. The emergence of new generation technology is changing the operations of the grid; it is only set to put greater pressure to open up the region for foreign investment. But the regulatory and political environment is failing to allow the level of investment that is needed to occur, including to meet the significant shift to a low carbon economy that is necessary and will be required by the EU by 2050.

I only needed to find this little gem from Bulgaria, to understand that things are not improving for utilities (and the investment environment in the CEE/SEE region).

In the beginning of April, Prime Minister, Boyko Borisov, declared the three power utilities and the lobbyists who helped implement the present electricity pricing schemes have committed a “daylight robbery,“ vowed to involve the Prosecutor’s Office in the probe and even threatened CEZ, E.ON and EVN with nationalization.

From the study I conducted a few years ago that looked at the privatization process in Bulgaria, Macedonia and Romania, I see things have not changed. I’m not going to state who is right or wrong in this fight, but rather use it as an example of the social and political discourse that governments and private energy companies operate within.

It is this constant bickering and overt political pressure on the utilities and other energy companies. Like forcing losses on gas companies in Bulgaria and Hungary. This is an attempt to keep consumer prices low. Although, this prevents the needed levels of investment into the current infrastructure and to improve it to meet future demands.

Maybe a paintball game can be used as a team building exercise for energy companies and governments.

As the Reuters article rightly points out, there are good returns to be had in the region and there is a need for investment in the chronically under invested sector. One of the reasons for higher returns in the region is because of the higher risk that investors face in the region – from the shifting political winds and constant political attacks that are launched.

Just as the electricity distribution companies that were bought by foreign investors are under a constant barrage of political and regulatory pressure on their prices and internal operations, they also secured (at the beginning) a higher rate of return to reflect this very risk of political and regulatory uncertainty. The politicians have only been too willing to prove the investors right. The article describes an ‘example’ of an opportunity in Romania.

Hidroelectrica, which generates roughly one third of the country’s power production, is seeking investors for its flagship project, a 1,000-megawatt hydro power plant worth some 1 billion euros seen finalized in 2019.

GDF Suez, Iberdrola and RWE and CEZ have walked away while Enel and a local unit of ArcelorMittal remain on board.

What is great about this, is this is EXACTLY what happened when Romania was privatizing the first electricity distribution company. Every potential bidder walked away – except Enel. And now that Enel is heavily invested in the country, along with Arcelor Mittal, it may be worth it for them to participate in a generation project where they can buy directly for their consumers electricity. However, because every possible buyer walked away from the distribution privatization, Enel was able to extract a higher rate of return in the final negotiations.  Treating investors badly doesn’t help your country in the long term.

The risk premium that exists in the CEE/SEE is important to emphasize. Even in Hungary, previously one utility executive I spoke to in 2006, said the risk premium was no higher than in Germany. Well, those days are gone under the Hungarian government’s new desire to drive foreign energy investors from the country.

I will participate in next weeks discussion not on the narrow opportunities that the Reuters article identifies, but on the broader risks and political unwillingness that exist in the region to significantly increase the level of investment. This failure to plan for the long term and to meet current system requirements will begin to bite as the region does build more renewable energy projects (and at high rates of return and/or with large incentives) and even new large centralized generation plants (ditto).

There are three key reasons that privatizations were conducted. Because of the physical state of the infrastructure (also as a result of failure of state owned industry), domestic economic conditions and external pressure by the EU or other organizations. The question is whether the region wants to wait for these conditions to exist again to begin the process of allowing private investment to renew the region’s infrastructure – and at a high cost – or begin to act now to systematically and in a steady manner, lower the region’s risk premium by working with investors – many of whom are already in the region from the first round of privatizations, like Enel.

The gloom that hangs over two middle aged men, playing with their children in Lake Balaton will only be lifted when governments begin to think over the medium and long term, to build a dynamic and innovative energy system (and economy). The good old days of the 90’s and even early 2000s were filled with a sense of optimism and opportunity. The perpetuation of the carbon based regime, marked by constant bickering over unsustainable low energy prices, will continue to dominate until politicians realize money and opportunity lie with a fundamentally different energy system. The broader national economies of the CEE region will continue to reflect the state of their energy systems. Innovative thinking in the energy sector easily passes through to innovative and higher investments in the wider economy. Politicians should choose this path, not Communist era energy policies that discourage investment.