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After Fukushima: Assessing nuclear power projects in CEE/SEE

The critical situation at the Japanese Fukushima Daiichi nuclear power plant has already influenced European energy policies but may have limited impact in Central Eastern Europe. The Japanese nuclear crisis is in its early days, but is characterized by the attempt to prevent massive amounts of radiation being unleashed from damaged nuclear reactors, destabilized by two cataclysmic natural disasters. Whether a third man-made calamity, can be prevented remains to be seen. In Europe the political response was swift. Germany shut down seven nuclear power plants and is conducting a full scale review, while the European Commission is developing common EU nuclear standards to be issued in a Directive in the summer. In Central Eastern and Southeast Europe the disaster will have a limited impact on the already faltering efforts to build new nuclear power generation.

The social and political tensions over nuclear power center on the dangers of harnessing an inherently harmful energy source to produce ‘clean’ electricity. Despite these misgivings, the necessity for low carbon energy sources is critical. The projected ‘renaissance’ of nuclear power was seen as playing an important role that could contribute to producing sufficient quantities of power with zero carbon emissions. In Central Eastern and South East Europe, most countries have a long history with nuclear power. They now have plans to expand the amount of nuclear power, however these are faltering due to the significant upfront costs. Any reconsideration of expansion plans in this region due to events in Japan will be minimal.

Projects throughout the region can be seen to be far from being developed. Romania has long considered adding additional nuclear capacity to use for electricity exports and to replace aging coal fired generation. In January 2011, the consortium that was to build two nuclear reactor blocs in Romania fell apart; structuring the financing for the facility was a continuous problem. In March 2011, Bulgaria began to reexamine the cost and viability of a 2,000 MW nuclear power plant to be built by Russia’s Rosatom; disagreement over the price and financial conditions are the main points of contention. The Czech Republic and Poland both have plans to build new reactors but deadlines are continuously missed. Hungary remains committed to replacing its present nuclear capacity by 2030; the bidding process for building another bloc is to begin in 2013. Financing is expected to come from the private sector but Hungary is strongly politically committed to nuclear power and with a lack of natural resources for low carbon generation, the state may finance portions of this project. For all these projects, like in Hungary, it will have to be determined whether it is in the national strategic interest to build these plants as they will need to shoulder more of the financial risks to make the projects viable.

Pressure to actually build these plants in the CEE and SEE region may increase after 2013. This is when the EU’s Emissions Trading System will require power plants to purchase carbon allowances. The cost of producing electricity from coal will increase and be felt by consumers. As one utility executive stated in an interview (drawn from a recent research project by this author), “In Europe they push for dramatic and rapid CO2 targets, but no nuclear, no coal, whatever technological mix is left is costly and will not support European industry” (Energy Utility Executive 2009).  This is the crux of nuclear power: What are projected high costs today may be low in 2030 when carbon based energy will be substantially more expensive.

The safety issues of nuclear power will always surround the technology. Events in Japan, presented in dramatic helicopter water drops, demonstrate the failure of the technology. However, the countries in the CEE and SEE regions are geographically close to the last nuclear disaster of Chernobyl, the experience of nuclear failure is not new. While there has been considerable activity over the past week in Western Europe and at the EU level, suspending and reconsidering nuclear projects, none of these projects in the CEE and SEE region have received similar treatment. In fact Reuters reported on March 17, 2011, the Czech Republic’s Prime Minister, Petr Necas stating, “There is absolutely no reason to limit (Czech nuclear power plants). The government would have to be a bunch of fools to take such a step.” The region remains dedicated to nuclear power.

The current impediments to nuclear power projects in the region are numerous enough, new safety concerns may add an additional variable in decision making, but will not sink the projects. Over the long term, the necessity of having affordable base load generation will prompt the building, of what could be described as, ‘debt prone and day-late’ nuclear power plants. The present EU energy strategy is focused on stopping the much broader disaster of climate change. Nuclear power will remain a central pillar for CEE and SEE countries to reduce their carbon emissions.

Coffee tax! Tax my Cabbage Instead

According to a report over at Portfollio.hu, the government may be considering additional tax measures that are unimaginable. One particular tax goes beyond my earlier blog posting about the creativity shown in Hungarian tax policy, to that resembles the diversity of cabbage dishes in the country. I mainly was referring to the different crisis taxes on energy, retail, banking and anything that can’t flee the country. Now it seems they may tax coffee!

The government also contemplates levying a “hamburger tax” on unhealthy food products and beverages. The tax would be slapped on some fast food, coffee, sweets and coloured beverages (e.g. Coke).

I’m not going to argue against a tax on unhealthy food – as health campaigners have some strong points, but clearly this tax is not about improving health, and more about finding ANOTHER thing that can’t leave, to be taxed. So I think we can add to the long list of sectoral taxes, not just in the energy sector but also in the ‘fast food’ and ‘processed food industry’.  Actually I can handle all these taxes, but not the tax on coffee!

Is it too soon to start the international public outcry that surely must be bigger than the one of the Hungary’s media law?

If the earlier taxes didn’t drive investors away, this one most certainly will. “Invest in a country that taxes coffee? Might as well tax cabbage.”

Tax my coffee?

No way!


North-South Interconnector – big news, but long in the making

The great thing about following the energy sector is that projects take a long time to get up and running. This means commenting on a project or policies resembles play-by-play on the golf course. With all this reflection time sometimes you hope to have some deep thoughts on ‘big developments’.

But sometimes, few thoughts come when politicians recycle long-term plans.  ‘Magical moment,’ may not be that magical after all. Particularly, when industry, regulators and TSOs and others have been working for years to increase cooperation. One of these ‘magical moments’ happened recently at the behest of the Hungarians, who are holding the EU’s rotating six-month presidency. There was (verbal?) agreement by the CEE prime ministers after  a dinner in Brussels. They stated they would all work together to form a north-south gas corridor.

The meeting was in the format “Visegrad+” (i.e. the Visegrad Four – Poland, the Czech Republic, Slovakia, and Hungary – plus Bulgaria and Romania), and was attended by Hungary PM Viktor Orban, Czech PM Petr Necas, SlovakiaTraian Basescu, Bulgarian PM Boyko Borisov, and Polish PM Donald Tusk. PM Iveta Radicova, Romanian President

The meeting was prompted by Hungary and one of its stated EU Presidency priority of increasing energy security of supply (aka, less reliance on Russian gas). However, it is clearly a rehash of an event held a year ago in Budapest, under Hungary’s previous Prime Minister. And which I wrote about here.

Now, I really don’t want to be cynical as politicians do need events to signify their influence and progress. Diversification of gas sources in the CEE/SEE region is a prime project that is not only a long-term one, but a necessity. Unlike investments necessary for carbon reductions, which are foundering, security of supply investments in gas are at least getting some attention, and most projects are moving forward. So this is good.

BUT what I fail to provide in the announcement of this BIG NEWS, is an effective analysis that has not been provided before. I think this is because while, Prime Minister Orban is heralding this as a historic moment, I view it as an artificial political moment in a long term technical project that is already well underway. The building of LNG facilities in Poland and Croatia (old news), the building of gas interconnecters in the CEE region (old news). My only observation is, a year ago, they all made the trek to Budapest to demonstrate their effort to work together on this very same plan, rather than meeting on the sidelines of a Brussels gathering.

Hungary

I’m no fan of Orban, and I become less so by the day. Not only does the recycling of the north-south gas corridor event speak of a lack of innovation and sincere effort in energy policy, but his vision looks to be more rhetorical while also being overly ambitious and expensive. As he stated,

Hungary will “free itself from a giant trap” when, in just a few years, the country will be able to take energy deliveries from the Black Sea, the Baltic Sea, the Adriatic Sea, Azerbaijan and even North Africa,  Orban said.

I take this to mean that he will be supporting the AGRI gas project that will ship gas by LNG across the Back Sea. Something again, that I find wholly unrealistic due to costs and the competition it will cause for upstream gas supply with Nabucco and South Stream – which are still failing to secure their own gas sources. Essentially, there isn’t enough gas yet for these two pipeline projects, how will this be secured for a more expensive option? Diversity is great, if the supply/cost ratio is there but this is lacking in AGRI.

Finally, my two -cents-worth may indicate the big rhetoric over this diversification of supply may just be the ground work being laid for giving the Russians the contract to expand the Hungarian nuclear power plant Paks. The Hungarian government announced they will be issuing a tender in 2012 with the bids evaluated in 2013. Ah, just before the next Hungarian elections.

It has been floated that the Hungarians are ready to give the Russians the chance to build this expansion of the nuclear plant. Technically, the Russians are already in a good position, because the current configuration is based on Russian technology. This discussion is also tied up with swapping MOL shares that the Hungarian government would like to get its hands on from Surgetneftegaz, the Russian oil and gas company. All this hoopla by Orban may work to build reassurances for the domestic audience that Russian participation in Paks does not threaten the country’s security of supply. Because after all you wouldn’t want all your gas and nuclear tech to be owned by the same foreign country?

Lost in Translation: Hungarian Government fails to take big hint over media law

An ‘expression of concern’ letter was sent last week by the EU Digital Agenda Commissioner Neelie Kroes to the Hungarian government concerning Hungary’s new Media Law.

The sustained response by the government (if you eliminate sound bites that they will change the law if asked – they will only do this if other EU members states do), is the current law does correspond with EU directives. However, I fail to see how, after reading the letter from the Commissioner the Hungarian government can be comfortable with the current law. And to not realize that further investigation is coming. I suggest to read the letter – it really is great.

EU Commission letter to Hungary, re: Media law

I’ll try to keep my focus on energy, but since according to the new law, I have to register this site with Hungarian authorities and provide balanced coverage (I’m not sure the Hungarian government is the best authority to tell me what balanced coverage is). Therefore, I think an occasional post on the topic is warranted. Not to mention I’m pretty mad about the wider impact of it – and the true reason the Hungarian government is doing this – to either destroy, curtail or take control of another independent institution. Just add it to the list of Budget Council, Presidency, Hungarian Central Bank (in a few months), pension fund, Constitutional Court, etc…

Sometimes it is hard to maintain a middle of the road analysis when democracy is undermined. I can only hope that like most inside and outside of Hungary, that the Hungarian government finds its way back to the democratic path – and not consider official investigative letters from the Commission as something to brush off.

Why is transparency important to the energy sector?

Quote of the day

This is from a project that I’m working on right now.  It is from one of the participants. It really goes to the heart of why the energy sector is so important and why there needs to be transparency and predictability in the sector. Both things that are being eroded in our current economic and political times.

In many countries, the energy sector is a large percent of overall national GDP.  Plus, energy is a fundamental building block of any economy in any society.  Light, heat, cooling and power, and are critical for homes, schools, universities, laboratories, shops, commercial establishments, offices, and industries.  Without safe, secure, reliable, and reasonably priced energy, societies are broken.  Because of the massive importance of a functioning energy sector, the significant amounts of cash that flows through the sector on a daily basis, the important role of agencies, such as regulators, and due to the inherent monopoly nature of core portions of energy networks, transparency is critical.  The public – consumers, ratepayers, taxpayers, business enterprises – need to have confidence that in a regulated environment, publicly appointed regulators are making decisions that are free of corruption, consistent with governing laws and regulations, reasonably predictable, understandable, and done without political interference, all to the maximum extent feasible.

Hungary is not ‘discriminative against foreign firms’ – really?

“I firmly reject that these taxes would be against foreigners … it is not true that this regulation is discriminative and against foreign (firms),” Hungarian EU affairs state secretary Eniko Gyori told reporters. (Reuters article).


My only response is to repost the following graphs displaying the nationality of companies affected by the ‘crisis tax’. Please note, the tax on energy companies does not include the ‘Robin Hood’ tax that was also extended.

The following graphs are from Portfolio.hu

Telecom

Retail

Energy

It just seems that Fidesz’s European view looks more like this, rather than the reality reflected in these graphs.

Bankruptcy of Emfesz will ‘Justify’ Hungarian State Intervention

If there is ever an excuse that could be used for greater government intervention it is the bankruptcy of a company. I don’t think I need to go into great detail, but only to refer to the current players in the economic crisis. The pending bankruptcy of Emfesz gives the Hungarian government the excuse for further involvement in the energy sector.

"Any advice on dealing with foreign energy investors"

The insolvency of Emfesz, as reported, was widely assumed to be coming, since the inability of Emfesz’s previous owner Dmytro Firtash to access his cheap gas stored in the Ukraine in January 2009. Before then, he was undercutting retail market prices by around 10%. However, in April 2009, he then lost his company to RosGas through a Swiss engineered corporate takeover for $1.00.  It is speculated that Gazprom was behind this takeover. This last statement maybe should be rephrased to consider that maybe it was just a faction in Gazprom/Russian oligarchy circles that pulled it off. Because it is clear now, the move was unsustainable (I think parallels could be drawn with the Russian takeover/near bankruptcy of MALEV).

After the Rosgas takeover, it was unclear where Emfesz would buy gas. But then, as media reports show, a new deal was struck between Emfesz and E.On in which the gas would be purchased from E.ON’s Hungarian gas storage company, E.ON Földgáz Trade Zrt. However, the delivery of gas from the upstream supplier Gazprom would be carried out by the previously established Panrusgaz. This company is a joint venture of Gazprom Export (including its subsidiary Centrex Hungaria Zrt.) and E.ON Ruhrgas. Therefore, it seemed that everyone could be a winner. However, it then became clear that the price Emfesz was paying for the gas was essentially the same price as other market participants – even E.ON itself. But Emfesz was still offering lower prices. Not even Russian or Hungarian accounting tricks could make this company viable with this strategy.

So we end up with Emfesz owing several billions of Forints. There are two things to consider, first, the Hungarian authorities were probably letting this drag out to see how negotiations with the Russians went this past November. Since nothing happened (as I predicted in October 2010),  the Hungarians are now taking the logical step that a government and regulator must take. Revoke the license.  This of course, can also be used to send a signal to the Russians, as the Hungarians are probably mad that nothing did come out of the November meeting between the Prime Ministers Putin and Orban. In a way it is a pithy response, if it is one at all, just as shooting a lame horse is sometimes the only response.

The closing down of Emfesz and using it to send a message to the Russians is probably not the best way to capitalize on the bankruptcy of an already weak company. Rather, the Hungarian government (and here is another prediction) will be using this event to highlight the dangers of allowing private companies to operate in the energy sector. Of course there are some inconsistencies in this, since they have imposed the tax on energy company revenues and labeled it a ‘temporary crisis tax-which-soon-will-be-a-permanent-tax,’ due to the profitability of energy companies. But this is unimportant.

Energy companies in Hungary are already on ‘no investment mode’ after the imposition of  the ‘crisis tax’ and because of the inability to raise rates to match commodity and wholesale energy price increases. Therefore, the government is undermining necessary infrastructure investments and the basic financial health of energy companies. Why should a German firm (or any company) incur losses because they cannot even pass along wholesale market price increases? Particularly, when the increase is partially the result of a weaker Forint and the rise of government risk ratings.

The government will spin the bankruptcy of Emfesz as an indication that private investors threaten the countries security of supply, and if they are not being paid high profits for their services then they are not interested. When the current private energy companies try to leave Hungary citing ill financial health, the government will engineer their exit on favorable terms for the state (there are some international treaties that protect private investment and these have to be softly walked over).

With some (not all will be able to leave) significant government ownership, the Orban government will realize its objective of imposing state ownership over the countries energy assets – and somehow keep prices low. (I actually feel crazy writing this as a government objective – but it is logically based on actions and statements of this government). As owners, the government can figure out how to pay for gas at higher market rates and the lower rates that homeowners and (SME) businesses pay. But by then, the pension money will be spent and Hungary’s credit rating will be in the garbage.

With the removal of foreign owners, control over the media cemented, Hungary will (somehow) be a strong country. However, just as the Russians in Emfesz couldn’t figure out how to break a fundamental economic rule of profits and losses,  the Hungarian government won’t be able to break this rule either. It is just too bad that the Hungarian people will have to deal with the aftermath.

Happy Holidays!

In the spirit of the internet and of Christmas I’m embedding the following video to link the two.

My apologies for not finding one energy related. Buy may the gas continue to flow for all over the yee olde holiday.

Have a great New Year,

Michael LaBelle

Impressions of the 5th Energy Forum

The difficult transition to a low carbon energy sector is strikingly apparent when looking at the Polish market. However, as the participants at the 5th Energy Forum, held this year in Sopot, Poland, displayed – some market actors are more willing to make this transition than others.

Michael LaBelle, Limax Energy, moderating panel discussion on the Modernization of the Energy Sector in Central Europe

The reason that I mention Poland as a challenging place to make this transition is the country’s almost total reliance on coal. Over 90%. The advantage of traveling to another country for a conference is that you can learn a lot about that country’s energy sector. And not just by the statistics, but by talking to the different officials from government agencies and companies. What I took away, whether correct or not, is a strong resistance from established companies and some government institutions about the purpose of moving towards a low carbon economy. In a way, for Poland, under the present energy mix, reductions may seem pointless. That is moving from 94% dependency to 60%, is like switching from a vodka martini to vodka and orange juice. Are you really going to feel the difference in the morning?

I would argue yes, the short term health benefits from the additional orange juice, can lead to further reduction in alcohol over the long term. If you don’t start at some point, then you’ll never make it.

On another note, the organizers of the conference were not only kind enough to invite me but also to have me moderate the session on the Modernization of the Energy Sector in Central Europe. They arranged a great, and diverse panel, which proved really successful in assessing some of the key aspects of the market developments in the CEE region and how some of these aspects can be applied to the Ukraine and Russia. Interestingly for me, Mr. Khotey from the State Property Fund of the Ukraine outlined how the country was preparing to privatize some of its energy companies, and notably distribution companies. I previously did on a study on this topic for USAID examining the efforts in Bulgaria, Romania and Macedonia.

Michael LaBelle, Limax Energy (L) moderating panel discussion on Modernisation of the Energy Sector in Central Europe; Panel members: Igor Khotey, Deputy Head, State Property Fund of Ukraine, Heimo Stauchner, Director, Co–Head Energy, Erste Group Bank AG, Austria, Franz Scheiber, Head of Business Unit Market Central Europe North, Alpiq AG, Switzerland, Vladimir Knyaginin, Director, “Center for Strategic Research North–West” Foundation, Russia

It was also mentioned by one of the speakers that role of the energy regulator was to ensure the interest of the consumer, which for him, is connected to low prices. On this point, I would also have to take issue, as not only is it in the interest of the consumers to pay a fair price, but also ensure that the energy system is transformed over the long term. While there are different regulatory philosophies, ensuring that consumers benefit from low(er) carbon energy sources is essential.

Energy prices and coal are interlinked for Poland. There is no doubt that renewable energy when priced against coal, with no carbon pricing, is more expensive. However, if  CCS technology is priced in with the cost of coal, then the opposite is true – coal becomes more expensive than renewable energy. So if Poland is waiting for CCS technology, in order to ensure the place of coal in the country’s generation mix, and to maintain cheap generation, the consumers will be footing an even higher bill in the future. Therefore, as distasteful as it is in the short term, switching to vodka and orange juice, will not only improve your health, but save you money as well.