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.
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.
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.