Tag Archives: institutions

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.

EU Needs to Protect Founding Principles: Threats from Russia & Hungary

The time has come for the European Union to morph into a strong international force representing democratic rights and international stability.  Acting softly does not work. The confluence of aggressive Russian tactics to take more territory from Ukraine and Hungary’s rose-tinted glasses on the authoritarian political-economic model of Russia and China – and rejection of EU liberal values, threatens Europe’s founding principles and its territorial integrity.

Peace is threatened on Europe’s edges. It’s time to reach back to the values and wisdom for the founding of the European Union, when it was the joining of the European coal and steel industries, with Germany and France uniting for lasting peace in 1951. Economic dependence would unify the continent and prevent war.

The annexation of Crimea by Russia is now an accepted territorial change.  Russia got it for free because the international community didn’t stand up for Ukraine. Now Russia is expropriating more territory to serve Russian President Putin’s political and nationalistic ambitions. Continual instability on Russia’s fringes can help keep not just his popularity up, but keep Russians together rallying for another war. At this point a victory is necessary for Putin. If annexation of eastern Ukraine is not the ultimate end, then instability and projection of an independent Russian enclave inside Russia will do. Control of Russia’s political system, state apparatus, the media, and clamp down on NGO’s all serve to ensure Putin’s power remains unchallenged, ultimately serving his aggressive foreign and military policy. Manufactured crisis ensures domestic support and keeps institutions and the populace toeing Putin’s line.

Hungary's political-economic model, as perceived by a street artist.
Hungary’s political-economic model, as perceived by a street artist.

In Hungary, the parallels are apparent. Orban has waged his own one-sided war against the EU, IMF, US, NGOs and almost every foreign government. The Orban government is actively inciting irredentism  in Romania.  Instability, created by Hungary, provides the government a platform to ‘represent’ Hungarian interests internationally. The ‘rational’ goes, sins between 1989 and 2010 of liberal economics and communist political maneuvering must be wiped out. However, for most people, this was the democratic period that Hungary had. Nonetheless, democracy, as stated by Orban, doesn’t really work well; now we can watch as Orban consolidates his personal power further by rejigging the whole state institutional structure, and improving upon his (essentially) unlimited authority. In two to three years time we will soon have President Orban to call the leader of the country. Echoing Putin’s back-and-forth between prime minister and president.

Fidesz and Orban have a false mandate. No government can be claimed legitimate when election rules are changed and when the OECD finds the elections unfair. The current two-thirds control in Parliament would not have happened if the elections were fair. Currently, the current local elections are under way, Fidesz wasn’t going to win (or by much), so the rules were changed at the last minute. In a few weeks, they can claim a ‘democratic’ mandate to continue their illiberal and illogical policies of modeling Russia, China and India – and not European countries.

Autocratic leaders are challenging the values and the founding principles for the European Union. For these autocratic leaders nationalism can replace economic growth along with illogical economic and foreign policies. The ‘nation’ also also replaces liberal democratic institutions and individual rights.

The 2008 economic crisis resulted in a delayed and inept EU handling by failing to foster economic cooperation between members states. The current democracy and territorial crisis caused by Putin and Orban, pose a deeper threat to the stability of the EU. Orban and Putin both disparage and dishonor the democratic principles and right for economic freedom: they both reject international stability done through common economic and political values. The expression of the nation is more important than economic growth or individual rights. Instability and security concerns are necessary to project an ‘us’ or ‘other’ mindset. Components needed to maintain unlimited power.

It is now time for the EU to solidify and project its unified strength against aggressive rulers with territorial ambitions and authoritarian power. Not standing up for the founding principles of the EU threatens unleashing the same violent forces the charter was established to contain. The EU must now escalate the cost for Russia to maintain its outpost on Ukrainian territory. Through both economic means, and in human life, through increased military aid to Ukraine to maintain eastern Ukraine. Russia won’t know the EU is serious about territorial integrity until it actively works to keep it. In addition, Hungary may be Russia’s outpost in the EU, but that does not mean the EU must accept or maintain the outpost. Appeasement for authoritarian leaders threatens the political, social and economic founding principles of the EU, and its territorial integrity. The EU needs to act.

 

Cut Orban off at the Soup Kitchen: Suspend EU Funds

The suspension of EU structural funds to Hungary should happen on Monday, March 11, 2013. This is if the Hungarian Parliament approves the fourth round of revisions to the Hungarian Constitution. Actually, it should happen anyway, as there is no real difference in the state of affairs today and what it will be Monday. But deadlines are useful and it seems that Brussels and the rest of the world woke up again to what is happening in Hungary. My argument for suspension of funds is focused on the role of state institutions. High quality and non-politicized state institutions must ensure the transparent spending of EU money. If these do not exist, the state is open to corruption.

I wrote before about Prime Minister Viktor Orban’s distaste of state institutions that are professional and align with common EU norms. With the placement of former Economics Minister Matolcsy to head the Central Bank and the demotion of two deputy governors, and the expected gutting of staff from the Bank, along with the finalization of the stacking of the Constitutional Court and planned retirement of the remaining hold-outs of non-regime judges, the institutionalization of regime supporters is almost complete. My call for suspension of EU funds rests on the need to remove the financial support of the consolidated Hungarian state under the Orban regime. If Orban’s and Matolcsy’s economic policies are such a success then they should stand on their own two feet. The longer the game of calling Hungary a democracy only perpetuates the regime resulting in the long term decline of the country’s professionally organized institutions and the rule of law. The door of the country is now open to ingraining corruption even deeper and allowing special groups to control whole sectors of the economy – including energy.

The Bulgarization of Hungary

The best example to give is a meeting I attended about six years ago in Athens with South East European countries. It was a technical working committee and most of those in attendance had the authority to agree to changes in how their electricity systems were operated. The only one that couldn’t do anything was the high ranking delegation from Bulgaria. They either sat there and opposed everything or said they didn’t have the authority. The problems with Bulgaria’s energy system are showing themselves from frequent black-outs due to lack of investment to protests erupting over the electricity bills. Snap elections are now underway. Representative of the problems in Bulgaria was the selling of cheap electricity abroad while Bulgarians were forced to buy expensive generation. The long fight between Brussels and Sophia over organized crime in the country – and the failure of Bulgaria to tackle it, demonstrates what can happen when  gutted and powerless state institutions exists and crime/special interests control the state.

I was a co-author of a study in 2009 on the privatization of the state owned electricity distribution companies in Bulgaria. It turns out that the privatization process or the new private owners were not the source of the problem. Rather the shifting politicized regulatory environment and the actions, or rather in-actions, by state owned energy companies is the source of much of the problems. Thus the fault lies with the state – demonstrating the importance of effective state institutions, with a professional work force to oversee the energy system.

Hungary's future 'regional' cash cow - maybe a little too fat to make it out of the country
Hungary’s all purpose state vehicle. From pipelines to mobile phone operators. The cow should be the symbol of the Orban regime. From milking private companies to producing milk for the Hungarian nation.

Economic Corruption 

One of the biggest complaints since the fall of the Communist regimes was how leaders of state owned companies financially benefited from the privatization of their units. The Hungarian economy is becoming more state owned, centralized and controlled by political connections by the day. Certain companies are ‘lucky’ enough to continually win government tenders while tenders that should be public are placed behind the curtain of state security (like a swimming pool or a parking garage) thus allowing certain firms connected to the government to be selected. At the same time, the Hungarian economy falters due to the lack of investment by established international firms. The cracks in Hungary are now appearing for organized crime and ‘opportunistic’ individuals to begin their investment cycle in Hungary.

The great thing about living in a failing state is I can watch it unfold and talk to people that are adjusting real-time to the economic and social changes. A few months ago I was in the gym and a business executive told me now was the time to begin investments in the country because when the regime falls then it will pay to be in the right position to pick up the pieces. His business, from what I know of it, is fairly legitimate. However, (representative of my movement between locker rooms and conference rooms) I recently met someone and his comments and interests in Hungary put me on guard. His business could be questioned as legitimate or not. Hungary for him was viewed as a great opportunity. He has money and wants to invest in Hungarian projects where most established players are pulling out and where any investment outcome is questionable or offers returns only in the far distant future. I question his motives for investing in Hungary and I view it as representative of broader interests in the country by ‘non-transparent’ businesses.

Once the dots are connected, a failing state, teetering on economic collapse, controlling special interests, Putinized democratic elections and state institutions that are under the direct control of politicians where professional decision making is given over to political and personal interests, then the recipe is set for Hungary to become a country ripe for economic corruption and pillage. Long term investments by established and stable national and international companies are replaced by white elephant investments given to government selected firms. EU subsidies are directed to political and economic allies (such as the recent agricultural land give away to connected individuals over local farmers). Hungarian nationalism is used as an excuse to ensure selected firms and individuals profit for their loyalty to the government. In this environment it won’t matter the character references of individuals or companies – if they support the regime then they are friends of the regime.

EU scapegoats – or Orban at the soup kitchen

The decision for the EU is simple. Does the European Parliament and the European Commission want to support the long term gutting of state institutions in Hungary? Certainly democracy and the right to vote is important, but the Orban regime can play soft with what democracy is in Hungary – values can be debated. Professional and institutional competence are inherent to the EU structure. Orban and everyone else may hate the bureaucrats in Brussels, but it is these bureaucrats in both Brussels and Budapest that disburse the funds and underline the democratic order. If funds could be suspended for Bulgaria and Romania over this point then they should be suspended for Hungary.

The suspension of funds for Hungary would drive the country into a greater recession, Orban will lash out at Brussels and blame the collapse of the Hungarian economy on the EU. But why should the EU fund a regime that doesn’t believe in democratic principles and effective, independent state institutions. These are the pillars of the EU. In a country where the rule of law is politicized businesses and EU funds cannot be spent effectively. Control over the Central Bank is only the most recent case of politicization. The longer the Orban regime stays, the less professional and more corrupt state organs become.(The greater the juiciest pieces will be picked over at the time of collapse). As economic decline takes hold (as it already is) the more desperate people will become to stay in their jobs and accept corrupt practices. Passivity and acceptance allows the erosion of democracy. It appears now, only the EU has the power to say no to Orban. And they should say no to his outstretched hand. If begging and homelessness is now illegal – according to Monday’s  constitutional revisions, Orban should be turned away from the soup kitchen.

Making institutions that serve our children

The matter that institutions are made of is routines, rules and structure. This can both prompt and inhibit innovation. New institutions are conceived in a time and place to meet pressing needs. Overtime, the rules and structures that were put in place age, however as both external and internal factors change (i.e. personnel, technologies and political-social circumstances) institutions can become restrictive unable to meet new demands and address opportunities.

Institutions are essential for change, but they can hold back ideas and technologies, leading to institutional and technological lock-in..

 

The examination I have done on the topic of risk governance applies to broad based institutions. My recent keynote speech at the EU-US Summit on Science, Technology and Sustainable Economic Growth, addressed the need to “break rulez” to prompt a more rapid uptake in new low/zero carbon technologies.  The presentation was a challenge for me, because I had both the opportunity to show my well constructed research to a wide audience but I also wanted to convey a sense of urgency – radical urgency. And convey it with emphasis that stays within an academic discourse (thus keeping people just on the edge of falling asleep).

The reason for my emphasis on ‘urgency,’ or ‘the pace of change’ as I framed it, is essential if we are to achieve an almost zero carbon energy system by 2050. Therefore it becomes almost impossible to speak of reaching these goals without discussing how to revitalize, restructure and revamp institutional processes in an urgent manner. Rulez need to be broken.

During the day long program, the urgency of the need to develop and deploy zero carbon processes and technologies was stated well by Nick Gotts, of the James Hutton Institute, when he rebuked another speaker that said we need to gradually roll out  new technology. Nick said we can’t wait another generation or two to begin rolling out new technologies, the significant consequences of failing to act now, will only be felt after 2050. Patrick Criqui, director at the Centre National de la Recherche Scientifique (CNRS), later finished this thought by stating that we are working for the babies of today. And he is absolutely right.

My two year-old son was sick last weekend and had a high fever.  Whenever there is a fever in the house, my wife and I go through the same discussion. She takes the temperature, looks at the thermometer and then says, “Oh – its 39 degrees.”  And then I ask “what’s that in Fahrenheit? Is it high?” –  I only know what ‘normal’ and ‘high’ are in Fahrenheit. So I feel the child’s forehead. Then I know how hot the fever is. But really, at the end of the day, does it matter if the fever is 38 or 40? You have to take action to reduce the fever. Even with his high fever, my son kept telling me, “let’s go dad, let’s go outside.” He’s picked up my restlessness.

Inaction only perpetuates the current condition. My effort to break institutional lock-in and ensure the wide deployment of new technologies is based on this restlessness. At least, when my son is older, he can understand why I was always pushing for all of us to get going. It doesn’t matter what the temperature will be in 2050. It will be hot, and the environment and us will suffer, thus action must be taken now. The current pace of change is not enough to stop the fever. The rulez institutions hold onto, like mementos from their own childhoods, need to be broken. It is the children of today that the institutions need to serve.

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The question becomes can you carry the inspiration for fighting institutions from your youth to middle age and beyond? Can the energy of the mosh pits of the 1990’s be transformed to fight climate change? Do we become lazy and content like the baby boomers and fail to make change like they said they would in the 1960’s and 1970’s. Can we afford to fail the next generation?