The big news this past week was the deal with Russia to expand the Paks nuclear power plant. Hungary’s Prime Minister decided – as it seems by himself – to sign a deal the Russians have been pushing for years. I’m unsure of why the timing was now. Maybe Orban either realized his ‘eastern opening’ strategy was only in his head or he looked around and saw he had scared all foreign energy companies from the country. “Shit, who’s going to give us cheap electricity” he said.
So Orban must have found the old phone in the closet labelled ‘KGST‘ or in English, ‘Comecon‘ (Council for Mutual Economic Assistance) and dialed up the Soviet leadership (for a great Comecon perspective, and my inspiration, read here).
Orban: “Hi is this Gorbachev?”
Putin: “Gorbachev? No, no, he doesn’t have this job anymore. I’m in charge of the Soviet Union now.”
Orban: “Oh, I remember we met last winter and you wanted to sell me some nuclear technology. I thought you were a KGB agent that had snuck into the conference. I remember now, I told Gorbachev to get his tanks out. He spoke too much of democracy. That was annoying”
Putin: “They brought me in to fix up the place and now with the Ukraine we are getting the club back together. You want back in Viktor?”
Orban: “Well, I’m working on kicking the capitalists out that are sucking our country dry. But now I have to figure out how to get cheap energy so the foreigners we haven’t kicked out stay. It’s getting a little hard for me to juggle everything. And the people want their cheap Soviet subsidized electricity. And frankly these capitalists whine too much when you deliver what the people want.”
Putin: “Well, I’m sure we can take care of that. Remember that nuclear power plant I told you about? Buy two blocks from us and your current price for electricity won’t change. I promise.”
Orban: “That sounds good, but I want to think about it.”
Putin: “Look, since we are getting the club back together, we are friends. Right?, So why don’t you come for a visit next week? If we ink the deal now I’ll pay for your trip and I’ll give you a good deal on some metro carriages.”
Before we examine how Hungary re-solidifies its Soviet Era power system and how Orban is welcoming a “below market” Russian loan, (after kicking the IMF out for providing the same tool), let’s wrap up the current state of the Hungarian power market and what the Orban government has done to date – in pure financial terms. First the state of the Hungarian energy scene looks like this:
- Electricity: “According to their profit and loss statements, universal services generated HUF 20 bn losses for the market players in 2011 and HUF 13.5 bn losses in 2012.” (Source: Portfolio.hu)
- Gas: “The Italian-owned company’s universal gas services led to combined HUF 29.5 bn losses for Tigáz in 2011 and 2012.” (Source: Portfolio.hu)
- Overall financial losses from energy utilities in Hungary are projected to total over 100 billion HUF in 2012 (from a top secret source, but all figures are from publicly available documents, NAV and KSH).
- Utility related investments have been cut by an estimated 65% in Hungary from 2009 to 2013. (from a top secret source, but all figures are from publicly available documents, NAV and KSH).
So from the roundup we could say the once reliable sector has gone the way of foreign owned banks in Hungary – with forced losses from government intervention slowly squeezing foreign owners and forcing them to reassess their long-term investments in the country. Or rather, making them decide not to invest any more than necessary in Hungary.
But what is even more striking is while Orban ejected the IMF out of Hungary and continues to push out foreign owned banks for providing foreign currency loans, the whole energy system is now living in a deficit and loans are the only thing keeping it ticking over. And now Orban is ready to ‘rebuild’ the energy system on more debt. Hungarian rate or taxpayers will need to swallow the losses currently being experienced by the private utilities and then they’ll have to swallow the interest rate from the Russians and half of the cost overruns of the new nuclear power plant. In short, Orban is building an energy system on pure debt with no clear plan to even finance or payback this amount.
But we need to get to the deal of the week. Because apparently it was a deal only available for Orban’s visit to Putin last week. Otherwise, an actual government or independent study would be done that shows us the cost/benefit analysis of buying a few Russian nuclear reactors and solidifying the country’s energy system for the remainder of this century. A deal of the century? I think not. Nor do these authors.
Considering its estimated cost of EUR 12.5 bn, the electricity generated by the two new blocks will be extremely expensive. Based on a back-of-the-envelope calculation, this would be around EUR 95/MWh (the equivalent of HUF 29/kWh), which is more than double the current wholesale price.
The authors, Vargha and Zsoldos, explain the financing cost, and just possibly the cost could be lower than this – but probably not. But if you throw in the transmission and other system upgrades, cost overruns and even the exclusion of cheaper energy sources (in 50 years time), you can see double the current electricity price is not only a realistic, but possibly a conservative assumption.
Now we add to the mix that Orban’s dream is to have all monopolies (not just energy related – watch out ‘Magyar Telecom’) in state hands then we can really begin to assess what will happen to Hungary’s energy system in the mid-term. The system that Orban is developing will take over the utilities currently hemorrhaging losses, buy into a doubling of the price of electricity for at least 40% of the countries electricity supply by going with Russian nuclear, all the while keeping prices 20% – 30% lower than in 2012. To explain this better I created the ‘Orbanisztan diagram’ (in Hungarian, the ‘sz’ is pronounced as a ‘s’).
As the reader can see, once you get around to the left side of the diagram, ‘state investment’ kicks into the picture. Because there is no private investment, either because private companies have no money or incentive to invest, or there is state ownership. While at the top of the diagram is the Hungarian utility rate payer and/or tax payer. It is important to put these two together. Because without any Foreign Direct Investment (FDI) it is the Hungarian rate payer that needs to foot the bill. But let me clarify this last statement. From my perspective, you want FDI as this ‘typically’ goes along with privately run firms that are typically more efficient than state owned firms. And since my consideration that private owned firms keep costs lower, they are tightly regulated by energy regulators – with power over pricing and profits, then FDI even if ratepayers need to create a return on investments, the end price will be lower than inefficient state run firms, which may only function on short term election cycles, rather than long term investment cycles. (Thus my BKV transport pass just got 1,000 ft cheaper this month, is only due to political reasons, not for BKV turning profitable or being well managed).
Because the government has cut and will maintain energy prices at an artificially low (loss making) level which does not pay for investments of either maintenance or modernization of the country’s energy system, then two things can happen: a) there is no investment and security of supply declines, thus black outs begin to happen more frequently; or b) money needs to come from taxpayers to fill the gap – and maybe we can imagine ‘taxpayer’ is not a homeowner, but foreign owned banks or other unfavorable industries like large box stores (e.g. Tesco or Auchan).
Or… c) bank loans!!! or cross-subsidizations!!! of energy activities by the behemoth of MVM – the Hungarian state owned energy ‘I-grow-bigger-everyday-by- buying-out-distressed-assets-of-German-and-French-energy-companies.’ And loans from the Russian state, done through MVM, so they are not ‘state’ debt.
So what is my best bet? It is on the last two loans and cross-subsidization. Taxpayers and muddling the waters of MVM. Because by coincidence it just may be that Hungarian authorities are looking at the ‘successful‘ Bulgarian energy system and seeing how they
rig structure their state owned energy behemoth, BEH.
As a proof of BEH’s vitality minister Stoinev explained that a certain EU member country has approached him with the idea to use the Bulgarian model for creating a state-owned energy holding of its own. Stoinev declined to name the country.
Guest Energy SCEE blogger Atanas Georgiev, described in great detail on how the spiderweb/incompetent and politically subservient energy system is run in Bulgaria. Or if you want to know the story of how Bulgaria did privatize their electricity distribution companies – and why the were so desperate to do so (because they didn’t have any money to modernize them), I suggest you read the report I co-authored on the topic. It provides some foreshadowing for Hungary in coming years.
To conclude, Hungary is either directly or indirectly assembling an energy system like the ‘efficiently run’ EU scolded country of Bulgaria (also in the Russian nuclear club and on the shit-list for backing out of Russian provided Belene NPP) for ideas of how to set up its own state operated energy system. This is a system based on losses on private utilities, financial loans and politicized regulatory decision making. And I haven’t even reviewed the bank loans MVM has taken out to fund the purchase of E.ON’s gas storage. It is now emerging there is no clear answer to the nationalization of energy assets in Hungary. The disfunctional Bulgarian BEH can provide the only source of inspiration of how Orban can run Hungary’s energy system. Through tricks equal to a Soviet era bookkeeper.
Which brings us full circle back to putting the old Soviet club of Comecon back together. For economic assistance the Hungarians are now pulling in the Russians and probably Bulgarians to find ways to (re)build Hungary’s economy. At the same time as sucking EU development money in – because private companies are no longer investing in the country. EU money keeps the country afloat. Desperate times lead to desperate measures, so how does a 12.5 billion euro nuclear power station – paid back far into the future – sound? I don’t know about you dear reader, but I’ll stick with the complicated EU energy rules and even those French and German utility companies. I’ve heard the story of Comecon didn’t turn out too well.