Why Russia wins against the EU’s single energy market

A battle of ideologies is underway in the energy sector of the South and Central Eastern Europe. Just as the ushering in of democracy after 1989 was viewed as a done deal, infusing market mechanisms into energy system was also viewed as an obvious choice. In Hungary, preparing energy companies for privatization began in 1989. However, just as democracy is now eroding in the region, so are the neoliberal energy market mechanisms. State ownership in energy is maintained, while formerly privatized companies are bought back. A new era exists of state owned utilities, politicized energy regulators and retreat of private investors marks the EU’s eastern energy markets.

The cost is high for the energy systems of Bulgaria, Hungary and Poland. State ownership in Bulgaria results in failed strategic endeavors and huge debut (Belene NPP and NEK). In Hungary the repurchase of MOL shares, EON Foldgas transit and storage, gas distribution from RWE and now the take-over of electricity distribution obligations. These are all funded by taxpayer money, most of the endeavors in Hungary affecting end-user pricing are done by their development bank, with the potential to cover losses.

In Poland, large state ownership exists while the failure to launch a shale gas industry partially stems from the inability and the lack of experience to work with foreign investors [each of these three countries and these issues will be discussed in other blog posts, along with costs]. The financial cost of mismanagement and cancelled projects stymies efficient, secure and lower cost energy systems from developing. The once hoped flow of private capital in the region is in retreat.

My bias on the issue of state ownership is clear, I do not favor mismanaged state owned companies or overtly politically shaped utility rates. In the US government ownership exists, and there is political influence in rate setting and market structure. However, in our three countries examined, political influence prevents the system to function in both an environmentally and economically sustainable manner. Electricity and gas rates are cut across the board, benefit even those that heat their swimming pools in the summer, rather than those stuck in energy poverty. Investments into energy efficiency are neglected in favor of maintaining lower electricity and gas prices. Corruption and favoritism often floats around state ownership. From the favored gas trades with MET, in Hungary to selling yearly capacity in a no-bid sale to a private company in Bulgaria; the exclusion of transparency and competitive bidding for capacities stymies fundamental components for a market based energy system from developing.

Excluding the air of favoritism, the political view in all three countries is clear: State ownership (or deals with favored companies) protects the natural resources of the country and provides social benefits that private companies do not. This contradicts the neoliberal competitive market agenda and cross-border operation of energy companies instilled into EU institutions and treaties. The past Communist system held development of the energy infrastructure central to social acceptance. The panel house (with a lifespan of 30 year) may be badly insulated but at least the central heating is cheap. Centrally controlled pricing is still linked to income levels.

(Source: European Commission, 'Energy Prices and Costs in Europe', 2014)
(Source: European Commission, ‘Energy Prices and Costs in Europe’, 2014) Overall, the cost of electricity for households in Eastern Europe is low to average in comparison to other European Union countries.

Universal access to electricity was the last great global energy project. The goal was clear, provide access to electricity – almost at any cost. This agenda drove the development of energy systems in North America and Europe. Communism accepted the same mantra, thus we should not view some central tenets of political-economic systems as exact opposites. But there are fundamental differences in financing system expansion and operations. The Communist state, as compared to users, pays the overall bill. For example, wages, in the factories of Eastern Europe, may not have been high, but nor were daily living costs. The district heating facilities of Dunaujvaros (previously Stalin City) are connected to the town’s main employer, Dunaferr steal mill. Shutting down certain parts of the steal mill requires a new cogeneration facility – based on full market pricing. Just as universal access was an engineering and political project (hydroelectricity in America), integrated energy and socio-political systems are integrated.

The full commodification of the energy services, electricity and gas, in the household is a market mechanism. Private owners of generation and distribution facilities need to be reimbursed, and with a profit margin, to provide ‘efficiently’ managed services. The energy value chain in both Capitalist and Communist systems holds the fundamental flaw of incentivizing energy production and not demand reduction.

Despite great strides in Western Europe reducing energy intensity of economies, full commodification of energy efficiency does not exist. In Eastern Europe, energy efficiency programs are usually funded by EU funds without governments viewing efficiency as reducing gas imports or improving people’s living conditions. It is still more ‘efficient’ for politicians in Hungary and Bulgaria to sell discounts on people’s utility bills than to provide them with better living conditions in the form of insulation and new windows.

The incentives for supply side, while existing in both neoliberalism and Communism, plays out despite both sitting in contrast to each other. Neoliberalism is inherently an economic project. It was developed by the Chicago School of economists and is often linked to the privatization of energy companies in Latin America and Pinochet’s regime of oppression and rise of Neo-Marxist guerrella fighters. In general, the shift towards global capitalism took off in the 1980s and early 19990s. Neoliberalism, viewed as a project by academics focus on the inherent evil obliterating state support and jobs for three quarters of the world’s poor. Economic shock therapy, eloquently described in Naomi Klein’s ‘The Shock Doctrine’. Neoliberalism, privatization and the market economy rob the factory workers of their jobs, heat and wages.

In Eastern Europe, Communism and political suppression of free speech and religion were just a few ‘costs’ that were paid for living in a utopia – a non-market economy. Now the Communist days of low cost utilities and relatively low cost living standards are now fondly recalled in Hungary, Bulgaria and Poland. Marxist economists trained in Moscow guided the broken and inefficient economies of these countries. While the engineered infrastructure of these countries were designed with efficiency and rational engineering principles in mind, operating them created a different level of engineered and economic inefficiencies. Such as opening windows to regulate heat and an economy based on bartering.

Five year plans favored the academic discipline of engineering for developing the energy system of Eastern Europe. Markets worked according to the infrastructure, rather than the markets dictating what infrastructure would be built. The failure of the EU to integrate its energy system lies more with the market policies that must underwrite new infrastructure, with short pay back periods and avoidance of state aid rather than a lack of engineering skill to integrate the markets.

Even from a market perspective, infrastructure projects planned out over a five year time horizon (or longer) hold significant financial savings for companies supplying the energy and for consumers consuming. The failure of the Nabucco and South Stream pipelines are partially attributable to the conflicting demands of open market access and infrastructure ownership. Energy regulators are meant to create these efficiencies in a market based system. Their role is negated when decision making is politically influenced and returns on private investments are not realized. Thus Bulgaria, Hungary and Poland cannot secure long term advantages from a market based system.

Profits then losses in Hungary's utility sector. Source: Hungarian Central Statistical Office
Profits then losses in Hungary’s utility sector. Source: Hungarian Central Statistical Office, draft statistics compiled for a benchmarking report for the European Commission – not done by me.

The higher risk for investors and the inability of the state to secure long-term private financing for large infrastructure projects opens the door for Russia to have it’s way (this is less relevant for Poland). The ability for Russia to finance large pipeline projects (North Stream, South Stream, Turk Stream) and nuclear power projects (Bulgaria and Hungary) demonstrates the strength the Russian state has (paradoxically) in financing energy infrastructure in the EU. Thus while the EU’s energy market is based on economics it can’t compete on financial terms.

The market approach also can’t compete when political involvement overrides long term private investments. Political interference pushes these countries closer to Russia as the availability and interests of private companies shrinks. In an environment with politically influenced energy prices, realizing returns on investment becomes more and more challenging. In Hungary, the response has been clear. Private distribution companies, paid out high dividends thereby removing capital from the companies while slashing investments. With the rejection of a market based approach, a financing gap emerges. Russia is happy to fill this by offering its former satellites a one stop shop for finance, infrastructure, technology and the potential for politically favorable pricing.

 

The Collapse: Utility investments in Hungary
The Collapse: Utility investments in Hungary H1 = first half of year, H2 = second half of year, draft statistics compiled for a benchmarking report for the European Commission, not done by me.

It is no coincidence that the biggest supporter of Putin and Russia in the EU is Hungary’s Prime Minister, Viktor Orban. After securing a secret late night deal to expand Paks nuclear power plant with Putin, Orban now acts as Putin’s European cheerleader for building Turk Stream. The ultimate goal is political support for Orban and his 25% utility price cuts – that must be maintained.

The clash occurs in South and Central Eastern Europe between former Communist systems and the neoliberal regulatory approach to EU energy markets. The two overriding academic disciplines of engineering and economics only realize their potential with political permission. While these two approaches are reconcilable, politically, past and current adherance to one or the other approach dominants. Favoring a market orientated approach relies on trust in market forces that efficiency will be introduced to the energy market. Trust in engineering enables political involvement to set energy prices – rather than the market.

After the fall of Communism trust was placed in the neoliberal market approach, after 25 years of playing with economic markets, politicians are no longer willing to place significant trust in markets. Thus the crisis of the energy system in the region is set to escalate between the neoliberal market approach required by EU membership and a politically guided market price resting on centrally controlled and engineered large energy systems backed by Russia.

I’m a Dirty Immigrant: The Hungary I know and love

On this blog I’ve stopped commenting on the policies of Viktor Orban and his insane bunch. There are many other ways to influence the world. Like co-writing the energy benchmarking report on Hungary for the European Commission or biking to Paks Nuclear Power Plant (and the rest of the Danube) to understand Hungary’s and the region’s energy policies.

[update: I finally found a fresh poster. Further down is a poster my neighbors tore down - but because I got up early for my morning one, I found this one intact. ]
[update: I finally found a fresh poster. Further down this row of billboards is a poster my neighbors tore down – but because I got up early for my morning one, I found this one intact. ]
Of course, having said that I want to spend just 15 minutes reflecting on the anti-immigration rants and policies Hungary’s government is pushing. Because, well… I’m an immigrant in Hungary. I think overall my ‘assimilation’ as Orban pointed out is what good immigrants do, is progressing well. I have developed an appetite for fish soup (usually made from carp) and Hungarian pastries (can anyone do poppyseed ‘mak’ better than the Hungarians!? – I think not).

Field Research: Me eating fish soup at a restaurant in Paks
Field Research: Me eating fish soup at a restaurant in Paks after biking 140 km from Budapest to Paks.

Nonetheless, the current anti-immigration billboard campaign the government has launched is particularly stupid. The thing is – in my 10 solid years of living in Hungary and my frequent visits since 1998, I have never been treated in a rude way because I’m a foreigner. If I’ve been ripped off or cheated it was because I am human. Those people cheating me also cheat Hungarians (kind of like the political class of Hungary). Once I even survived a train trip in the biking car of a train to Balaton with a member of Jobbik. We had a great conversation – in Hungarian.

A few months ago, just as the hate campaign by the government was beginning I was getting ice cream with our children (dual citizens of America and Hungary) and I met a mother from my son’s ovi (nursery). I was giving her my impressions of Hungary and how I like it. But then it felt weird, because Orban was just coming out with his hate campaign against foreigners. I told her that I really felt the government no longer represents the people of Hungary. Because from my experience Hungarians are really open to me, my kids and to the other foreigners I know. They are also strongly aware how other countries treated Hungarians fleeing the Communist regime in 1956. Countries like Germany, UK and the US took them in.

Thus the ‘counter’revolution to Orban’s current billboard campaign against Hungarians is the true Hungary I know. The ground swell to deface and tear down the anti-immigrant billboards is the Hungary that I know and love. These are true Hungarians that are open, hospitable and want their country to be part of Europe. The Orban government is an anomaly that does not represent the best, or even average, of what Hungary is.  Hungarian’s accept a lot of shit, but just like Turkey’s Erdogan just lost his election because he did not accept or align with the majority of Turks (which I also know well), Hungarians know that Orban represents the same political and economic regime that they sought to get ride of before 1989.

The thing is, my Hungarian is far from perfect, I can figure most things out, but I can’t even understand what is written on these billboards. Sometimes I’m such as stupid immigrant. Looks, like I need to keep studying Hungarian to understand what I should do to please Orban and stay in Hungary. To understand the posters better I’ll have my daughter and son help me with the translation. But then I’ll have to explain to them how their father is not a burden on Hungarian society and that maybe I should just go back to America. But then I wouldn’t be able to write about Hungarian and European energy policy. Looks like I’ll be staying here, paying taxes and putting up with my ‘burden’ status.

In pursuit of Danube fish soup this past weekend. At the Danube bend, Visegrad in the background.
In pursuit of Danube fish soup this past weekend. At the Danube bend, Visegrad in the background.

Energy Dependence: Politically cheaper than energy independence

The Soviet Union embedded into the landscape and economies of Central and Eastern Europe a system of technological and resource dependence. Political and social benefit derived from this energy system. Politicians still continue to benefit from this arrangement. This system fails to reflect current political arrangements and technological advances. Failure to build an energy system that is technologically and resource independent of Russia maintains the political and social ties established during Communism.

The centralized system created a continental oil and gas pipeline network to deliver the natural resources of the Russian heartland and Central Asia to the ‘satellite’ countries in Europe. Replication of this networked approach also extended to nuclear power through scientific knowledge and components. To create sufficient political independence a new energy system needs to be built. This includes a new gas networks and new electricity generation technology – all non-Russian sourced. Failure to build an alternative system maintains the historical status quo.

Picture of a young Communist worker building the foundation of Hungary's future energy system
Picture of a young Communist worker building the foundation of Hungary’s future energy system [Also, the Hungarian text on the side lauds the brotherly friendship of the Soviet Union and Hungary – I’m working on a translation]

The old- new energy system

The Soviet energy legacy was handed off to the Russian state which posses three key energy resources and technologies: 1) Oil, a global commodity that is easily shipped, and holds limited pricing differences. 2) Gas, relies on transit pipelines, industrial and household infrastructure and is susceptible to supply interruptions and monopolistic pricing, without sufficient storage or alternative supply routes. 3) Nuclear, rests on technological knowledge, spare parts, fuel processing and storage; technological lock-in occurs creating high switching costs.

Breaking the energy dependence network established by the Soviet Union requires Eastern Europe to establish a new regime of energy independence. This is done in two ways: First, alternative supplies of resource are required. This means building alternative delivery systems for resources currently delivered by Russia. New gas transit pipelines bringing non-Russian sourced gas will deleverage the region from energy dependency. Second, alternative technologies offer the ability to reduce long-term dependency. Nuclear power affects two generations of citizens, the high sunk costs prevent present and future political and social independence. Adding more energy alternatives rather than subtracting old infrastructure, over time, brings about greater energy independence.

The cost of energy (in)dependence

Resource independence holds two approaches. Poland pursues and energy independence strategy opposite Hungary and Bulgaria. Both are influenced by the cost of resources. For Poland, domestic and imported coal provide 90% of the countries electricity generation. Imported Russian gas is important for industry and cogeneration of electricity and heat. LNG now provides an alternative source of gas – but at a higher cost. The true cost of coal is not reflected in its market price. Environmental and health costs are not priced into the energy security argument for continuation of coal. Therefore, the cost of resource independence does come at a price.

Hungary and Bulgaria, in contrasts, seeks to maintain and increase their use of Russian gas. Alternative supply routes are sought through interconnectors to Slovakia and Romania. With the expansion of interconnectors, Western European gas can now reach the CEE region and act as a limited bargaining lever for lower prices. Nonetheless, both countries are slow to build and open up existing pipeline capacity to neighboring countries. The limited steps taken for infrastructure and market diversification prolong their resource dependence.

Resource dependence extends to upstream diversification. Both countries see Russian sourced gas, via Turkey as a ‘true’ route of energy diversification. Both countries are heavily dependent on Russian gas and use gas a political measure of their political devotion to Russia. Gas transit fees can help offset politically controlled gas pricing for consumers. The financial losses incurred by Bulgaria’s NEK are equal to the transit payments of Russian gas flowing to Greece. Hungary’s support for South Stream and Turk-Stream only excludes Ukraine, they do not break Russian resource dependency. Annual gas contract negotiations are always framed by the Prime Ministers of Hungary and Bulgaria as diplomatic successes and servility to Russia.

Technological dependence in Hungary and Bulgaria are present in the form of nuclear power. Poland rejected the Soviet offer for nuclear power in the 1980s.
The built facilities in each country provide ‘cheap’ electricity at a price consumers in both countries can afford. The centralized and state owned facilities enable the state to actively manage and influence the energy system in both countries. Low priced electricity can be supplied to households. Bulgaria was in talks with Russia to build another nuclear power plant at Belene (more on this elsewhere) but ultimately backed out of the deal during the financial crisis as demand plummeted. Hungary, after Prime Minister flew in secret to Russia, signed a (secret) deal to expand Paks nuclear power plant. Hungary is now technologically dependent on Russia for another 40 – 50 years.

Hungary’s dependence on Russia, while masked by the technological dependence is also financial. As an interviewee in Bulgaria pointed out, the Russians have the whole package that no other company or country can compete with. They provide the financing, the technology and the fuel – they are the Amazon.com of nuclear power. Competing on these terms is almost impossible for other countries. Thus, if a country is serious about nuclear power, the Russian offer – particularly if you are a cost conscious country – is very appealing. If a country is open to non-centralized generation sources and able to finance its own energy system, then they will probably not choose nuclear power (this is a general statement and needs more support elsewhere).

Concluding Energy Dependence

For our discussion, I discounted the full environmental cost of nuclear and coal (including waste storage and CO2 emissions). Avoiding the environmental discussion (for the moment) enables engagement with the political prioritization of energy security and energy prices. Energy independence is not provided when the energy system is based on the old political-economic order. The Communist system linked the energy resources of Russia and Central Asia to the Communist satellite countries of Central and Eastern Europe. This system is perpetuated in Hungary and Bulgaria.

The overriding cost consciousness of governments and consumers results in continuation of the energy system. Investment continuity, just as private investors demand it, is provided to Russia through political agreements. Continuation of resource and technology dependency ensures Russia stays politically and economically connected to new EU member states. There is an inherent contradiction between neoliberal market requirements of the EU and the secret and centrally controlled monopolistic structure of the Russian energy system. So far, Bulgaria and Hungary accept this contradiction, while Poland strives for self-sufficiency from both systems.

SCEE countries extend the Communist energy systems to the future

There is a delicate and blurred line between investments into the sustainable energy technologies and security of supply. Both are overreaching concepts that describe a multitude of approaches. At the core is the attempt to upgrade technologies with a low environmental impact while ensuring energy resources (primary and secondary) are secure. Creating a sustained momentum of investments through a clear trajectory is core to an efficiently managed system. The sustained trajectory towards a more secure and environmentally sustainable energy system is where countries in Central Europe fall short.

In Europe, there is a clash of how embedded energy systems contribute to energy security. There are two distinct approaches, one in older member states (UK, France, Germany) and one in newer eastern member states (e.g. Poland, Hungary, Bulgaria). Some countries transformed their energy systems in a rapid manner, like Germany and Spain, where solar and wind received a tremendous boost through feed-in tariffs. This transition is now self-sustaining due to the drop in the cost of technologies and a mature domestic service industry. While Spain cut off financing the industry became well established. In Germany, support remains and the renewable sector will continue to grow.

More broadly, the transformation boosted both countries’ energy security while moving them towards a sustainable energy system. Both environmental and commercial reasons (being leaders in energy technology) fueled this conversion. Spain reduced its oil imports while Germany reduced coal (temporarily) and nuclear power in their energy mixes. Social support existed in both countries for this transition.

Energy technologies in the SCEE region

Building a sustainable technological trajectory to transform energy systems is not occurring in South and Central Europe. Some countries, like Poland, Hungary and Bulgaria have not noticeably altered their energy systems. In fact, these countries are marked by a reassertion of their older technologies. Renewable energy technologies are kept to the minimum EU requirement which is below 20%, and little or no government financial incentives. Instead, these countries are clearly reliant on extending and expanding their current energy technologies. Poland will maintain a high mix of coal in electricity generation, currently this is near 90%. The overall 2050 energy mix is projected to have 60% from coal, 20% from gas and 20% from renewables. Thus a rough projection can see electricity generation from coal being around 70%, while boosting gas and renewables in electricity generation.

Hungary is set to increase nuclear power to over 70%, by expanding its nuclear plant. If life extensions are done for current reactors, then by 2050, this 70% ratio could remain in place. Electricity generation from coal and gas and some renewables will remain. Thus, Poland and Hungary pursue a 70% mark for their electricity systems based on previous technologies. This percentage, when combined with gas, effectively locks out renewable energy to any meaningful degree.

Poland’s Electricity Generation Mix

Source: European Commission Country Report 2014 - Poland
Source: European Commission Country Report 2014 – Poland

The energy mix of Bulgaria, from the outside, is diverse. It is a net exporter of electricity and has hydro, nuclear and renewable energy (wind and solar). However, as I will explore elsewhere on this blog, there are systemically high costs associated with Bulgaria’s solar feed-in tariffs, expensive long term contracts for coal-fired power plants, and the general overcapacity of nuclear power, which means even this ‘cheap’ source of energy either needs to be exported or (at times) taken off line due to the oversupply from solar and coal. The future of the Bulgarian energy system, while on the face of it, appears nuclear and centralized, consistent mismanagement may result in technologies with shorter payback periods dominating the energy mix, such as gas and renewable technologies.

Bulgarian Electricity Generation Mix

Source: European Commission Country Report 2014 - Bulgaria
Source: European Commission Country Report 2014 – Bulgaria

Technology and Resource Dependency

The choice of Poland and Hungary to maintain their future energy mix at 70% based on technologies from the previous energy era are directly connected to the perceived final price of electricity, gas and energy supply security. Bulgaria continues to debate and engage with reliance on Russian nuclear technology and gas pipelines – on the same level as Hungary. Bulgaria lacks the momentum to diversify away from Russian resources and technologies. All three countries are affected in their choice of energy systems by Russian control of resources and technologies. New investments fall into one or both of the categories of resource in/dependency and technology in/dependence.

The future energy systems in these countries are based on the previous Communist energy technologies and resources. This is not a trajectory that moves these energy systems towards being both sustainable and secure. Rather, ‘cheap coal’ and ‘cheap nuclear’ are perceived to provide the affordable energy that the citizens of these countries accept. The competitive advantage deriving from ‘cheap’ resources and technologies rests on the previous Communist energy complex. Today, these facilities are built under considerably different market conditions than what we have today or in the future.

It is the difference between the old political-economic regime and the one that exists in the EU that is a source of friction today. Financing of the expansion of Hungary’s Paks NPP is now provided by Russia. Russia attempts to influence the future energy choices of the region by extending the previous political-economic system of resource and technology dependency. This will be discussed in the  next blog post.

Workshop Presentation in London: Energy (In)Security in the CEE region

How do we understand the balance between energy investment risks and security of supply? I answered this question last week at a workshop sponsored by the University of Liverpool in London. The workshop organized under the title, ‘The evolving notion of security in law and policies on energy investment: international and national perspectives’ provided a great venue to explore this question and to frame my current South & Central European Energy Expedition (#SCEEE)

I made it to Paks
I made it to Paks

Lecturer Mavluda Sattorova of the University of Liverpool brought together a collection of speakers that really created the right environment to discuss how investments in energy projects are balanced with energy security concerns. Professor Benjamin Sovacool, Director of the Danish Center for Energy Technology at AU Herning started the day and Graham Coop, a lawyer from Volterra Fietta and specializing in the Energy Charter Treaty ended the workshop. A full list of speakers and the program can be found here.

Energy In-Security: The Competition and Cost for Eastern Europe’s Sovereign Energy Markets

In my presentation I focused on the dichotomy of the Central and Eastern EU Member States needing to have open and competitive markets, but holding in place and even building up their energy systems built during the Communist period. (I am currently writing a blog post on this, so I will publish it later today or tomorrow).  This is important because it demonstrates how little things have changed from the previous political-economic regime.

Notable in my presentation I made a correction to my previous view that the region moved from a government controlled energy system, to one based on governance, where technocrats have a say. My new view is that under Communism, it was very much a technocratic governance system with experts and engineers designing the system rather than just a pure political project. Although, I do not want to diminish the political involvement in the design. This means we are moving from a governance regime to another governance regime. Theoretically, this is an important points and contradicts existing EU energy governance literature.

This new insight is one of the first outcomes of my energy expedition (#SCEEE) where I am biking down the Danube from Budapest to the Black Sea this summer. In my presentation I described my experience at Paks and set out what I hope to accomplish in the next legs of my expedition.

 

European Commission energy report identifies progress and set backs in Hungary

Giving Hungary’s energy regulatory authority greater political independence and improving investment certainty are recommendations recently published by the European Commission’s report on Hungary’s energy sector. Identified in the report are Hungary’s regional integration and consumer dissatisfaction with gas suppliers.

Contributors to the report, including analysis on Hungary, are Michael LaBelle, an Assistant Professor at Central European University, CEU Business School and Department of Environmental Sciences and Policy, and Andras Deak, Research Fellow at the Institute of World Economics of the Hungarian Academy of Sciences. Working with energy consultancy AF for the European Commission, the overall report provides a snapshot and recommendation for each EU member state.

Electricity price change by component 2008 – 2012 (source: Eurostat, energy statistics)
Electricity price change by component 2008 – 2012 (source: Eurostat, energy statistics)

The 2014 report found overall improvement in the EU’s energy infrastructure and market. Consumers in some markets have more choices for electricity and gas suppliers, cross-border trading increased and wholesale electricity prices declined by one-third and gas prices were stable between 2008 and 2012. Suggestions included more substantial regional cooperation, use of smart meters and linking more closely wholesale and retail pricing – so lower wholesale prices translate into lower retail prices.

The report on Hungary included the progress made linking Hungary’s electricity market to the Czech Republic and Slovakia. This increased the amount of electricity available on all these markets creating regional price convergence. The report also noted that Hungarian gas consumers are the least satisfied in the EU.

Deterioration in the regulatory environment and notably the powers of Hungarian Energy and Public Utility Regulatory Authority were identified as problematic areas. Actions by the Hungarian government during the reports timeline of 2012- to early 2014 noted the removal important independent functions of the energy regulatory of network tariff setting authority. These political actions resulted in the reduction of energy prices by 20% (subsequently more since the completion of the report). The appeals process against the authorities decisions was also altered removing Hungary’s courts from providing sector oversight. Overall, the report identifies actions by the Hungarian state of increasing its ownership while investor owned utilities lost money and were dissuaded from investing in the sector.

The full report can be found here, and the report on Hungary can be found here.

 

Present and Historical Benefits of Nuclear Power for Hungary and the Soviets

Buda to Baja: Leg 1 of the South & Central European Energy Expedition (#SCEEE), post 2 of 2. Post 1, can be found here.

“Energy is ideology,” stated a Bulgarian energy expert in relation to Russia’s use of energy as a projection of power. But, he continued, the age of energy as a weapon is over, the options are now plentiful. While there are more options today, it is important to frame Soviet and Russian technology as a form of influence corresponding with particular ideologies and forms of governance. This is an emerging theme from my interviews and conversations on the historical role of the energy system in former Communist countries.

Picture of a young Communist worker building the foundation of Hungary's future energy system
Picture of a young Communist worker building the foundation of Hungary’s future energy system. Displayed at the Paks NPP Visitor Center.

Ideology is often perceived to be a function of governments. That is, it is a top down process – similar to building up the idea of nation. But we can also see that ideology – like market ideology in the EU – also works in the form of governance. And here I change from the use of ‘government’ to the use of ‘governance’. Because in academic literature (including mine) we perceive governance as a technocratic rule making process. This is invoked for the regulatory systems propagated by the EU. But even within the EU (and discussed elsewhere in this blog and in this project) we have the propagation of neoliberal market ideology.

The connection I want to make to nuclear power in Hungary and in former Communist countries, is the Soviet Union was able to use ‘governance’ to instill and propagate its own ideology of societal goals through technology, including scientific expertise and processes. Nuclear power was one element of the energy system used to integrate and build grand projects that modernized the economies of COMECON countries (see my previous post).

Looking at the history of Paks (and nuclear power in the region) integration of the eastern satellites into the Soviet Union was facilitated by the energy infrastructure, such as gas pipelines and nuclear facilities. This integration lends itself to political integration and resource dependency through fulfilling social contracts for the built up expectation the state will provide low cost energy – and not payed from the salaries of citizens.

Continuity of Investments

Recent Russian efforts to foster integration by building new nuclear power plants and gas pipelines in the region represents building on past investments. Continuity of investments, is an areas I’ve examined in the past for companies like E.ON and RWE entering new EU Member States, but I (and others) have overlooked and failed to perceive the sunk costs of the Russians/Soviets into the Eastern Members states’ energy infrastructure and knowledge networks. Previous rounds of investments are represented in the Paks power plant itself, built in the 1980s. There is considerable knowledge capacity (including the extensive training given to each worker) built up since the early 1980s.

Brief video of the Soviet Memorial at Dunafoldvar where I spent one night on my bike trip to Paks.

Shifting of the governance system – and also the accepted ideology – away from a centrally planned economy to one emphasizing market forces, building and operating the energy infrastructure, undercuts and devalues the previous round of investments (under the previous regime). This observation is extremely important in my later examination of the current expansion of Paks NPP. Paks therefore is not just a component of Hungary’s and the region’s energy system, but an ingrained technological, political and social element of the previous and current economic system (including the guiding ideology). Renewable energy may make market sense, due to its smaller scale and shorter payback periods, but in political and social systems operating in a governance system of centralized energy systems, nuclear power fulfills multiple five-year plans.

Nuclear power works within this centralized governance system on multiple levels, in the respective order: 1) physical; 2) knowledge; 3) economic; 4) geopolitical; and 5) social.

Physical integration into the environment
The physical location of Paks Nuclear Power plant on the bank of the Danube is as much of a technical requirement as it was for assembling the structure. Cooling towers are not necessary, as river water is used for cooling and steam generation. In addition, production of the nuclear power plant components was a regional endeavor, enabling key components to be shipped on the Danube. For example, the reactors were made in Czechoslovakia at transported on the Danube. The use of the Danube and the sourcing of the parts underscores the regional dimension and participation in nuclear power.

In my future bike trips on the Danube I will be visiting the other nuclear power plant facilities, documenting the role of the Danube in tying together both the nuclear facilities and the economies of the region.

Knowledge integration
Operating the nuclear power station required students and employees to travel to Russia and the German Democratic Republic (DDR). This extensive education and travel results in the acculturation of experts into nuclear science and operational cultures. Education and training was also done at the Technical University of Budapest, this is where the Hungarian nuclear experts formed the basis of their careers.

Interestingly, during the early years of operation at Paks, the shift of workers were duplicated. There was a Hungarian team and a Russian team of operators performing the same functions. This enabled training and assisted in double checking that everything was done according to procedures.

Economic and competitiveness
The focus here is on the role of nuclear power in laying the groundwork for lower energy prices. But let’s not lose sight that the slogan ‘too cheap to meter’ is also an American expression to demonstrate the projected prowess of nuclear power. Currently, over 50% of Hungarian electricity consumption is supplied by Paks NPP. The working assumption (by some experts) is the full cost of nuclear power is reflected in the market price. I’m currently researching the construction costs and how these were paid. But the working assumption by some Hungarian experts and politicians is the full cost of nuclear is reflected in the current electricity price. From their perspective future nuclear power is perceived to offer this price advantage over renewable or coal power. The dominant paradigm in Hungary, Bulgaria and Russia is nuclear is cost competitive, resulting in a competitive economy.

Geopolitical
The extensive physical and knowledge integration into the Communist economic system enables a legacy of Russia to remain embedded into the nuclear power industry. This extends the technical hand of Russia and keeps the former satellites close. Thus the current raging debate over expanding Paks and how this ties Hungary to Russia for another two generations. The debate is not only technological (nuclear or not) but an issue of sovereignty and political alignment. Does Hungary want to cut off a highly symbolic and historical tie that offers Hungary economic and social strength, and go with a more short-term neoliberal market based energy system? Under the current Orban government this is simply not an option – the centralized energy system remains reflecting the political governing style.

In a region that placed science in the highest regard, and energy infrastructure development as an expression of ideology along with a symbol of economic might, moving away from large scale energy projects goes against the grain. More deeply, the embedded physical assets, the developed knowledge and supply networks contribute to a legacy system that locks-in technology, engineering choices and geopolitical influence. Shutting down the nuclear power industry in these countries is akin to shutting down German solar or closing the coal mines. In a region and country with high support for nuclear power, it is unlikely that Hungary or Bulgaria will give up nuclear power. It is essential to consider these aspects and the embeddedness of energy technology into broader political-economic and social networks.

Social integration
Politically the choice to remain with nuclear is a continued expression of national might and scientific prowess. Solar and wind energy represent – not just a decentralized system, but technology owned and developed by Western firms that also control and profit from selling this. Giving up on ‘Russian’ nuclear technology undercuts CEE politicians own political and social standings. The fond recollection by workers of how Paks was built and the role of KISZ (the young Communist party), holds a strong legacy throughout the country. The 1980s were a time of prosperity for Hungarians, Goulash Communism worked. So much so, that by the time reactors 3 and 4 were being built new Hungarian companies were supplying the technologies for these, rather than Russian ones. Entrepreneurship was alive in Hungary in the 1980s. (I’m concentrating on the nuclear up-sides of Communism, not the significant downsides of the political-social regime)

In the present day, the town of Paks thrives off the largess bestowed upon it by the power plant. The cultural life is said to be equal with cities much larger, sport and cultural clubs are prominent. It is probably the only ‘factory’ town from the 1980s still surviving in Hungary today (although maybe Gyor could be considered as well). The country as a whole is viewed benefiting from Paks. MVM (the state owned company and owner of Paks) holds significant sponsorship throughout the country of cultural events. Tangible benefits are perceived from nuclear power in Hungary. In a sense, in a political-economic climate dominated by corruption, the only law that still works is the law of physics, and the role of science (maybe things were not perceived so differently under Communism). Corrupting or swaying this scientific knowledge can only result in a disaster. At least some social faith can be placed in physics of the atom.

Conclusion
The term ‘governance’ has a much more modern connotation to it. Often this is expressed in reference to EU expansion and technical rule making. In relation to Soviet nuclear technology, the spread of technical knowledge and exchange of ideas among experts can also be viewed as a form of governance. Hungary’s decision to remain nuclear is set within these historical and broader networked elements that hold centralized systems essential for the political system. Socially, it is still expected government will assist in price support. Providing continuity to past investments – of a centralized system – attempts to fulfill political and social expectations. Whether this is financially sound, considering broader technological trajectories, remains to be examined.

Energy Expedition Summary: Nuclear Power and the Danube

Buda to Baja: Leg 1 of the  South & Central European Energy Expedition (#SCEEE). Post 1 of 2.

The Danube river proves to be an essential element to the energy system of Eastern Europe. The Danube integrated Eastern European Communist countries with the Soviet Union, facilitating economic cooperation through COMECON, the counterpoint to the Western OECD. To gain a unique and new perspective on energy technologies and relations I am biking down the Danube river from Budapest to the Black Sea and in a shale gas region in Poland. Here is a summary of the first Hungarian leg from Budapest to Baja.

I traveled by bike from Budapest to Baja, from May 21st to May 24th. On Friday May 22nd, I stopped at the Paks Nuclear Power Plant to meet with representatives of Paks and a local Paks politician. Honestly, after biking 140 km in the rain, over two days, their genuine hospitality and patience was outstanding. In another post, I’ll dive into the history of Paks and my visit, because first it is important to connect with the Danube river and its emerging meaning for me in the energy system of the whole Eastern European region.

Budapest to Baja: Basic route I took on bike - but there are some exceptions.
Budapest to Baja: Basic route I took on bike – but there are some exceptions.

Biking down the Danube began as a separate personal goal. It merged with my idea for a book and a research project when I realized nuclear power plants were located along the Danube. I wanted a method to connect with the average citizen to understand their perspective on regional energy politics and technologies. What I learned by this four day bike trip is the Danube serves as an essential conduit for the region’s energy infrastructure and facilitates political economic aims for integration of the region. It is a silent player in regional integration, but one which I hope to highlight through my research.

Reflecting on my trip (in a dry room back in Budapest) the perspective, I gained by riding a bike along and through the countryside surrounding the Danube, connected me to the land and water. This connection is essential when we consider the energy resources and technologies.

The natural beauty and history along the channelized Danube is striking. Contrasting these with the most technologically advanced and dangerous energy technology humans have created is profound. It is also this nature that cools and enables the technology to function. The contrast with farms, vineyards, and Roman ruins provides the historical context to frame how humans existed without electricity to the means we now use to generate electricity.

The building of Paks also relied on the Danube to transport materials: creating a regional supply chain of nuclear power plant components. For example, the reactors were made in Czechoslovakia and transported on the Danube.In addition the turbines were made in Germany, while the steam generators are Hungarian made by Ganz. The use of the Danube and the sourcing of the parts underscores the effort the Soviet Union went to create a regional involvement of countries in building a nuclear power industry – they embedded nuclear power in the region through knowledge and commercial networks.

I made it to Paks
I made it to Paks

Importantly, the building of the nuclear industry was based around COMECON (Council for Mutual Economic Assistance). COMECON served an important role in integrating the national economies of Communist states with the Soviet Union. This offered an economic and political framework to build NPPs in Czechoslovakia, Romania and Bulgaria. Poland, after giving the go-ahead, later opted out. In all these countries similar physical integration of parts networks and sourcing was done. Rather than the technological components emanating from Russia (as we think today), the parts suppliers drew on COMECON countries. We can now view the Danube as facilitating this relationship and construction of NPPs.

Finally, it is important to reflect on the special view biking provides in connecting the Danube to energy infrastructure. Honestly, biking in the rain for over 160 km out of about 216 km wasn’t the most enjoyable (seriously, a little pity is earned). But I really gained a new perspective. From the bike I was able to reflect on and experience Hungary, which is dramatically different from what I (and most people) experience in Budapest. Hungary has four of the poorest regions out of 20 in the EU. Placing this poverty and the people within the broader energy debate enables a better contextualization of either justifying, or not, the pursuit of certain energy technologies and policies. I look forward over the next few months to provide this perspective more for Hungary and the region.

Some experimental videos made on the way

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 Pull of the Communist Energy System

The role of the state in the energy system in Central Europe is fraught with historical ups and downs. Under Communism the energy system represented progress and equality with the Capitalist West. There is no doubt the energy system from gas transmission to electricity generation and transmission in all the former Soviet Union and its satellites was efficient. The energy system lends itself well to five year plans.

Last week I was in Bulgaria doing research on energy prices and the relaitons between Russia and Bulgaria (I’ll be having a lot more on this topic in future posts). I met with many renowned experts, including Bulgarian Atanas Professor Tassev, who has advised many governments and international organizations, including the World Bank. Atanas Georgiev and I sat in his office while he smoked away at his cigar. There are many old school habits that still persist the further east you go.

Professor Tassev is no doubt one of the leading experts on European energy, even if his spoken English is challenged. So I’m grateful to Professor Georgiev for translating for me. In the discussion over Russia Professor Tassev said, “When geopolitics talks, the politics shut up. And when the politics talks the economy suffers.” With this statement he gets to the heart of the energy debate between the EU and Russia.

The debate over energy is more than just everyday politics, it is about geopolitics which exist in a different realm. Our discussion was in the context of building a new nuclear power plant at Belene, Bulgaria. Russia was meant to build it, but Bulgaria backed out causing high tension between the two states.

Politicians act to influence economic development. The political strategy for the energy sector, whether in America (see my PhD thesis) or in Europe, is to provide electricity at the lowest price. Action will be taken over the choice of technology that fulfills the strongest social goals. In the case of Germany, ‘green’ goals are/were prioritized over upfront costs. In the CEE region, the price of electricity in the short term drives political decision making. Thus political interference in the regulatory pricing process.

Geopolitics is for the long-term. The long-term goals for energy technologies come in the form of nuclear reactors and gas transmission pipelines that span continents. Cheap and competitive electricity and gas today, must be preserved for those politicians that value the most energy costs. Open competitive and transparent markets, as those valued by the EU, provide no assurance on short-term or long-term price. Politicians involved in the economy fiddle with the elements necessary for economic growth. The energy sector is the backbone for any growing or declining economy, so there can be a convergence of domestic politics and international geopolitics in choosing energy technologies.

Russia posses both the technological know-how and natural resources to back up its geopolitical and political aims. These aims coincide with the domestic agenda of CEE politicians. Going forward economic growth in the CEE region is dependent on assurances and predictability in the price of energy. Price is seen by politicians in the CEE region as a competitive advantage against those EU countries with competitive and environmentally aware energy markets.

The Soviet Union modernized the energy infrastructure at a price each country could afford. Integration of these countries occurred through the energy infrastructure. A dependency built up over these years. For countries like Bulgaria and Hungary, turning away from Russia and this historical relationship becomes fraught with an inability of politicians to influence their economies. While a lack of engagement may be good for the economies, it is not good for the politicians. And this is where we have a stalemate between integrating into the EU’s interdependent energy system, and Russia’s dependent energy system.