Tag Archives: Bulgaria

Five ways to destroy your energy sector and your economy – a note to the Hungarian Government

I was aiming low – ‘Five ways to destroy your energy sector and your economy – a note to the Hungarian Government.’ I IM’d the title to my friend in the Hungarian energy sector – he said, “i am sure they know at least ten.” Well, most certainly they do, but I’m not as creative as the current Hungarian government. How could I even imagine that encouraging consumers to not pay their energy bills would become a government policy – and legalized. Nonetheless, I’ve written about creative tax making in the past.

To herald in the New Year and to recognize that the wise men (and women) from the EU and IMF may be gone for a few more months and as the Orban government continues to force the country into a downward economic spiral, and installing a new authoritarianism, I thought I would provide the current government a Christmas package of proposals that could bring the Hungarian energy sector more quickly to its knees. Because, as I will show, once you have destroyed your energy sector, dissuaded manufacturers from investing due to an unstable electricity sector, the only direction to go is up – and this requires foreign investment, an effective regulatory environment and strong political will that corrects the past mistakes of low/subsidized energy prices (as demonstrated in this study).

One: Encourage consumers not to pay their energy bills

The introduction of a new bill in the Hungarian Parliament would allow public institutions like schools to avoid pay their utility bills. This proposal has caused the National Development Ministry State Secretary for Climate and Energy Affairs Janos Bencsik to submit his resignation.

A proposal submitted to Parliament by Fidesz parliamentary caucus leader János Lázár last week seeks to prevent utility companies from shutting off power to certain customers who fail to pay their bills…. Industry insiders said that the proposal would allow public institutions, many of them notorious late-payers, to ignore their utility bills with no consequences, leaving power companies no recourse but lengthy and costly legal suits.

Macedonia, provides a good example as to what can happen when no penalities are imposed on late or non-payment of electricity bills. Essentially, the Hungarian proposal reverts back to the Socialist era, when non-payment was rampant in some countries.

Hungary's new energy slogan

 

In a study on the privatization process of the Macedonian electricity company (with the distribution entity being sold to EVN) I wrote, “Unpaid consumer bills, mainly from the period before privatization, are a significant issue. EVN is pursuing lawsuits against 400,000 customers for non-payment, 80% to 90% of these cases stem from the pre-privatization period. This is down from a high of 450,000.”  The draft report was read by reviewers and they came back to say that this 400,000 number must be an error. ‘Didn’t I mean 4,000?’ No – 400,000 court cases for non-payment.

The huge number of non-payment from consumers were causing significant losses to the company at the time of privatization, around 30% of the electricity transmitted in 2006 was unpaid. Of course, these losses affected the selling price at the time of privatization, as well as an indirect impact on investments and the price of electricity – and certainly a very acrimonious relationship between the government, regulatory and EVN. At the end of the day, it is the rate payer and tax payer (usually the same) who has to pay for this.

Lesson 1: to devalue a company, lower investment and create system instability encourage consumers to NOT pay their energy bills. If the company is already foreign owned, this method will be sure to create losses for the company and may encourage their withdrawal.

Two: Regulate the price of energy below the cost of providers

The case of Bulgaria’s privatization of its power plant in Varna, to the Czech power company CEZ,  demonstrates that it doesn’t have to be just the distribution companies that can be forced to eat the losses. In the same study, the decision by the Bulgarian regulator to decide on the price of electricity that would be allowed for power production from the privately owned power plant demonstrate that  it is also the generators that sell to the distribution companies in the regulated market, that must contend with the low prices.

“In the case of CEZ’s Varna Power plant the complaint centers on two issues – regulated segment market quota and the price on the regulated segment, which, according to CEZ, is set lower than production costs. CEZ Varna states that it needs over Lev 77/MWh, to be at cost, while the approved rate from SEWRC is under Lev 72/MWh.”

The development of energy regulators is something special, however, the Hungarian government views the current regulator as not knowing better than Parliament. Since June 2010, the Hungarian Energy Office lost the power to effectively and professionally regulate the price of electricity and gas.  The justification: “it is intolerable that a significant part of families’ budgets consist of utility bills.” Therefore, the regulator is the wrong unit to ensure that families can pay their bills.

The recent ‘forced’ sale of E.ON’s gas unit to the Hungarian government, and the dumping of E.ON Bulgaria by the mother company, both demonstrate what squeezing by governments does. It is still not clear how consumers benefit from government political decision making or ownership. In the case of Bulgaria, one of the main reasons, that I was able to extract from a key participant in the privatization of the distribution companies, was the fact that the government could not be trusted to ensure investments were done due to the desire to keep prices low. The same case certainly applies to Hungary – in the medium and long term, the energy sector will begin to fail if investment levels are not maintained or even increased. It takes reflective pricing of the actual costs of the energy system to ensure proper levels of investments are done to maintain and improve security of supply.

Lesson 2: to ensure that the energy system does not improve, or begins to deteriorate, make sure that companies do not have sufficient funds to cover operating and capital expenses (CAPEX and OPEX). Either removing the regulator from the decision making process or placing political pressure on the regulator can result in lower energy prices. The result can be the company is sold back to the government at a low cost. Great strategy if forced nationalization is the objective.

Three: Create a regional hegemonic energy company!

There is nothing like nationalism to fuel erratic policy making. Ideology both pro or anti-market can dent and over simplify the complex relationship between the state and private investors in the energy sector. The fact that the energy sector is a fundamental component to economic growth and a direct link to voters (through their utility bills), makes the energy sector a highly politicized (read why politicians find energy as attractive as prostitutes). It would require a book to write about all the different and constantly changing national energy strategies in Central Eastern Europe and the South East of Europe to review how almost EVERY country considers their state owned energy companies strong enough to become a regional player like CEZ. The present result is that these ambitions have only resulted in continued justification for government ownership and a lack of modernization of assets for domestic users. Hungary, Bulgaria and Romania each has these strategies, yet none of them competes regionally.

For Hungary, the government sees that MVM (the state owned former electricity behemoth that is now being used to control everything from gas to telecoms) can fulfill this regional ‘cash cow’ role. Or as Janos Lazar, head of the parliamentary group of the Fidesz party, said in an interview. “I see great potential in MVM, in building it up, on the national and regional level. There’s a lot of money to be made here, a lot of money,” said in a Bloomberg interview. (see previous post on this.)

Hungary's future 'regional' cash cow - maybe a little too fat to make it out of the country

Lesson 3: To help justify why the government is so important in a country’s energy sector, just keep saying that they will be expanding regionally – and there is a lot of money to be made. This expansion still has not occurred, and if it were to occur it must be subsidized by current rate/tax payers. Nonetheless, there is still room for a first mover advantage by one of the large state owned energy companies – like MVM (see photo above to see how fast they can move).

Four: Create an erratic policy and regulatory environment

Maybe this goes without saying. Having an erratic policy and regulatory environment is usually built into the business plans of privately owned energy companies. For rate payers, this means paying more for their energy, because the risks are much greater and therefore energy companies entering and operating in a company are going to seek to have a higher rate of return. The rate of return that the electricity distribution companies received at the time of privatization in Bulgaria was 16% and 12% in Romania. While this may be great for the investors – at least on paper – as the case studies show, the risk that these companies took is partly justified based on the continued price squeeze that the companies are under. They are expected to fulfill their investment commitments, thus incurring losses, thus lowering the rate of return (in a very simple explanation). Whereas, a more predictable and stable regulatory environment can, over a few regulatory cycles can lower the rate of return, the country’s risk level and thus energy prices.

Lesson 4: erratic energy policies and regulations, can keep risk levels high and thus require companies to have a higher rate of return. This will result in higher energy prices, so instead of creating a stable predictable investment environment, keep companies guessing – this will justify the continued political intervention in the energy sector.

Five: Get free energy for government use – expropriate electricity and gas

Hungarian Prime Minister, Viktor Orban speaking in December 2020, at a primary school about the success of the free energy scheme for state institutions

 

Political control over energy prices, means that privately owned companies must accept what the government tells them to charge. The point of having an energy sector regulator is to ensure that there is sufficient incentive for privately owned companies to get a fair rate of return on their investments, while protecting consumers from monopolistic abuses. A professional regulatory staff  assesses the full costs that are incurred by privately owned companies, and ensure the costs are justified and consumers pay for an efficiently run energy system. Removing incentives or not covering the cost of operations and future investments, removes the incentives to invest and threatens security of supply.

The Hungarian government now controls the price of gas and electricity. They are also about to decide that certain consumers (state owned entities) do not have to pay their energy bills. If they allow this, the government in reviewing the costs that should be allowed in the price caps, can decided that the non-payment by these consumers cannot be viewed as losses for the company to write off – or for other consumers to cover. They will force the private electricity and gas providers to pay for the energy costs of the government.

In short, as in the Socialist era, the Hungarian government will decide that government institutions do not need to pay their energy bills, they will either make the Hungarian rate/tax payer pick up the tab through their utility bills – thus higher prices, or they will force the companies to incur losses caused by non-payment from the government.

Lesson 5: If you want to ensure that the government (through whatever entity local or national) does not pay for energy usage, simply make sure the price is set by the government and stipulate in law that there are no penalties for non-payment by government entities. This will dissuade energy efficiency improvements and drive the price of energy up for everyone else – if these losses are included in the price of electricity or gas.

 

Conclusion

The five points reviewed here represent the ways that can lead to decreased investment, less private ownership(which should be more efficient), and higher energy prices for all. The one area that I have not touched on is how creating a stable investment environment, with a well functioning and independent regulator also can create lower energy prices. Erratic policy making, expropriation of energy by the government and increased state ownership all lead to higher energy prices for consumers. In the long term, the trend will only lead to an under invested energy system that has blackouts, lacks system stability and cannot support the requirements of industry. A robust energy system is a requirement for a growing economy. Failure in the energy system represents failing every citizen. The Hungarian government is only too happy to ensure that the private ownership is diminished or eliminated while state owned energy companies with no transparency -(and a history of not justifying their costs, like private utilities), become fatter and fatter. I don’t know if fat cows produce more milk, but they certainly cost more to feed. If the cost of energy is the bottom line, then let’s have some lean beef that is healthier for the consumer.

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.

SCEE Weekly News Review

The quick turn around by the Bulgarian government to support at least one Russian/Bulgarian project was displayed fully on Saturday Nov. 13, 2010. The prime ministers of Russia and Bulgaria Vladamir Putin and Boiko Borisov sat down and agreed to establish South Stream Bulgaria AD to develop the Bulgarian section of the pipeline. Gazprom and the Bulgarian Energy Holding (BEH) will be the main principles in this project. However, as reported by novinite.com in the Russian press, this means little.

“The establishment of a joint company in general does not make the destiny of real construction clearer. This would happen only when an investment decision is made, but the perspectives here are very difficult to forecast,” expert Mihail Krutin points out cited by “Nezavisimaya Gazeta.”

Of course finally getting the Borisov government to agree to a project with Russia didn’t have any impact on current Russian gas prices for Bulgaria. According to novinite.com the Bulgarian PM stated after the Russian PM left town that they would be getting lower gas prices – contradicting Putin’s assertion that these things are not connected.

And finally, according to publics.bg, the visit also produced statements that technical progress is still being made in building Belene NPP and other partners will be joining the project. At a Climate Strategies conference in Budapest this week and the 5th Energy Forum last week, it is clear that despite widespread energy industry perspectives on the future growth of nuclear power (excluding German and Austrian perspectives that were vocalized at the Climate Strategies conference), financing and ownership structures still remain key hurdles to building nuclear power. And Belene is turning out to be the poster child for the difficulty of building nuclear power.

In other Russian interest related news, the Hungarians prove again they have Surgetneftegaz pinned to the mat. According to Portfolio.hu,the Metropolitan High Court of Appeal supported the earlier ruling of a lower court that the MOL was right to bar Surget from being listed in the share registry. Outside this narrow legal ruling, this is also connected to the Hungarian Energy Office not approving participation of Surget in MOL due to it not clarifying the companies ownership structure. Well, the only joke that can come from this ruling is that even if Surgut was now listed as a full owner of MOL, the Hungarian government would no doubt come up with a special tax to apply to Surget.

And in broader EU news, and something that will need to be followed up on in separate post, Bloomberg reports that the EU Commission outlined its energy infrastructure priorities for the next two decades. But specific projects won’t be identified until 2012. So maybe I have two years to write that post.

And finally, not only did the Bulgarian visit have energy as a central focus, but it just may set off a new round of democracy in Russia. Apparently, you can now vote and suggest a name for the dog that PM Borisov gave to PM Putin.



Bulgaria: Oh – I have to pay for the pipeline?

Will that be cash, credit or debit?

Bulgaria appears to be ahead of most countries signing up for gas projects. Probably only for the fact that they are the only ones that might be able to squeeze a little extra money out of others. Sofia now wants a little extra help from the EU to finance its pipeline construction to connect to Nabucco. I guess a transit pipeline is not much help if you can’t get the gas out of it. Seriously, though this raises two flags.

One, Bulgarian finances are tight, but so are the other CEE countries – Romania, Hungary, how will these countries be paying, not only to build the actual Nabucco pipeline but the connections for the off-take? Will MOL and Transgaz be able to self finance these portions? For me, this is a significant point as it indicates that the other countries will be coming out with similar requests for financial help or maybe even a reduction in their share of financing portions of the project. If things are financially tight now, for companies and governments alike how will they raise the needed capital in time to begin construction in the next few years?

Point, 1.1 For Bulgaria, Serbia and Hungary it also must be asked:

– What about financing of South Stream connections?

– What about financing for South Stream pipeline portions that are more directly connected to state participation?

Two, we have a on Trend.az, of Bulgaria getting ready to join AGRI. Georgia is keen to export Azeri gas via tanker to Bulgaria. However, while the whole AGRI project remains speculative, it becomes even more unsure when it appears that Bulgaria can’t finance key aspects of the Nabucco project. Security of supply can be increased for each country, but participation in every new gas pipeline project that is announced seems dubious.

And three, what will also appeal to Hungary and Romania, is Bulgaria request to shift Nabucco costs out of national budgets – i.e. debt levels will not be seen.

Overall, the financial crunch is emerging for these projects. While countries continue to sign up and support all alternative routes – the deeper questions of who is going to pay for this still needs to be asked. In addition, if these pipelines/LNG facilities are built how much will gas cost for consumers? Will the cost be so high, as to reduce demand making these projects over ambitious?

For Sale: slightly built nuclear power plant

Bulgaria has stopped construction of its second nuclear power plant until it finds a new investor and funds to complete the project, Prime Minister Boyko Borisov told Tuesday’s edition of the daily 24Casa.

“The country has no money for an atomic power plant,” Borisov said. “We will build it when investors come.” (Novinite.com)

I think we can now begin to see the long-term impact that the financial crisis is having on state sponsored energy projects. What is interesting about this is that the Russians lobbied hard to keep construction going on this.  The Borisov government, according to Novinite,  “turned down a 2-billion-euro offer made by Moscow for a stake in the plant, which would have kept the construction work going.”

What is interesting is that Serbia expressed some interest in taking a 5% stake in the plant. Although that is pretty small. If this is going to be revived in the short term then more countries in the region should take bigger stakes in the project. Although this is doubtful, due both to the financial crisis and desire of all countries to be fairly energy independent in the region. As for private investors, it doesn’t seem that they are lining up after RWE pulled out last year.

The big question remains as what other regional projects, involving government financing,  are now under the microscope? What about the proposed merger of Nabucco and South Stream by the two Italian companies, Eni and Edison? Do Bulgaria and Hungary have enough financial muscle to proceed? South Stream is already under examination by the Bulgarians, what will be their conclusion? If they are ready to pull out of the nuclear deal with the Russians are they also prepared to pull out or renegotiate their gas pipeline deal too?