Tag Archives: energy efficiency

Putin-Orban Politburo Meeting: Cash and energy co-dependency

The global fall in oil prices and the shaking foundation of Russia’s economy has analysts and the media questioning Russia’s commitment to financing and  building Hungary’s expanded Paks II nuclear plant. On February 17, Hungary’s Prime Minister will be in Moscow for a meeting with Putin – almost a year to the date Putin visited Hungary. Top of the agenda is energy. In this short analysis, I’ll simply be stating the importance of energy projects and the historical commitment both Russia and Hungary hold to supply side economics of energy resources. Their common energy policy is: Immediate cash is more important than long-term energy reduction methods. This is in contrast to more advanced countries which are moving to tackle demand side inefficiencies and rolling out low cost distributed generation technologies.

The autocratic habits of Putin and Orban make them susceptible to stick with supply side economics. Pushing out natural resources and producing more and more energy to grow an economy is straight from the Politburo playbook. Or more accurately, Gosplan’s book.

To frame my discussion on supply side history of energy resources let’s go back to the 1980s, when the Soviet Union’s organization of Gosplan set the five-year plans. And let’s frame this discussion within the general economic difficulties the Soviet Union found itself in the 1980s. Energy investments were planned to increase 50% between 1981 and 1985. More broadly, this “implied that energy was to absorb fully two-thirds of all new Soviet investment during the coming five-year plan…. [With] the share of energy in the planned increment of industrial investment came to a whopping 85.6 percent.” This means, almost all of the money meant to build the Soviet economy was going towards energy projects. Much of this was down to the increasing costs of extraction and expanding the energy network from Siberia (Gustafeson 1989, 36). We can also insert gas pipelines to Eastern and Western Europe. In short, the energy sector was the primary recipient of financial resources for the Soviet Union. The sector held both domestic and foreign political-economic dimensions.

Just to bring us back to the era of Soviet energy policy and the Politburo

Wrapped in the Soviet energy strategy was rolling out nuclear reactors across the Eastern bloc. Hungary was a recipient of this push with the building of Paks in the 1970 and early 1980s. But Hungary pursued Paks only after it became clear that oil was going to be very expensive over the long term for producing electricity. Paks II represents the continued economic investment abroad for political-economic influence, and this supply side ideology.

There was a moment of rationality, by 1983, Gorbachev recognized the need to re-orientate, at a significant scale, capital onto energy conservation measures. Nonetheless, by 1985, global oil prices plummeted along with the dollars fall against other currencies. Oil profits were wiped out in the Soviet Union (Gustafeson 1989, 36, 46 -48).

It is important to pause here, I’m spending time on this, as it reflects our world today – in 2016, low oil prices and external conflicts (even down the the Syria/Afghanistan comparison).  The push for conservation was a watered down for the five-year plan starting in 1985, investment into energy supply would continue at a high pace – the money was needed, while energy conservation was given lip-service (Gustafeson 1989, 36, 46 -48).

An energy conservationist?

Russia is built on an export hand-to-mouth energy system. Political influence and immediate cash needs supersede long-term planning for efficiency and effectiveness of energy resources. Putin is lucky to find a friend like Hungary’s Orban who also understands the benefits of supply side energy for political and economic purposes. Cash generated from consumers helps to finance government expenses.

Hungary holds no ambition to reduce its raw energy needs. The solution of the Orban government since 2010 is to take money from foreign and domestic energy companies to reduce household’s energy bills by 25 percent. I’ve outlined how unsustainable this is before. The drop in oil and gas prices over the past few months, has seen households in Bulgaria pay less for their gas, but the same has not happened to Hungarian households. Essentially, either the financial losses in the system are being paid off, or the money goes into the ether.

Under the Orban government, over the long-term, Hungarian households are no better off than the foreign energy companies. The dramatic reduction in investments into the energy sector means fixing things as they break will cost more money. In addition, there is almost no money to invest into energy efficiency. If a large number of Hungarian households have trouble paying their energy bills – and this is the rational used for nationalization and reducing bills 25 percent – then they don’t have money to invest in energy efficiency which will reduce their bills more than 25 percent. Thus over the long term, Hungarian households will  pay more for an energy system with spot repairs and for leaky windows and walls.

Demonstrating the common perception in Hungary of corruption at the highest levels, the government is reallocating EU funds of HUF 309 billion meant for energy efficiency measures in 50,000 homes. The money will now be used only in public buildings. In my opinion this is an attempt to satisfy the EU’s energy efficiency directive. This stipulates that governments must renovate three percent of the buildings they own per year. Just like other large scale projects in Hungary (notably LED street lighting by Orban’s son-in-law), these government controlled projects are susceptible to corrupt tendering practices. Or in the eyes of the government, they can meet the EU energy efficiency directive while also channeling money to selected companies. They also do not need to finance this three percent goal from the state budget.

Just like the government of the Soviet Union, both Russia and Hungary place supply side energy economics ahead of demand side efficiency measures. Even if these measures cripple and stunt the economic growth of each country. Supply side measures are only short term building projects pumping out more and more natural and financial resources. Only the companies and individuals vested into building the infrastructure and selling energy resources make money. The financial resources of households are degraded over the long term because they must pay more for emergency repairs and inefficient homes.

Hungarian gas bills represent a simple wealth transfer to Gazprom and both the Russian and Hungarian governments: Twenty-percent of every gas bills goes to pay Hungarian VAT (this is higher than in 2008 – and even higher than Norway’s VAT), around 70% of householders bill payments go to the (mostly) Russian entities that sell the gas, including Gazprom Export. Thus, Hungarian households do a wealth transfer to Russia and to Hungarian government approved entities involved in the gas business. Only a small percentage of the bill actually covers the network costs – which the government waged the war against foreign utilities over. The increase in corruption in Hungary and the endemic corruption levels in Russia means Hungarian households are forced to pay for energy services that may also be involved in corruption. The costly expansion of Paks II, also fits into this narrative. If investments into energy efficiency (both electricity and gas) were carried out households could reduce this wealth transfer to Russia and the Hungarian government.

Source: European Commission, 'Energy prices and costs in Europe' 2014, https://ec.europa.eu/energy/en/publications/energy-prices-and-costs-europe
Source: European Commission, ‘Energy prices and costs in Europe’ 2014, https://ec.europa.eu/energy/en/publications/energy-prices-and-costs-europe

The original push for energy conservation by Gorbachev in the mid-1980’s was also a push for increase resources to benefit consumer goods and the lifestyles of Soviet citizens.  In the end, the financial resources went into expanding the energy sector to underpin an inefficient industrial sector. Immediate cash was the main concern. This is the same concern that underpins the operations of Hungary and Russia – thus they maintain a supply side energy system with high taxes. It would be useful if Putin and Orban spoke together about improving the lives of their citizens through energy efficiency efforts – and not expanding the profits of Gazprom and intermediaries involved in the gas business or large government projects meant expand energy production (Paks) or steering energy efficiency contracts to approved companies.  Hungarian household should not subsidize the supply side energy interests in Russia and Hungary. It would also help if Putin and Orban stopped acting like members of the Politburo in 1985.

Additional sources:

European Commission. “Energy Prices and Costs in Europe,” 2014. https://ec.europa.eu/energy/en/publications/energy-prices-and-costs-europe.
Gustafson, Thane. Crisis amid Plenty: The Politics of Soviet Energy under Brezhnev and Gorbachev. A Rand Corporation Research Study. Princeton, N.J: Princeton University Press, 1989.

Euro Energy Czar: Does West Europe finally get it?

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

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

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

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

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

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

 

 

Five Reasons why the War of Energy Technology is on

The war of energy independence is on! Like all wars there will be losers. And like some wars, we stumbled into this one. Through the narrowing of options, outdated partnerships and the emergence of new options, the global energy landscape is getting on a new footing. Bold statements can be used to describe any period in our recent energy history. But there are five reasons why the War of Energy Independence is on:

1: High oil price

High oil prices are driving diversification. The global economic decline and the link to oil is clear, policy makers must  now attempt a partial break between the oil based economy and economic growth. It would be great to pronounce this break as a clear strategy that governments are pursuing, but while the logic is there, the policies and actions are not. Greater oil dependency may also create war (Iraq et al.) and even now reducing oil usage creates a more effective US military.

2: Shale gas technology

As sexy as it is to cite shale gas as a game changer, there is no doubt it has altered the carbon landscape in the US. It is also the biggest indicator of the technological based war for energy independence. The dramatic impact it has made in the US and what the US economy can achieve through cheap gas, indicates the fossil fuel era is not over, but on a new course. It is also a clear export technology the US is pushing throughout the world. For us observers in the CEE region, the US government just a few years ago was absent. Starting in Hungary and spreading throughout the region, with the emergence of the shale gas potential, the US government and the oil majors are now more than happy to show up to energy conferences. The push for energy diversification for the CEE/SEE countries, away from Russia, is supported by the US government by using shale gas technology – not renewables. Overall, whether in the US or Europe gas from shale deposits can provide diversification and increase national energy security.

The war is on: Technology killing off big oil – but is it possible? Can a politician kill oil dependency?

3: Nuclear is out-ish

With the anniversary of Fukushima on us, the profound impact it has had on the nuclear industry in the Europe and America as a widely deployed technology means it is now a marginal technology. I am a supporter of nuclear power, but it remains hard to see how the third and fourth generation reactors, that are much safer, can be deployed to demonstrate its long-term viability. If we live in an age of competitive markets with short term investments dominating the energy landscape, then long term projects like nuclear (or Nabucco) will be the rare exception. For these to go ahead, other factors like energy security (or corrupt business practices) will have to overcome the current financial and even technical realities of alternatives that are now present. Thus, in one sense this war based on a technological race may have its first victim.

4: Renewable Energy – it is here and now

The wide deployment of renewable energy and the demonstrated success of it means it is here and now. Technological success is not a question – it is just a question of whether governments will enable it to succeed – and at what level. As Germany is demonstrating you can have a future without nuclear and with large, large scales of clean energy technologies.

5: Energy Efficiency– well, is it here?

The big acknowledgment that energy efficiency plays in an essential role in a low carbon economy is as persuasive as clean air is good for us. But what is being done? The dispersed action that must occur means creating effective energy efficiency schemes are not as easy as building a centralized generation plant. It take local and national action to make it happen, along with creative financing. The pay-offs are huge and can make a significant difference in ‘winning’ the War of Energy Independence. But the wide spread deployment of energy efficiency measures remains a battle that still must be fought.

Technological race

The war is spreading beyond Washington and Brussels. In Bulgaria there is now the Movement for Energy Independence (DEN) that seeks to create an energy strategy built on technologies and resources not dependent on Russia – including re-evaluating and using shale fracturing technologies. This movement on the European periphery is indicative of the merging of three issues: 1) energy security, and a push for reducing reliance on Russian energy dependence (gas, oil and nuclear), 2) the viability of renewable energy technologies, and 3) the broader issue of climate change. The necessity of having a carbon based economy is no longer there. Proven technologies can now be utilized that are distributed, or the resources are delivered from multiple sources, located nationally or regionally.  Gas, can now come from shale deposits, LNG or by pipeline from non-Russian sources. Oil’s high price creates an inducement to move away from it, while energy efficiency can reduce demand for all energy inputs. Who wins the war of independence will play out in the corridors of power – politicians now hold the key to decide which technologies will be favored.

War of Energy Technology - starts now

 

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.

Second Wave FDI Strategy in Energy hits SCEE

The energy and consumer resources of the SCEE region are now in play for global players. Traditionally dominated by European utilities which pushed into the region when countries began to privatize their electricity and gas distribution companies, the likes of E.ON, RWE, EDF etc… now a second wave of investment may be occurring.  It may be too soon to be calling it a full wave, but there is no doubt that constrained home markets and past expansion plans by a range of energy companies have hit a wall with the global economic meltdown resulting in new strategies being deployed.

Just as the first wave of privatizations altered the energy landscape in the SEE and CEE regions, the second wave represents strategic actions that will cement companies into the region for decades. First let’s run through the slew of stories that serve as the foundation of this proposed second wave, it looks like a grab from Cold War foes.

Today there is the setting up of the joint venture between Gazprom and the Hungarian Development Bank (MFB) called ‘éli Áramlat Magyarország’. It is the company that is meant to operate the South Stream Pipeline through Hungary.  However a decision will be made in 2011.  Although you would think that MOL would actually be involved in operating a pipeline through Hungary, it is already committed to South Stream.

The Russians are still in the headlines in the noisy affair in Croatia of whether they are or are not interested in taking over INA. They continue to deny it, and MOL continues to come under political pressure for ‘corruption’ allegations over how MOL gained control of the company from the Croatian state. Nonetheless, less file this under ‘interested FDI’. As it could be seen with the previous story that if South Stream doesn’t pass through Hungary then it would pass through Croatia, thus having to deal with the technical competence of INA-MOL. Either way, MOL and Hungary stay in the South Stream story – thus the current sour grapes between MOL and Russian Surgutneftegas may go by the wayside before 2011, when actual construction decisions on South Stream (and Nabucco – with US support) are made.

But waiting to put both these pipe dream pipeline plans into disarray is Exxon Mobil, with the aid of MOL, which continue to explore the Mako gas field in Hungary. With Mako possibly holding huge potential reserves – if it can be extracted. Two earlier tests wells have failed which may have helped to prompt Exxon Mobil to buy Texas-based XTO which has expertise in shale and tight-sands deposits.  Very useful expertise for the Hungarian tight-sands, and other countries’ deposits in the CEE region. This should mean if  gas is extractable, XTO will be able to bring the technical expertise to make it happen.

Lest we forget that we are at the beginning of a green revolution, US based Fagen Inc will be setting up a bioethanol plant in Hungary. With Hungary a top 10 global exporter of corn and wheat. Hungary may be well positioned to use its natural resources to its advantage. And this is the true story of the second wave of foreign investment into the region.

This partial list of FDI, coming out within the same week, does indicate change in how foreign companies are participating in the local energy markets.  There is much more activity on the production and resource provision side then on the consumer-services side of the business chain. This represents a maturing of the business market in the region. The privatization of distribution companies was ripe for the injection of private capital which governments lacked at the time and for managerial expertise. The newest round is focused more on investments of energy resources that feed into the consumer side of the business. The result will be a new supply sources that will compliment existing sources. From a security of supply view, diversification of sources is a good thing. But part of any evaluation of security of supply are political and geopolitical elements.

The competing/complimantary projects  (depending who you talk to) of Nabucco and South Stream no doubt must be assessed from a geopolitical point of view. But I think that is for another posting. What is important is that the investments by these companies represent a long-term regional investment. The necessary skill sets will be fostered with local talent and infrastructure improved. This is a good start to what will become a larger wave of investments set to transform the infrastructure for energy production to low and zero carbon energy sources. Gas and ethanol are key in the near and mid-term transition process. Expertise and the development of infrastructure in these businesses will lead the transformation necessary to reduce the regional carbon footprint.

Update: to underscore this second wave of investments, and into renewables there is now this story:

The European Bank for Reconstruction and Development (EBRD) has decided to invest up to EUR 125 million to take a 25% stake in the Hungarian and Polish subsidiaries of Iberdrola Renovables. link

Absorbing the cold and not EU money

“Designing a policy without ensuring the necessary finances for its implementation, however, is akin to setting out naked for a polar expedition.”

Ready for Global Warming

Just picture that. You got your sled, you got your chocolate you even have your fury boot and mittens on. But you got no hat, no coat and no pants. This is the picture that CEE Bankwatch Network and Friends of the Earth Europe provide us with their study on the failure of New Member States to absorb funding for renewable energy and energy efficiency. You may have some comforts, but you are going to get cold. The graph below describes the significant deficient in absorption.

I recently interviewed some people concerning energy efficiency for a project that I’m working on. The ability to effectively finance energy efficiency projects was a top concern of theirs. This included coming up with schemes for banks to increase their lending and for governments to institute effective policies.

The results of this study indicate the severity of the problem to effectively find ways to manage already existing, or matching, money for projects. It doesn’t appear to be just finding the funding sources, according to this study, the funding is there. In order for these programs to be effective the institutional capacity must be there.

Graph from Bankwatch and Friends of the Earth
Souce: CEE Bankwatch Network and Friends of the Earth

Overall, the study provides a nice assessment of the barriers existing in each country. And according to them, when you get down to the reasons, climate mitigation projects are not seen as a priority.

I think this explanation is too broad to be accurate. Maybe a better core reason, or explanation, is that energy efficiency isn’t as appealing as other projects, or energy subsidies that can be handed out. The concentration by policy makers has been on supply side ‘greening’ while little has been done for demand side ‘greening’. For anyone looking at the numbers and the payback of energy efficient technologies it is profitable. Therefore simple economics are not the reason for the failure to institute widespread programs. We can only hope the politicians and heads of institutions don’t wait too long before bringing us the clothes so we don’t have to stand around naked.