All posts by Michael LaBelle

Michael LaBelle provides a critical but light hearted analysis of the complex field of EU and CEE/SEE energy politics and business. He is is an assistant professor at the Central European University Business School and in the CEU Department of Environmental Sciences and Policy. He teaches courses on sustainability and innovation in business and energy policy. He conducts research on how institutions and organizations foster change to contribute to a low carbon future. Dr. LaBelle is based in Budapest, Hungary. He can be reached at michael.labelle(at)energyscee.com

Launching of an Energy Expedition: #SCEEE

Today I’m launching the South & Central European Energy Expedition (#SCEEE). This project stems from my interests in the energy infrastructure in the Central Eastern European region. I also have a great interest in bike riding – particularly in Hungary. I established a goal this summer to bike from Budapest to the Black Sea. Combining the two interest seemed a natural fit that align with current research into efforts to keep energy prices low in Bulgaria, Hungary and Poland. These efforts are examined withing the broader context of the region’s market alignment to the European Union and its infrastructure alignment with Russia.

I am breaking the expedition into two legs. First from Budapest to Apatin, Serbia (where my great grandparents come from). This will only be about 4 days. In August, I’ll be biking then from Apatin to the Black Sea, passing through Bulgaria and Romania. Overall, I will be biking more than 1500 km and passing many of the regions nuclear power plants, hydroelectric facilities, thermal power plants and many, many farms.

The objective of this bike expedition is to observe firsthand and document both the centralized and decentralized energy infrastructure. The formal takes the shape in facilities like nuclear power plants, gas fields, district heating systems and damns. The informal are homeowners, farmers and communities using different energy sources like wood, coal, solar, wind, biomass for energy production. I also plan on interviewing and interacting with a range of stakeholders in these communities. Interviews are scheduled ahead of time and are also ad-hoc.

Picture from a bike trip around Lake Balaton in 2014. In front of a poster proclaiming the Hungarian governments slashing of utility prices.
Picture from a bike trip around Lake Balaton in 2014. In front of a poster proclaiming the Hungarian governments slashing of utility prices.

My aims are to establish from local officials, workers and ‘ordinary’ people how energy prices and energy technologies influence their everyday lives. In particular I want to contrast this everyday perspective with the those of policy makers, industry officials and representatives of organizations. The latter are often represented in a disproportionate way in my (and other academics) research on energy policy.

This back to basic approach is meant to infuse historical field practices often used in the discipline of Geography (I’m a Geographer by training). Much of this training I received as an undergraduate at the University of Minnesota Duluth under the influential Geographers of Professors Matti Kaups and Larry Knopp. In contrast, my MSc and PhD studies at the University of Bristol emphasized the theoretical approach – or at least the academic contribution stemmed more from the theoretical expression of the world, rather than expression of the world while using theory.

A final aim of the #SCEEE is to disseminate and educate to a wider audience what infrastructure exists and how local people interact with it. I will be blogging, tweeting (#SCEEE) and producing videos documenting these interactions. This real time data collection method and spot analysis will feed into more in depth research I am conducting with national level stakeholders and document analysis. Publications will be in the form of journal articles and a book on the pursuit of cheap energy prices and the social and geopolitical ramifications (and yes, I still need to find a book publisher – so offers are welcomed).

Finally, all expeditions are not launched solely in the interest of science. There is a personal interest that drives a person to explore and engage in a familiar or unfamiliar environment. This innate curiosity is what makes social science so much fun: The ability to break down larger social and environmental processes into categories that highlight systemic weaknesses or evolutionary trends (to name just a few themes). So I launch this expedition with the expectation of serendipity and chance to provide information to whet both my exploratory appetite and to inform the larger research project. My personal interest of energy and biking converge to propel both interests (literally) further down the road.

Nonetheless, looking out at the grey morning sky, I just hope my new tent repels the water that sinks many expeditions.

The Day Hungary Cleaved from Europe: The true cost of Russian gas

The visit of Russian President Vladimir Putin to Budapest on February 17th, 2015 marks the day the Hungarian government voluntarily returned to the Russian sphere.

The outcome is three-fold: First, Hungary’s Prime Minister Viktor Orban openly rejected the EU path of energy market transparency and integration. Second, Hungary accepted ‘cheap’ Russian gas in exchange for a Ukraine-like gas arrangements which depend on Orban’s political fortunes at home. Third, Hungary operates its gas network for the benefit Russian geopolitical aims.  This arrangement threatens both Europe’s  and Hungary’s drive for energy independence, system stability, and European energy security underpinned by interconnection between countries.

A great friendship

The Cost of Cheap Gas

The Hungarian movement into Russia’s embrace was done in the name of ‘cheap’ gas. Reportedly, the price dropped from the oil-indexed price of $440 per thousand cubic meters (tcm) to $260 tcm, against a European gas-on-gas average price of $270 tcm. Bingo! Nonetheless, the drop is significant when you consider this post listing previous 2013 prices in the EU (before our recent oil and gas price decline). Importantly, the deal renegotiated Hungary’s previous long-term contract with Gazprom enabling it to utilize its previous unused gas on the take-or-pay scheme. Although, this supply extension (from a trusted source I’m told) was already agreed to back in 2008 when E.ON owned the import rights. Thus in short, Hungary received very little from Russia for all the political and economic favoritism listed below.

But first let’s put these numbers into a regional perspective. The new price is based on non-oil based pricing, thus hub price. Bulgaria, for example in 2012, renegotiated its long-term contract between Bulgargaz and Gazprom increasing the gas hub based pricing to 20% from 10% previously.  While OMV in January of this year, shifted to hub based pricing with Gazprom. Thus Hungary simply follows on this regional shift that began in 2008 and gets a somewhat lower price for being a good customer.

This temporary arrangement, rather than going with a new long-term contract, was done under the reasoning that current volatile gas and oil prices means Hungary may see further price drops in the future (er, or Russia might increase the price?). It is also enough time for Hungary and Russia lay plans for a gas link to Turkey. Importantly, for this article, election years in Hungary may occur in 2018 and 2022. Any change in government after 2018 will need to deal with the Russians at that point. Cooperation on gas and nuclear will need to continue.

Nonetheless, let’s not think in terms of only open market pricing – which Gazprom is not noted for. Particularly, when Putin shows up on your door. Rather let’s consider that Hungary’s European Union membership was openly sold for gas necessary to prop up artificial utility price cuts and for a trip wire gas deal – any shift in the governing party will result in more expensive gas. Cheap gas and political trip wires are key reasons for the past political instability in Ukraine, in other measures Orban is also shifting Hungary to the Ukrainian gas model.

The overall actions of the Hungarian government during Putin’s visit demonstrate Hungarian historical values are neither respected nor honored. Rather, shameful Hungarian historical political tendencies bared themselves by Putin and Orban’s negation of the living memories of Hungarians break from the Soviet sphere in 1956 and 1989.  But Hungarian society, the one that I know, is waking up. The Hungarian people reacted to Orban’s governing style, and no doubt Putin’s visit, by taking away his two-thirds majority in Parliament in a local by-election this week, February 23rd.  There is no social return to Russia’s barracks.

The Hungarian populace is firmly in the EU. In contrast Orban openly embraces Russia in the pursuit of cheap energy sources, in the form of gas shipments and new nuclear power plant agreement. This pursuit belies a more efficient scenario where Hungary’s EU membership serves as a basis for a more secure  and interconnected system that provides sustainable priced electricity and gas. EU presence in negotiations can also boost Hungarian gas deals. Following the EU path both honors Hungary’s European membership and advances national and EU energy independence.

Political reasons are behind Orban’s friendship with Putin. Hungary has cut electricity and gas prices more than 25% since 2012. During the 2014 local elections advertisements existed across the country proclaiming the energy price cuts; in 2013 there was an open government funded PR war against foreign owned utilities – even a petition drive! The price cuts, while good for households in the short term, have significant impacts on the energy system.

These prices are resulting in private gas and electricity companies hemorrhaging cash for residential customers. Eni, the Italian gas and oil company Hungarian gas subsidiary, TIGAZ, is accumulating financial debts nearing its capitalization.  The Hungarian government is racing to set up its own for profit service provider in 2015 (although they say it is non-profit, it is registered as for-profit). This is necessary to take over the universal consumer obligation. The private distribution companies, owned by ENI, RWE, E.ON do not need to file again to be universal service providers to supply electricity and gas at a loss on the regulated market to households. Nonetheless, to be fair to the Hungarian government, these and other companies did have years to foster a competitive market for households and they never did. The question though is how to foster a  fair market price without bankrupting companies.

The losses on the regulated market can be taken over by the Hungarian state, which has conveniently placed the ‘non-profit’ entity in the Hungarian Development Bank. However, the placement of many energy entities – such as a gas trading entity, into the bank raises red flags.  The potential exists for capital injections into the bank, by the government  to result in cross-subsidized losses. The bank incurs losses, through its ownership of the service provider, but the government makes up for these losses by capital infusions into the bank. However, under the gas agreement the current 25% cut likely be maintained without losses, thus Putin delivered Orban a golden egg – with Putin keeping the goose.

(In the past few months I have submitted questions on this topic to the Hungarian government and state owned companies but my requests for interviews were all declined. The Hungarian energy regulator did speak to me about the technical reasons for cutting gas off to Ukraine in September 2014 – a contract from Naftogaz was never returned).

The Hungarian energy system now operates under the same politically driven concerns as the bankrupt Bulgarian energy system. As a starter, under Orban and the Fidesz super majority in Parliament, the operating profits of the Hungarian utility sector as a whole flipped from a profit of HUF 224 billion in 2009 to HUF 119 billion loss in 2012.   Bulgaria is at least attempting to dig itself out of these past practices, which has placed the Bulgarian state owned energy company, NEK in debt of €767 million in the past four years. (well, it now recognizes these losses, so maybe it will act). Hungary is just lowering the ladder to go down this hole.^ Orban is right, he does need Russian gas to have cheap energy for consumers. The significant losses by utilities and the re-organization of the Hungarian energy market demonstrates this.[For more on information on the similarities of Hungarian and Bulgarian energy systems see this (draft) co-authored article].

Putin’s Pipelines

Driving further dependence on Russia is Hungary’s reduction of interconnector capacity between Hungary – Austria (HAG), and Hungary – Slovakia. The HAG has 3 bcm, but Hungarian state owned MVM holds a monopoly on the capacity granted by the Hungarian Parliament in 2011 citing energy supply security as justification. Capacity is extremely limited and widespread media coverage given to a partially Russian owned firm, MET, holding a special arrangement with MVM on importing and reselling gas into Hungary through HAG. The other owners are reported in the Hungarian media as being politically connected in Hungary.

The story of the Hungarian-Slovak interconnector is short. Meant to open in January 2015, ‘technical reasons’ keep this 5 BCM pipe closed. In addition,  operating rules are delayed while they are being modified. The importance of the SK-HU pipeline is viewed by the fact that German Chancellor Merkel in her February visit with Orban, brought up the use of this interconnector by RWE. As is clear, Putin has Orban’s ear, not Merkel. It remains unknown when this pipe will open.

Constraining Hungarian import and export capacity also constrains volume and price liquidity on the Hungarian market. This would erode MVM’s and Gazprom’s lock on the Hungarian gas market and even allow export to Ukraine. Evidence of this can already be seen in the relatively huge profits booked by MET through its deal with MVM shipping gas from Austria. In 2010, MET had HUF 44 billion revenue in 2010, by 2012, the company had  HUF 280 billion in revenue and “paid 60 billion in dividends to its owners, 2.5 times more than the overall dividends paid by the whole group of foreign incumbents in the same year.”* Or as mentioned above, the utility sector as a whole experienced a  HUF 119 billion loss in 2012. Other market players receive no such treatment, instead they are burdened by both special sectoral taxes and regulated utility rates. The losses in Hungary may only be comparable to Bulgaria – not a model energy system, plagued by riots and constant court battles between utilities and governments.

In terms of the SK-HU interconnector, RWE would benefit by both exporting to Ukraine and servicing Hungary’s industrial sector, which are stuck with Russian gas. In addition, Orban promised Putin not to re-export Russian gas to Ukraine, further restricting gas that could flow to Ukraine.

Market liquidity enables Hungarian industry to build managed gas portfolios enabling them to leverage a variety of gas trading mechanisms to hedge and play with market pricing. These should be done on a liquid Hungarian gas exchange which is operated by MVM’s CEEGEX. Instead, western European gas is limited in Hungary.

Under current rules, Hungary operates a ‘free trade zone’ for gas in its state owned gas storage facilities. Gas traded between entities is confidentially reported to the Hungarian energy regulator.  No tax is paid until withdrawal happens. Thus, Gazprom is able to ship gas to Hungary, the gas can be traded multiple times, and only once it is withdrawn from storage does the price become known. Non-transparency is a friend of Gazprom. Just as huge profits are booked from imports from Austria by the selected MET, who buys and trades with MVM, the stored gas remains opaque. Bi-lateral contracts while legal, should be pushed towards the exchange. Hungary already has CEEGEX  where all free-trade zone gas should be openly traded and would serve Hungary and the region well. Orban has a vision to develop Hungary as a gas trading hub. Restricting imports and exports reduces Hungary’s regional potential.

The necessity to increase Russia’s gas storage in Hungary was prevalent last fall when Hungary needed Gazprom to store gas in Hungary  because it did not purchase enough over the summer months. After Hungary purchased the storage company from E.ON in 2013, the new owners in their first year were waiting for market participants to fill up the storage. With the Hungarian energy system already running a huge deficit, and the Hungarian government slapping taxes on everything from coffee beans to maintaining its 27% VAT,  the country is hard pressed to pay for gas.

One of the key outcomes of the recent Putin-Orban deal was Hungary now only pays for stored Russian gas once it is used. This means Hungary does not need to pay for gas sitting unused in its storage facilities. Security of its gas supply is now handled by the Russians. This is important, as was the case this past year, where Hungary had expensive Russian gas sitting in its storage while the hub price next door in Austria was significantly lower. This may be one reason, the HAG interconnector has a stuffy nose.

This agreement for storage between Putin and Orban also validates my previous argument explaining why Hungary stopped gas shipments to Ukraine and was not able to fill-up its storage during summer. By September 2014, it was clear the Hungarian government needed Moscow’s help. Thus the gas storage deal was struck in September and shipments to Ukraine blocked to make way for the deluge of Russian gas into the Hungarian gas system – or so the official explanation goes. (Coincidentally shipments stopped after Orban met with Gazprom CEU Alexei Miller in September 2014, previously I gave Orban the benefit of the doubt, no longer).

The agreement over flexible storage amounts and timing of payments is also reminiscent of Ukrainian dependency on Russian gas. In the past, Ukraine’s inability to pay for gas placed it under the thumb of Moscow. When Ukrainian political leadership changed, it also meant a significant price increase  for the European friendly government. The new flexible agreement with Putin and Orban further opens the way for any post-Orban political era – which the Hungarian people are beginning to contemplate. Future gas negotiations will need to occur in 2019-2020, time enough to check in on Hungary to see how well Paks is progressing (the start of construction), gas price shifts, Hungary’s stance on EU energy integration, and after the 2018 elections.

The impact that Orban’s embrace of Russia is already apparent. Neighboring Slovakia is planning EuStream which seeks to build an interconnector with Romania and routing the gas via Bulgaria to the Southeast market. This avoidance of Hungary goes against Hungary’s historical attempts to unify both the CEE and SEE region into a tightly integrated gas market. In 2007, Hungary’s MOL took the initiative in its New European Transmission System (NETS) to lead the way. I personally sat in one of the first meetings and it was clear while MOL was taking the lead, it was political resistance in the other countries that held back the concept.  Now we see Hungary attempting to maintain its political control and influence over the region, with neighboring states planning to avoid Hungary.

The pipelines leading into Hungary from Austria, Slovakia and Ukraine, under current operations, should be viewed as strongly influenced from the strong friendship that exists between Orban and Putin. It is apparent from many of Orban’s public statements that he views Hungary being under the tutelage of Russia. Despite calls that Hungary’s energy sovereignty must be protected at all costs. The cost is a battle with the EU over Hungary’s low energy prices, not with Russian energy dependency.

Quixotically, the result is reliance on Russian gas and nuclear technology. The definition of ‘sovereignty’ in recent history holds its place in the last great international relations era when the Soviet Union existed. Thus for this argument of energy sovereignty to even make sense, it must be defined as energy dependence with political and economic sovereignty at home. Unfortunately, if we look at Ukraine, not only have they lost territorial sovereignty, political sovereignty was violated when Russia increased their gas price as retribution for being EU leaning.

When Orban speaks of sovereignty he speaks of his own political sovereignty – retribution will come for new political leadership not aligned to Russia. Putin’s pipeline’s are no longer just transit pipelines.  Hungary maintains energy security restrictions on the HAG, flips on and off the tap to Ukraine, and has technical difficulties with getting its interconnector up and running with Slovakia. All these align with Russia’s aim of restricting regional gas flows. In the past I have usually given Hungarian authorities the benefit of the doubt on these technical matters. Sometimes, it is good to question authority.

The Message: Orban left Europe

The stern and cold messages sent by both Chancellor Merkel (before Putin’s visit), who didn’t know what to make of Orban’s admiration of ‘illiberal democracy’, Polish Prime Minister Ewa Kopacz who held, “honest and difficult talks” with Orban (after Putin’s visit), Slovakia routing neighboring pipelines around Hungary, Romania’s intelligence chief considers Hungary untrustworthy, and Ukraine invites the regional heads of state for a commemoration, but not Hungarian, these all send a clear message: Orban cleaved Hungary from Europe.

The European project founded on energy security and dependency is firmly rejected by the current Hungarian government. All European energy systems are nationally focused, but only those systems most open to corruption and voter manipulation, like the case of Bulgaria or Ukraine, firmly reject integration, transparency, and cooperation with neighboring countries. The European energy system pushes market transparency and integration in the pursuit of prices that sustain and develop the energy system.

In contrast, secret middle of the night nuclear deals, opaque financing of energy utilities, state controlled pricing, coincidental limitations on imported gas,  all underpinned by a hotline friendship – with a leader of a country that formerly occupied your own country, and  just invaded your neighbor, but who gave you some ‘cheap’ gas, to help your politically controlled energy system, reads like a Russian novel, with things never ending well for the main characters.

On top of our Russian novel,  none of Orban’s actions can be labelled as energy sovereignty. Rather, as we can see from Ukraine, energy dependency creates political instability, under investment in the energy system, corruption and the maintenance of a political distance from Europe. Stepping out of Russia’s line results in swift reprisals.

February 17th, 2015, Orban was the lone man out in Europe for opening Hungary to Putin.  The pursuit of cheap gas, the rejection of Europe’s new Energy Union and embrace of a former occupier signals Hungary’s political, economic and energy dependence on Russia. This new relation is dependent on Hungary’s nuclear power deal withstanding EU scrutiny, sustained ‘cheap’ Russian gas and Hungary threatening to block EU diversification efforts  through the Energy Union.  Hungary stands with the opaque political governance model of Russia, not the transparent governance model of the EU.

Nonetheless, as Hungary’s long history shows, the Hungarian people do kick the Russians out. The price Orban got for gas is already too much for most Hungarians.

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References:

^LaBelle, Michael, and Atanas Georgiev. “The Socio-Political Capture of Utilities: The Expense of Low Energy Prices in Bulgaria and Hungary.” University of Eastern Finland, Joensuu, Finland, 2015.
 *Felsmann, Balazs. “Winners and Losers on the Liberalized Energy Sector in Hungary: A Co-Evolutionary Approach.” Budapest, 2014.

Euro Energy Czar: Does West Europe finally get it?

The apparent creation of an energy czar for the European Union signals a harder line against Russia. A move from the days when Germany’s Chancellor, Gerhard Schroder moved from the chancellor’s chair to a Gazprom chair – represented the ‘tight’ relationship between Germany and Russia. Akin to marriages  between European monarchies. (I’ll leave it to you to develop the image of Schroder marrying into a Russian oligarch family.)

The revitalization of the eastern European countries is now represented by the appointment of Prime Minister Donald Tusk of Poland to lead the other European leaders in the EU Council of Europe. Tusk earlier this year championed a call for an EU gas union that was widely acceptable as a great idea – and has pushed forward the long simmering discussion of a closer EU energy union.  In 2010 former European Commission President Jacques Delors and Polish MEP Jerzy Buzek, floated the idea to build an EU energy community – drawing from the founding structure in the European Coal and Steel Community.

It is now the Polish contingent that is pushing for a ‘high official’ to coordinate all external energy policy.  The EU Parliament’s Foreign Affairs Committee overwhelming adopted the proposal to create an energy czar to represent a common EU energy position in the foreign policy realm. Adopting a common energy foreign energy strategy and representation – no matter how muddled by diplomatic niceties, is stepping in the right direction to address the tremendous energy security gulf between ‘old’ member states and the states joining since 2004.

As I’ve written before, there is a huge gap between the development of the energy systems in the west and east. Both financially the western EU members are able to invest and upgrade their energy systems, while the east are stuck attempting to keep prices extremely low, with limited upgrades throughout the system. This applies to rolling-out more energy efficiency measures and renewable energy. The east becomes stuck in this pipeline dependency. Unable  – and in some cases – unwilling to finance their way to a new energy system.

Independence from Russia is a nice dream, but energy is the way Russia projects its power. For some politicians, like Hungary’s Prime Minister Orban, staying within the Russian sphere of influence holds financial and political benefits. For the Poles, they gain politically moving away but are so wedded to the Russian gas system, and reject significant upgrading to their energy system, such as getting off the carbon road, that they remain tied.

An EU energy Czar able to counter the Czar of Russia (Putin) must be given legitimacy from EU members.This means both the Germans and the Hungarians – much line up with the Poles and seek greater independence from Russia. However, as the building of the South Stream pipelines shows, Hungary and Bulgaria are willing to move forward with Russia on the pipeline despite strong resistance from Brussels. Unilateral agreements and development projects – at the expense of the overall long term EU energy security – will fail to elevate the Czar to a meaningful position.  European countries must line up, and even lend some sovereignty to an EU high representative for energy. The foundation of the EU is based on coordination of energy and industry, let’s ensure this remains central to keeping Europe strong.

 

 

Hungary is a Russian Gas Fuelled Grasshopper Biting Ukraine

This post is also available on Natural Gas Europe. But with a more professional title.

Just as surely winter comes every year, so does the heating season. However, if the justification from Hungary’s TSO, FGSZ is to be believed, they need to stop gas shipments to Ukraine to prepare for this winter. The Hungarian Prime Minister, Viktor Orban appears to be the grasshopper in Aesop’s fable. The Grasshopper and Ant story is about a grasshopper that plays all summer while the ants work – in preparation for winter. Well, in the cartoon version, it only takes the fall leaves to be blowing for the grasshopper to get cold and regret that he didn’t work harder. In our version today, it is the Hungarian government who didn’t work hard enough in the summer. Although on a state radio news broadcast last Friday night, Orban was credited with ensuring the country has enough gas for the winter – the announcer just didn’t mention this was at the expense of Ukraine.

If we can piece together events, on September 25th it was Naftogaz of Ukraine that suddenly found out, through an email from Hungarian TSO FGSZ, the counterpart was halting deliveries to Ukraine. Media reports imply this was after pressure from Gazprom’s head Alexei Miller met with Orban. However, I do not agree. Hungary is on too good of terms to be threatened by Russia – unlike Poland which disrupted flow for a few days after Russian pressure in September.

The reason Russia refrains from threatening Hungary is the Hungarian Prime Minister is at the forefront in Europe arguing against sanctions over Russia’s involvement in Ukraine. In addition, Orban spearheaded and flew in secret to Russia to sign a deal with Putin to expand the existing nuclear power plant. A big win for Russia to get an EU member to sign up to Russian nuclear technology. Hungary has secured a Russian loan to build the plant, despite having no discussions with the Hungarian public or any feasibility studies. Orban is in charge of Hungary’s energy policy – and representing Russia in the EU. He also pushes to restrain Ukrainian western leanings. Pushing for great autonomy for ethnic Hungarians in Ukraine matches Orban’s nationalistic zeal and his regional agenda; autonomy for ethnic Russians also matches Putin’s agenda in Ukraine. Hungary turning off the taps to Ukraine benefits both Russia and Hungary, by keeping Kiev under pressure.

Technically speaking, Hungary halted deliveries to Ukraine to receive significant quantities of western bound Gazprom gas to be stored in Hungary. The history here is on September 16th Hungary’s Development Minister Miklós Seszták received Russian deputy Energy Minister Anatoly Yanovsky. They discussed the ability for Hungary to store gas for Russia, around 500 million cubic meters. This would take 15 – 20 days to transfer into Hungary’s underground storage. In a scenario that gas flows from Russia, traversing Ukraine, are cut off then Gazprom’s gas would be available to European consumers – and to Hungary. Importantly, it helps Hungary because as of September 27th, the storage capacity was at 62%. It is, however, no accident that Hungary’s capacity is this low at the onset of autumn.

In May 2014, at an event hosted by Central European University the issue of Hungary’s ill preparedness was discussed. A now former manager at Hungary’s state owned Hungarian Gas Storage company, stated that the biggest issue facing Hungary was the low reserves and the financing of gas purchases. The reserves then were at 25% capacity. In short, money to buy gas was inhibiting Hungary’s ability to prepare for the coming winter. Therefore, the current low gas levels of 60% should not be seen in isolation. The lack of gas is a result of the lack of stable state finances for the energy sector and Orban’s energy ‘war’ waged against foreign owned energy utilities. The energy sector is now showing the stresses of heavy state ownership. The flooding of gas into the Hungarian system is at best a result of poorly managed state energy assets, at its worst, it is a calculated move against Ukraine.

Since 2010 Orban has put energy assets under state ownership and driven utility prices lower. Now, the utility sector, and particular retail gas companies, are deeply in debt, they are incurring huge losses to pay for the Fidesz government’s more than 25 percent reduction in electricity and gas bills instituted a year ago. The Orban government is now laying out a plan to have ‘non-profit’ utilities. This is hard to see how the sector can shift from horrific losses to a non-profit-chartable-status without increasing consumer costs. The cost reduction and continued nationalization of assets are set to continue.

Mike and HU energy billboard
A billboard proclaiming Hungary winning the energy war against the foreign owned utilities. This is me biking around Lake Balaton – my field research.

The story of Hungary cutting off gas supplies should not be seen as Hungary bending to Russian pressure, rather Russia is helping out Hungary. Central to Orban’s grip on elections is ensuring Hungarian’s feel benefits. Whether this is in the form of retroactively changing mortgage loans between banks and their clients – forcing the banks to payback money in cash, or buying E.ON’s gas storage unit – for energy security reasons – Hungary needs to project power and responsibility over its own fate – and at the same time, deliver cash into the pockets of Hungarians. Russia can help finance and make life more comfortable for Hungarians. Ensuring the Hungarian energy system functions is now dependent on Russian short and long term investments into the country (gas and nuclear).

Hungary needs more gas in its storage in case there is an interruption between Russia and Ukraine. Russia is more than happy to store gas in Hungary, this deal does the following four things to benefit Russia and Hungary: 1) Russia stores gas in Hungary and not in its normal location in Ukraine, giving it European market access and depriving Ukraine of the chance to siphon any off; 2) Previously stored gas was ensured by E.ON Foldgaz Storage, but storage is now owned by the Hungarian state- which lacks the funds to buy large quantities of gas; 3) Hungary boosts its gas reserves with no money down, it only buys from Gazprom if there is an emergency and needs to use it; and 4) Hungary gives the elbow to Ukraine (like it has throughout the entire Ukraine-Russia conflict) but doesn’t inflict significant pain, just cuts off gas for a few weeks proclaiming its own security as more important. Nowhere in this analysis is the assumption that Russia threatened Hungary with a gas cut-off for supplying Ukraine with gas.

Hungary could have – and should have, bought sufficient amounts of gas over the summer. Instead, the country’s leadership were playing with grasshoppers. Back in the spring or early summer the Hungarian government could have struck the same storage deal with the Russians. Instead both Russia and Hungary have waited until the last minute to unroll their ‘technical’ response to Hungary’s low storage capacity. By Russia flooding Hungary’s gas system, Ukraine is deprived of valuable and necessary capacity to help mitigate their looming winter gas shortage. In a generous reading, Hungary is an unprepared neighbor. In a bad reading, Hungary is colluding with Russia to short Ukraine of gas. Let’s hope Hungary is a grasshopper.

Russia Wins the Energy Race and Captures the Crimean Prize

The occupation Ukraine’s Crimea peninsula by unmarked Russian troops brought Russia’s energy dominance over Europe back into headlines. Europe ‘appears’ constrained in a strong response because its reliance on Russian gas. Strong economic sanctions against Russia could start a trade war, with Russian sourced gas spiking in price leading to higher European electricity and heating bills.

"Any advice on dealing with foreign energy investors?"
“So what’s the price for ‘cheap’ energy?”

The debate around potential sanctions is framed as the EU versus Russia. But this is Europe, the inter-factional fighting within Europe actually leads countries allowing Russia to walk away unmolested with the Crimea Peninsula. There is an unreported race in Europe: the energy price war. In each country this plays out differently, for those in the west of Europe it is the result of the high initial cost of shifting towards renewable energy, for those in the east, it is reliance on Russian gas.

Spain, which once offered ‘you can’t loose’ subsidies to anyone hooking up solar panels to the grid have now removed all incentives and are looking for ways to claw back previous financial commitments. From Germany, the Czech Republic to Bulgaria the standard feed-in tariff, which paid a premium on every kilowatt produced, has fallen out of favor due to consumers opening electricity bills and dying of sticker shock. Or so it seems.

The high cost of electricity in Europe is now a constant topic of discussion for European leaders. Europe has a disproportionately high priced gas and electricity system compared to the United States.  Politicians are scrambling to find ways to reduce the bill in Europe. Hungary, in the run-up to next month’s elections, has reduced electricity and gas prices by 25% over the past year. Losses for the energy providers are mounting and investments have significantly dropped. Even in the UK, the idea is floated to freeze electricity bills.

utility investments in Hungary

The energy price war is as much internal as external. The external is the low priced shale gas that has flooded the US power market. Making cleaner burning gas more feasible than coal power stations, and pushing cheap, and easily transportable coal into the European market. As the price of gas has dropped in the US, EU external dependency on imported gas has increased between 2001 and 2011 by almost 20% according to Eurostat’s dependency barometer, with Germany increasing imports by 10%. The global price of gas is relevant for Europe’s economies.

Importantly, the price war is also between Central Eastern European countries like Poland and Hungary against the perceived high priced countries of Germany and France. The drive for shale gas in Poland is an attempt to drop the price to bring the chemical and manufacturing industry from next door Germany. The recent agreement between Hungary and Russia, has Russian Rosatom building two new nuclear blocs is fueled by Hungary’s Prime Minister’s belief that nuclear in Hungary will be cheaper than heavily renewable based electricity in Western Europe. Not even the Russian invasion of the Crimea, which others compare to the Russians stomping out Hungary’s 1956 revolution, has shaken the Prime Minister’s decision – nor his support for Russia and Putin (I don’t strongly agree with this simplified comparison, but honestly, it is really disgusting that Orban doesn’t personally come out with stronger opposition to Russia and Putin’s move – this really exemplifies what kind of person and leader he is.  But I digress).

Any economic sanctions against Russia for invading the Crimea holds the potential for higher gas prices in the European market. Despite recent efforts to diversify away from Russia, the price of gas in the EU is of national economic and political importance. Voters and industry expect the cheapest energy prices possible. Economic stagnation on both sides of the Atlantic forces politicians to look at how they can cut costs, increase economic activity, and compete against each other. Lowering energy prices can be equivalent to lowering taxes, providing an economic wallop. The message is clear, Russia wins the Crimea, but Europe needs Russia’s help to compete against the US – and with each other.

Russia wins, EU and US out

Is it too early to proclaim a failure of US and EU policy in Central Eastern Europe? An energy rich Russia is proving able to buy off the elite of the former Communist countries. Russia’s strategy, in place for years, is now paying dividends. Let’s list the Russian wins:

  1. South Steam – winner / Nabucco out
  2. The wreck of shale gas in Europe
  3. The failure to construct an LNG terminal in Croatia
  4. The scuttling of Hungary’s Emfesz by Russian interests and acceptance (if not assistance) by Hungarian authorities
  5. Russia wins the Paks expansion in a secret deal with Hungary’s Communist-like Prime Minister Orban
  6. Croatia kicks out Hungary’s MOL for Russia’s Rosneft then gives them another 20% as a ‘bonus’.
  7. Russia and Bulgaria continue their love-hate brotherly relationship. They build another nuclear reactor.

And, let’s list the EU’s failures:

  1. EU ‘liberalization’ fails to understand deep rooted state-elite ownership needs. “Stupid, it’s not the price that’s important but who controls the price.”
  2. Energy efficiency efforts fail miserably to be deployed which can reduce energy costs.

And, let’s list the failures by the United States:

  1. The United States fails in every way possible to even figure out a post 1989 strategy for Eastern Europe. The region became the Somalia of Europe.

So what if Russia owns the energy systems in Slovakia, Hungary, Bulgaria, Serbia and Croatia. I once wrote an article plotting the geographic growth of German, Italian and French energy companies. If I were to map the progress of the Russians in the past few months it would look like a war room of shifting take-overs and retreats. Russia is now positioned to control the economic backbone of Eastern Europe.

The sooner we return to using the term, ‘Eastern Europe’, the sooner we recognize the true state of democracy and economic development based on state run companies operating on subsidized energy costs from Mother Russia and taxpayers.  Economic growth in Eastern Europe is now perceived to be based on energy prices, rather than financial capital from Western banks. Just as the elite in these countries made money from the entrance of private capital, energy is now emerging to be a money maker.  (But first you have to remove the current money makers). Special deals will soon be done for selected favored industries and companies, subsidized by rate/taxpayers. Thus further distorting the true cost of energy.

The economists of the 1990s may have supported the growth of national elites, but they became bankrupt with our current financial crisis. Now it is the ‘national’ energy companies that are becoming the prized national assets; harking back to the era of electrification in the early twentieth century. They are the engines of economic growth that will dig each country from the pit of national economic depression. But it is Mother Russia that will finance and control this expansion. The populace of these countries will now be the serfs making Russia and the state elites profitable through their pursuit of centralized energy systems.

My response: Time to dust off the old international relations books. Time to unite IR and energy more closely. Time to welcome back Russia to Eastern Europe. The time is now.

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.

 

Hungary’s Non-Profit Utility Model: like nationalizing the steam locomotive

The typical reaction to Hungary’s Prime Minister Orban and his ruling Fidesz politicians’ efforts to make utilities non-profit is, “Oh, they are nationalizing the foreign owned utilities and driving them from the country.” I think after more than three years of Fidesz economic consolidation, none of this is surprising.

Making utilities non-profit (whether private or public) is like nationalizing the steam locomotive in the 1950s, technology progresses, so don’t be caught with a Beta-max video machine. The energy utility model, gas and electricity, is outdated and set to become the rail lines of the late twentieth century – that is the remit of government and not private industry interested in profitable growth. New technologies and businesses are present that make the electrical wires and gas lines to homes and businesses a low margin business. In essence the Hungarian government is stepping in thinking they are ‘buying’ the steam locomotives and railings at the height of the industrial revolution.

Hungary’s energy system – keeping it around like a steam locomotive

The large privately owned electricity distribution companies operating in Hungary, that the government seeks to burden the most, RWE and E.ON have already stated they are radically changing their business models to revamp or shed low margin businesses like distribution. The E.ON 2.0 plan calls for a focus on high growth markets (they already pulled out of Bulgaria), while RWE sees their role in actively participating in the energy revolution that involves distributed generation and smart energy systems. The stock price of European utilities have halved over the past five years, new business growth – or even company downsizing (as proposed by RWE) is necessary. Centralized energy systems and the utilities that manage and profit from these are becoming mere network operators with slim (or none) profit margins.

Two energy camps are now emerging in Europe. I’ve stated this before, essentially old EU member states are modernizing and updating their electricity systems with smart IT networks that are able to eliminate huge inefficiencies in consumption and in the supply network. From smart energy meters in homes, to balancing generation assets more efficiently, the integration of IT into the energy system holds huge potential for business, RWE and E.ON are both jumping into this business.

For new EU member states in Eastern Europe (I purposely revert back to the old geographic name and historical connotations) political control and perceived low energy prices are the overriding concern. Under this scenario the system will likely not receive the capital necessary to make a smart energy system develop. This results in the perpetuation of the current centralized energy system where only the price of generation can influence the end price. This is literally the ‘dumb’ business model. A simple demand and supply equation. The citizens of Hungary and other Eastern European countries, are now being forced to maintain a technologically outdated energy system while politicians claim credit for giving the people something that more developed countries now longer want. In short, Hungary and Eastern Europe purposely maintain their second tier hand-me-down status in the European family.

Politicians in Eastern Europe can claim they are lowering the cost of train travel by nationalizing steam locomotives in the 1950s (with the already amortized costs). They ignore modern technologies that can also lower the cost and lead to a more efficient system to operate and provide robust benefits to consumers. There’s a reason that in Hungary the travel time from Budapest to Lake Balaton has changed little since the steam locomotive. So I wish the Hungarian government good luck with their new steam engines. But it is too bad they don’t draw on their substantial human capital in IT to drive their country and the region to the leading edge of a European smart energy system. No doubt, if all the utilities are in government hands, then significant modernization of the grid drawing on Hungarian expertise could happen. But this I doubt, the government will be too enamored with their newly acquired steam engines to notice the smart peasants working in the fields.

Wherefore art thou Polish Shale Gas?

Juliet:
O Romeo, Romeo, wherefore art thou Romeo?
Deny thy father and refuse thy name;
Or if thou wilt not, be but sworn my love
And I’ll no longer be a Capulet.

 

I went in search of Polish shale gas a few weeks ago. I spent some time looking under rocks in Warsaw and Lublin, asking a few people if they had seen this shale gas revolution. I went to a few offices, met people in cafes and even explored a few bars in search of revolutionaries that were upending the country by drilling holes and fracking the ground apart. This was my fourth trip back to Poland in a year. On this trip I focused on those ‘pesky’ environmentalists everyone blames for slowing shale gas extraction down.

In this blog post I’ll just list a few general impressions and hold the more exact details for some articles. But I met with national and local green people. The great thing about meeting with these people is that they didn’t know where the revolution, or even the start of a shale gas industry, could be found. It even turned out that not only did they not really oppose shale gas in Poland but they were waiting just like the companies for the Polish government to figure out what it wants to do. My statements may be sweeping here, but when it comes down to it, the Polish green organizations could point to why they may oppose shale gas extraction, but they were more articulate describing how and for whom shale gas should be extracted. That is, shale gas should be used within a more localized gas distribution system benefiting those communities that allow extraction to occur. Thus total denial for using fracking technology is not embraced by all, or even many, green Polish organizations. The issue is much more nuanced than widely reported.

Polish Shale Gas Love

The building of a shale gas industry came across as highly theoretical as the members of the organizations themselves were not really convinced that much would come of shale gas in Poland. I was expecting a much stronger reaction against shale gas and a push back against the current exploratory wells being drilled. But the people I spoke to seemed really laid back about any threat. It seemed to me that they have come to the realization  there really won’t be any large, or even medium, scale shale gas ‘revolution’ in Poland. Three companies have recently pulled out of Poland – while various reasons are cited, it most likely is a collection of things, but what is now emerging as the incompetence of the Polish state to effectively manage and build an administrative system that incentivizes exploration and extraction.

It is hard to nail down specific reasons for the revolution not taking off in Poland, but I am certainly more of the opinion that the revolutionary wind has been sucked out. From an institutional perspective, state institutions are good at building up and deploying a technology – but don’t expect that this occurs overnight in a revolutionary zeal. Combine this assumption with administrative procedures and  the inherent tendency to dot every ‘I’ then the momentum that was propelling companies to drill has just run out. One lessons for the US that can be applied is the speed and scaling up of fracking technology that occured – this will not happen in Poland or Europe.

But asking a state administration to deny its own internal procedures – brings us back to our Romeo and Juliet quote at the beginning. It is not just a question of “wherefore art thou”, but can the Polish state deny its bureaucratic legacy to make shale gas extraction licensing lean and mean – at the bureaucratic speed of Canada and the US? Instead of looking for the answer to this, maybe it is just best to assume the shale gas industry in Poland will be asleep for a very long time. Thus, Polish environmentalists know it is best to sit back and let the Polish state trip over itself. And that is an impression I’ve gotten from everyone on all sides of the debate now. Polish shale gas will be as successful as Polish wind power. Somewhere it will be there, but it will be hard to see where.

To Save Energy, Digitize the Waste

Saving the environment has always centered on reducing waste. Usually this is focused on reducing solid waste. Separate and recycle your plastic, paper and metals etc…. Well, I think that has generally caught on. Even if people don’t do it they know about it. Importantly, businesses understand that waste is a sign of putting money down the drain. Unfortunately, how we use energy is not seen the same way. There is no physical trash we are paying to be hauled away. Turning on a light or operating an old machine seems like there is only a small cost to having a more energy efficient light or machine. But the kilowatts add up and cost us all money. So let’s re-frame energy efficiency as energy waste.
It's not much to ask

So what do we do with energy waste? How do we dispose of it? How do we handle it? Is it toxic or is it just wasteful – after all we have the air to suck up the wasted heat or machines that eat the extra electricity. In many climate scenarios like the Global Energy Assessment, there are scenarios that look at the role of energy efficiency and how this reduces demand and thus carbon emissions. The savings are dramatic for the climate and for the planet. But until we really begin to quantify and measure the difference of the waste – to physically see the waste, progress is slow. We have to convince people of the merits of energy efficiency and demonstrate the money to be saved.

Therefore, let’s turn energy waste into a bunch of ‘1’s and ‘0’s. Digitize energy waste. Make the energy talk to you. Find out when and where there is energy waste by closely monitoring it on a computer. By using monitoring equipment the waste is displayed in a graphical format (maybe in the form of a pile of trash) indicating for businesses and households how much is being wasted. Just like photos or books, once we digitize the physical properties of energy we can tackle them with a computer. We are now in an age where we digitize everything and turn it into information that can be examined and shaped and reshaped into many different forms. A part of this is called, ‘big data’. The ability to mine and identify trends in tons of data. Maybe not 100% accurate put pretty close and good enough to do something interesting that has impact.

Once energy is digitized then we can establish a regulatory framework that incentives, in a broad regulatory and creative framework, how energy waste can be reduced. Whether this is for a firm bidding on energy efficiency measures for a building or a group of buildings and then retrofitting to a specified energy efficiency level or going into a company and looking at and working with machines and other manufacturing processes. Some of this is not new, but what should be done is monitoring the difference before and after the changes. Commoditize the waste. Energy inefficiencies are waste, other waste is seen as a commodity. So let’s not perceive energy waste as a soft form of feel goodness and something that is just good for the wallet, this approach has not worked to date. Let’s see energy waste as a commodity that can be bought and sold. High regulatory standards should be set and enterprises should be encouraged to remove this waste.

Digitizing energy waste lets us see what we are throwing out. It lets us measure how much we throw out. Quantifying waste lets us incentivize more accurately the profit margin of energy waste hauling firms. So let’s invite the garbage man into our homes and businesses and get ride of all this garbage – we’ll be saving money.