Who will pay for Orban’s Energy Promises?

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.

Putting the old club back together.

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.”

Orban: “Deal.”

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.

Péter Simon Vargha and István Zsoldos

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.

 

One Year, Three Energy Price-Cuts and Six Chairmen in Bulgaria – Is This Possible?

[This is a special guest post written by Atanas Georgiev, Assistant Professor at Sofia University, Bulgaria. After my last blog post missed the mark on the situation in Bulgaria I wanted to call in an expert for readers of The Energy Scee  who could provide an accurate overview of the goings-on in the country. Atanas is kind enough to provide this concise summary of recent events in Bulgaria.  — Michael LaBelle, The Energy Scee]

The newly-elected chairman of the Bulgarian national energy regulatory agency, Mr. Boyan Boev, announced on December 20, 2013 during his first press-conference an unexpected “gift” for local consumers – a single-digit percentage price-cut to be implemented from January 1, 2014. The draft decision was published by the State Energy and Water Regulatory Commission (SEWRC/DKEVR) in the late afternoon on the same day and was scheduled to be discussed with the stakeholders on the next workday – December 27. After the discussions then, the decision was taken by DKEVR on the next (and last for the year) workday – December 30.

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The chairman’s hot chair

Mr. Boev is the 6th (sixth!) Chairman of the regulatory commission, who was in charge during 2013. Angel Semerdjiev was the head of the regulatory body from 2009 to the end of January 2014, then Mr Andon Rokov headed the regulatory body in an interim period as an acting chairman. The next in charge, Ms Yuliana Ivanova, had a short official term, and after alleged lack of experience, she also resigned. The next Chairman – Ms Evgenia Haritonova, was the next head of the body, but was replaced by Ms Angela Toneva right before the second price cut. Ms Toneva resigned in the beginning of December just before the latest price cuts were announced. In mid-2013, the other 6 member of the board of DKEVR resigned together with Ms Haritonova, and one of the new members resigned in December with Ms Toneva. If you lost track on the way, the recap shows that the 7-member regulatory board had 17 different members during some time in 2013, and 6 of them chaired the commission for some period…

Of course, this is not so strange in Bulgaria, because the new socialist government managed to replace almost all the board members and CEOs of all state-owned energy companies shortly after coming into power at the end of May 2013. The incumbent power public supplier NEK, for instance, has 4 different CEOs throughout 2013, and 12 different members in its 3-member board. This is not so strange as well, because NEK had 10 different CEOs and 24 different board members for the period 2008-2013.

Price-cuts in three steps

Throughout the whole year 2013, the Bulgarian energy sector was in turmoil. The end prices of power utilities have been diminished three times – in March, August, and in late December, as a result of the populist moves by two of the three governments, which ruled the country. In order to evaluate these moves, we need to put them in the broader energy-and-politics context of the year:

  • On January 27, groups of consumers protested their high electricity bills in the Southwestern towns of Sandanski and Blagoevgrad in front of the local DSOs (CEZ Distribution Bulgaria) offices. The consumers claimed that their bills are several times higher, due to longer metering periods and the colder weather;
  • On January 28, the head of DKEVR Angel Semerdjiev resigns, after he was asked to by the PM Boyko Borissov. The law does not allow “firing” of the regulatory agency chairman, but the message is that he was “replaced” because of the late implementation of the Third Energy Package in Bulgaria;
  • On February 10, thousands of citizens protest in more than 15 large towns in Bulgaria participated in a “national protest against monopolies”, demanding diverse goals: from individual contracts with heating utilities to the nationalization of the DSO grids (currently owned by CEZ, EVN, and Energo-Pro, the latter acquired it from E.ON after it sold its Bulgarian assets). The evening before the protest witnessed the torching of 2 EVN service vehicles in Plovdiv;
  • On February 12, protesting citizens in Sofia attach the building of DKEVR with tomatoes, fireworks, etc., demanding lower energy bills. The event was organized by nationalist parties – VMRO and Ataka;
  • On February 17, a total of about 100 000 protesting citizens marched in over 35 towns. Many offices of DSO companies are attacked with stones, bottles, eggs, and vegetables;
  • On February 21, the government of the rightist party GERB with PM Boyko Borissov resigned , after clashes between police forces and protesting citizens and a self-torching of a young protesting citizen in the Black Sea town of Varna. The interim government, appointed by the President Rossen Plevneliev, tried to balance the sector through consultative councils and proposed a change in legislation in order to finance rising subsidies for renewables with the revenues from carbon emissions, among other measures;
  • On February 28, the enacted changes in the Energy Law allowed the regulatory agency to change energy prices at any time during the price and regulatory period, the former being July 1 – June 30 prior to the change. The next week, DKEVR voted the first price cut for the year – about 7% on average for end consumers;
  • On July 29, DKEVR decided to cut end-user prices from August 1 with about 5%, after a prolongation of the price period with one month and amid suggestions from the Government and the Parliament, that “there is a reserve for about 5% price cut”;
  • On November 29, the Parliament suggested a tax on renewables, amounting to 20% of their revenues, is the proper way to balance costs and revenues. The change was enacted with the State Budget Act for 2014.

Cutting technical losses at large

The common trait of all price cuts is that they balance revenues and costs mainly in the system of the national incumbent NEK, while depriving DSOs from their revenues. Part of the changes also affected power producers – the nuclear plant, the large TPPs, and cogeneration plants in heating utilities and on industrial sites. An easy way to cut grid distribution prices has been the “innovative” way of administrative diminishing of the allowed percentage of “technical losses”. The first cut came in March, lowering allowed grid losses from 15% to 12%. Then, in the end of July, the second price-cut was made possible through the additional diminishing of allowed DSO technical losses – to 10% (for CEZ and EVN) and 11% (for Energo-Pro). The final decision in 2013 additionally diminished these numbers – to 8% and 9% respectively, or 2 percentage points for each of the DSOs.

During this regulatory turmoil, the government tries to defend its position in an arbitrage started by Atomstroyexport on the decisions of the previous government and parliament to freeze the NPP Belene project. However, this is not a hinder for the new government to start negotiating a new unit at the existing NPP Kozloduy with the American company Westinghouse. The large-projects scenery also includes a final contract with Gazprom on the Bulgarian section of South Stream, which was scolded, and then taken over for re-negotiation, by the EU energy commissioner Guenther Oettinger. The 100% state-owned Bulgarian Energy Holding, which is owner of the state-owned energy companies, somehow managed to take a 500-million EUR obligations loan in the end of October, just days before signing a deal with Gazprom for additional 620-million EUR loan, related to the construction of South Stream.

The best is yet to come

It appears that 2014 will be not quite less tense in energy terms for Bulgaria than the previous year. Still there is a large deficit in the regulated electricity prices mechanism in Bulgaria, caused by rising renewable energy subsidies and generous investments in non-regulated businesses by state-owned incumbents; the government is not stable and preliminary parliamentary elections may be expected anytime soon; the main reason for the mismatch between utility bills and consumers’ income (namely – the low income) is not going to change as well. All these factors cause a nightmare for any analyst, who tries to predict the events in Bulgaria even for a 1-month horizon.

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 This guest post is written by Atanas Georgiev who is Assistant Professor in the Faculty of Economics and Business Administration of Sofia University, Bulgaria, where he teaches Regulatory Economics and Utilities Management to grad students. Atanas is also a lecturer at the “Energy Diplomacy” courses, organized by the Diplomatic Institute in the Bulgarian Foreign Affairs Ministry. He is the chief editor of both the Bulgarian “Utilities” magazine and the online portal www.publics.bg, as well as a frequent author of articles in other energy-related publications. Atanas graduated from the “Economics and Management in Infrastructure, Energy, and Utilities” program at Sofia University and later visited trainings on Energy Pricing in the Public Utilities Research Center (Florida, USA), EU Energy Law at the Florence School of Regulation (Italy), Infrastructure Economics at the Turin School of Local Regulation (Italy), Energy Security at the Masaryk University (Czech Republic), etc. He is member of the International Association for Energy Economics and of the Scientific Committee at the Turin School of Local Regulation.