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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.

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.

The Russian Rock: Re-landscaping CEE energy (in)Dependence

The recent ‘war of independence’ against Western European owned utilities in Central Eastern Europe (CEE) and South East Europe (SEE) sets the stage for re-integration into Russia’s energy sphere – and dependence. A war against electricity, gas and water prices has been raging in Hungary since 2012 while SEE countries have a longer history. The firm rejection throughout the region of privately owned utilities managed by independent regulatory institutions limits capital inflow to upgrade and diversify the region’s energy infrastructure.

Omul de tinichea transfagarashan

Benefiting from the ‘war’ against Western capital is Russia. State owned Gazprom remains the dominant and stable supplier of gas to the region’s state owned firms and centralized energy systems. The CEE (including Poland) and SEE regions reject complex market structures with competition and diversified generation technologies pushed by the EU. Full independence from Russia is no longer sought, rather a ‘safety’ margin to weather a Russian gas storm provides a low cost diversification option. Three historical periods are discussed, with the third marking the re-integration into the Russian fold.

  • Stage one, fully dependent on Russian resources and technology;
  • Stage two, building an energy system semi-independent of Russia;
  • Stage three, ‘(in)Dependence’ on Russia’s energy wealth, the recognition of benefits gained from dependence coinciding with diversification of energy sources.

The CEE and the SEE regions see energy dependence as strategic while allowing for new infrastructure, such as gas interconnectors, shale gas and LNG terminals to rebalance the energy landscape and provide space for energy independence, rebalancing the historical Russian dependence. The term, ‘(in)Dependence’ provides a encapsulating expression of how Russia remains firmly positioned in the CEE/SEE regions’ energy landscape. It is the rock in the region that despite the best efforts of multiple countries, governments and international organizations, Russia remains firmly positioned in the CEE/SEE energy landscape.

Dependence

The Central Eastern European Region, including the Southeast of Europe, is heavily dependent on Russia’s energy resources. This includes gas, oil and nuclear technology. The ability to cement through physical infrastructure and human capital during Communist period established a robust connected system of resources and expertise between the region’s countries and Russia. The headlines hold that gas security is the most contentious issue. But finding a solution to this dependency requires a complex and stable energy investment climate. Since the fall of the Berlin Wall and 2004 and 2007 eastward expansion of the EU, diversification away from Russia for CEE countries was the overall most important headline issue. Despite concerted efforts the region has failed to find alternative sources for Russian gas and remained wedded to Russia. The era of Russian energy dependence can be seen to have evolved over decades under the technical capabilities of the Soviet Union.

We see the impact that this uncoordinated, but regional consistent energy strategy has on the CEE region: Complete reliance on Russian gas and oil imports. After the political winds shifted in 1998 and the region shifted towards Western Europe for political and economic integration these energy links were viewed as high risk entrapping the region into an almost single sided relationship where the terms are dictated from Moscow. The region may have gotten democracy and removed overt economic and political control but the energy infrastructure is a strong reminder that continues the previous political-economic relationship.

Independence

The launching of the energy independence period, away from Russia, began in the mid-1990s.  Privatization of energy assets and the establishment of energy regulators brought private capital into the energy system, transforming the role of the state. Market considerations would help guide and fund development of the national energy system. Technocratic independent regulatory institutions would oversee the region’s energy system.

Privatizations of energy companies, mainly electricity and distributions companies were never very popular, but the politicians making these decisions were aware the state was incapable of funding a renewed energy system able to operate efficiently. Bloated inefficient companies, were typical and unable – or unwilling due to political pressure, to collect from large and small consumers. In Macedonia at the time of privatization there were 500,000 individual court cases filed over fee collection. Large state owned factories paid little or nothing. Other countries mirrored this systemic inefficiency resulting in underfunded and crumbling energy systems. The entire CEE and SEE region made the hard decision to bring in mainly Western European energy companies to fund the renewal of power generation and electricity and gas distribution systems. These important energy assets were privatized, in some countries more than others, but each country, usually with strong encouragement from international organizations, did privatize. Enough to place the energy sector on a market footing.

By the mid-2000s sufficiently robust national and regional markets in electricity and gas were well under development in the CEE and SEE region. Strong market and regulatory elements were integrated into the system. Authority of the energy system typically, on a technical level, transferred from an energy minister to an ‘independent’ energy regulator, who set prices and technical standards. This technocratic system was established to ensure the long-term commitment and investments by private energy companies were secured and the system as a whole was managed to ensure its continual long-term development.

Since the onset of the 2008 financial crisis already strained relations between private energy companies and governments escalated. The underlining truth to the ‘Utility Rebellion’ of the CEE and SEE region is politicians had a hard time letting go.  From price setting, control or influence over cross-border electricity and gas interconnectors politicians have a hard time coming to terms with allowing the energy sector to operate like an open, but regulated, market. Repeated attempts to establish a transparent and unified electricity system in the Southeast of Europe has failed, despite consistent support (and pressure) from international organizations and institutions. In 2013, the tension has spilled over into outright social and political rebellion against private owners. This includes (but not limited to) some headline cases:

  • Albania: In January 2013 the energy regulator took away the license of Czech power company preventing it from operating in the country.
  • Macedonia: Disputes between Austria’s EVN and the Macedonia government over debts and investments are on-going since privatization in 2006.
  • Bulgaria: After years of building tensions, including court cases, between private investors (CEZ, EON, EVN), the spring of 2013 saw public street protests erupt over electricity and gas prices resulting in new elections, along with investigations and regulatory changes in Bulgaria’s energy sector. Although the fury is equally directed at state owned companies as well as privately owned ones.
  • Hungary: What was once a success story of privatization and equal risk levels to Western Europe, changed after the 2010 elections with the new Fidesz government.  Extra taxes on energy companies were introduced after which the energy regulator was sidelined and forced legislated price cuts above 20% in 2013, compounded by a proposed law to be passed before the 2014 elections of utilities becoming non-profit entities. Many privately owned utilities are making losses since 2011 and have slashed investments.

 

Markets and independence

The focus on market transformation contributed to two false assumptions: First, from a Western European perspective, overall EU gas supplies were not significantly exposed to Russian gas interruptions – if they were to occur at all. Russia was a stable supplier not willing to use gas as a political weapon and the governments of the CEE and SEE regions could diversify themselves; second, over time alternative sources could be secured from Europe’s ‘near abroad’. During this age of attempted energy independence, the pro-market perspective and activity created an assumption that the market would induce greater supply security, investments by Western European firms would contribute to greater energy security. However, these assumptions came to a head at the start of 2009.

Supply disruptions, between Russia and the Ukraine, were already regular seasonal events, but in 2009 the crisis cascaded into disruption to EU Member States. This disruption showed, what was already known in the region, diversification away from Russia was important for the energy security and security of supply for the region. It was not the overall EU level of dependence that matter, but the regional dependence. EU institutions woke up, but not until after they coordinated a technical response of sending gas to dried up systems in Bulgaria, Hungary and Serbia. Afterwards, the EU threw greater effort and coordination into helping the region diversify and open up alternative routes of supply for the region. These include interconnectors, expanding gas storage, ensuring reverse flow in pipelines and instituting new procedures and guidelines to ensure a timely coordinated action in case of emergencies. However, much of this diversification is funded by national governments. Key diversification projects include:

  • Polish LNG
  • Poland’s push into shale gas
  • Hungary’s oil and gas group MOL upgraded an oil pipeline to the Adriatic, tying the region into global oil supplies.
  • Bulgaria signed an agreement to import gas from Azerbaijan starting in 2019, completely avoiding Russia by transporting the gas through Turkey and Greece.
  • Bulgaria will build interconnectors with Turkey and Greece.
  • Upgrading gas interconnectors between Hungary and neighboring countries, particularly a new Hungary-Slovak interconnector that begins to establish a north-south gas corridor to Poland.
  • Gas storage investments in Hungary and Austria
  • Western interconnectors to Austria and Germany with reverse flow capability are being built or upgraded.

Missing from these ongoing or completed projects, is the most symbolic project of all, Nabucco. The failed bid to transport Azeri gas to the SEE and CEE regions may turn out to be more politically significant than functionally significant. Existing Soviet era transport pipelines to Russia remain the only large supply route of gas into the region. Regardless of boosted interconnectors, regional LNG access or gas storage, Russia will remain the dominate gas supplier to the entire region, all the additional projects provide a boosted level of energy security and improve security of supply in times of emergency. Nonetheless, if the goal is to ensure operations through a cold winter when the gas is cut off from Russia then the region can weather a Russian storm.

The failure of Nabucco to launch prevents the region from adding the significant alternative capacity, which combined with on-going diversification projects, could reduce further Russian reliance. Nabucco, backed by a consortium of CEE, SEE and Western European companies represented the most symbolic effort for energy independence. It was the battle between competing gas pipelines through Europe’s southern gas corridor: Russia supported South Stream vs. Nabucco. The EU backed Nabucco, had the political-economic edge to deliver more gas while increasing energy security. In the end, the pure commercial decision was taken by the upstream consortium to deliver gas into the Italian market through a competitor private pipeline to Nabucco. The downstream activities in the CEE and SEE region prove themselves just as important as the upstream transit routing decisions, which together influence large scale investments into the region.

Building the Nabucco pipeline through the CEE/SEE region would require decades of commitments from all upstream extraction parties tying them into downstream distribution partners. As outlined above, past relations between the region’s governments and foreign energy investors is turbulent. If Nabucco went ahead the upstream suppliers, extracting in Azerbaijan, would be tied to the political whims in the CEE and SEE region. If the original point is to play Nabucco against the Russians, then the tables could be turned to threaten the extra capacity from the older Russian pipelines to drive prices lower once Nabucco pipes are in the ground. Fixed assets and fixed prices are only as fixed as the political winds.

Current actions of governments throughout the CEE and SEE region demonstrate independent energy regulators are used for window dressing to meet EU requirements. Energy regulators were meant to ensure the long-term investments by energy companies were protected. This has turned out to be false. Under current conditions, the forced price reductions, revoking – or the threat of revoking – licenses and continued disputes over the prices of electricity and gas creates a significant challenge to maintain necessary investment levels, upgrade or prevent a company from financial losses. It is hard to imagine the political rhetoric and actions stopping for upstream suppliers physically locked into the region and with alternative sources of gas for governments to buy.

The original energy newcomers to the region, described above, are now withdrawing – or literally being squeezed out, like in Hungary. In short, the energy investment environment has turned negative, price pressures dominate, and political along with social demands result in an unpredictable market. Despite gas being a global commodity, politically mandated cuts in electricity and gas prices force losses onto distribution companies. Building a multi-billion Euro pipeline through the region begins to weaken under the current domestic and regional conditions energy providers are met with.

The loss of Nabucco should send a clear message, and the politicians of the CEE/SEE should hear it: Market fundamentals, are the basis for investments, not political considerations. Politicians can fight downstream electricity and gas companies for lower prices, argue with Russia over contracted prices, but unless governments are prepared to pay a market price for commodities – thus subsidizing their consumers, energy companies will go elsewhere. Private capital doesn’t finance displays of populism and energy independence that in the long-term undermine both security of supply and energy security.

 (in)Dependence

Today, 2013, we have a new era, of energy (in)Dependence. It represents the limits of infrastructure development, alternative import routes and politically induced market risks. Constant political warfare with private energy companies, in most of the CEE and SEE countries, has resulted in depressed incentives for infrastructure upgrades and price instability. Building a non-Russian transit pipeline into a region of significant market instability requires incentives outweighing these negatives. Each country in the region is proclaiming energy independence, which then (laughably) increases their reliance on Russian gas and increases security of supply risks. Resiliency within national systems is less than in regionally integrated systems. Faltering now on regional integration or preventing foreign capital from entering only underfunds alternative energy solutions which displace Russian gas.

The region’s largest gas projects moving ahead mainly rely on government efforts and financing. Gas storage in Hungary, network interconnectors, Polish LNG terminal and shale gas. While these efforts are able to move the ball down the court towards greater energy security, they do not provide substantial regional upstream diversification. The original intent of privatization of energy companies was to infuse capital into the regions’ energy systems to modernize the infrastructure, governments lacked the money to redevelop the basis of their economies. The question must be asked, does this trend continue, or has energy capital taken flight?

CEE and SEE governments cannot finance a new energy system that excludes market based elements and players. EU institutions are pushing for great market transparency, elimination of state aid, stronger energy regulators, stability in prices for private energy investors, and the interlinking of national and regional markets, thus reducing the room for political interference in energy markets.

There are now a number of attraction for CEE/SEE governments to deal with Russia and maintain its dominate position in the region, and in fact, moving away from Russia now appears more dangerous as the original – and justifiable reasons for energy independence fade. Russia remains a single supplier who is ‘simple’ to deal with. The terms of gas supply are clear, ‘You buy it we deliver it.’ Not the Brussels motto of, ‘If you buy it then here are the competitive conditions that have to be fulfilled, here is the transparency that is expected, and we expect the energy regulator to make well-reasoned opinions based on professional decision making process.’ Politically, that EU garbage only works in Western Europe.

Politically for CEE countries, Moscow can now act as a counterweight against Brussels. Whether this is just symbolic or not, the political elite in the CEE region is learning to balance energy relations between the old foe and the new foe. Finding a common cooperative topic with Russia is also beneficial for on-going relations, if not energy than what? Agriculture or software? There’s nothing that says a serious relationship than building long-term energy ties with Russia. Satisfying the strong neighbor, financially and commercially on energy issues distracts them from other issues.

A cooperative relation also demonstrates that CEE countries can stand by themselves with Russia. The rules of the energy sector may be dominated by Brussels and Western European companies, but the national governments of the CEE region still have an important role to play in their national gas markets and pricing. Bilateral relations are fostered and maintained with energy. While Russian gas, in the age of independence, was viewed as a necessity, in the age of (in)dependence, negotiations demonstrate politicians are in control of their country’s energy assets and a solid relationship exists between old foes/friends. This is contrasted against the assumed friendly relations with Brussels and the EU’s demands for an independent and transparent energy sector with complex rules and limited room for political grandstanding and influence. Russia and Gazprom are more than happy to lend to the showmanship, with the price of gas possibly linked to the temperature of relations between countries. Energy (in)Dependence provides security, simplicity, political capital and limits the need for a more complex energy market to replace Russian sourced gas.

The intertwined concepts of finance and market complexity, for alternatives to Russian gas, provide another reason for energy dependence on Russia. Despite alternative gas supplies, like LNG and shale gas, becoming more available, they will only make a small dent into the domestic or regional gas market. Any alternative to Russian gas requires considerable investments into developing a functioning gas market, including a nationwide network with gas power plants. Failure to incentivize private companies to invest in alternatives to Russian sourced gas (such as shale gas) ensures continued Russian dominance, for example in Poland’s gas market. Poland values energy independence, but not even concerted investments into LNG, shale gas and interconnectors can reduce its heavy reliance on Gazprom. The same applies to all the other countries in the CEE and SEE regions.

Conclusion

The political and economic hurdles for energy independence are too high for the CEE and SEE regions: Building a new energy system, funded by private capital, requires competition and complex market structures with limited political involvement.  Extending dependence on Russia energy resources provides the opportunity to maintain centralized energy systems and using Russia as a counter weight to Brussels non-political energy market schemes.

The collapse of Nabucco represented the failure of an energy independence strategy. A high priced, visionary project that was politically supported but without the political or economic stability required for its long term success. The debate over Nabucco overshadowed the on-the-ground work of building and expanding interconnector capacities, LNG terminals, domestic gas deposits and an overall beefing up of security of supply components. Enough so that supply disruptions, from Russia or transit countries, would have a limited impact. Energy independence can be gained by small hedges against Russian agitation and action. Therefore, (in)Dependence provides a lower cost, economically and politically hedged energy strategy that balances the local politics of the CEE/SEE region and the competing demands of Brussels and Moscow. A classic Central European strategy.

 

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.

Nabucco, and the distant love of Europe

Nine lives or no lives? That is the prospect for Nabucco.

Noise or game changing events: another round of alternative pipeline plans, the re-positioning of political actors, makes another act in the Nabucco opera either more intriguing or increases the restlessness of the audience.

Separate actions inflict little wounds on Nabucco but collective cuts may be eroding the ground underneath. Does the U.S. still fully support Nabucco? What’s the purpose and/or reality of  the new South East Europe Pipeline project?

Will there be any life for Nabucco?

All these questions lead to separate and diverse perspectives of what the future may hold for Nabucco. The doubts begin to settle in as the relationship between EU backers and the governments in the two distant regions move beyond the courting phase of their relationship and seek to build a solid gas link.

Reassessment of relations

There comes points in a long-term relationship where an assessment of what each partner wants…. is it true love, infatuation or is there a true coupling where each partner brings important elements to the relationship? Europe must decide whether it wants to develop the relationship further with the countries of the Caucases and Central Asia. The recent – warning shot – provided by the U.S. State Department Special Envoy for Eurasian Energy, Richard Morningstar should begin to focus attention in Brussels. The ‘misinterpreted’ comments that smaller pipeline projects that are more commercially viable may be better.  While the U.S. embassy rushed out a ‘clarification’ it still states that the sooner a commercially viable pipeline is built the better.

Reality or love

There are always reasons why a relationship will fail over the long term. Particularly when you put two ‘individuals’ together from two different cultures. Maybe now is the right time to review these. What are the worries that prevent countries from the EU to solidify their relation with potential supplier countries for Nabucco?

Financial:  “How are we going to pay for it?”

Distance: “But you are so far, can we really have a long distance relationship?”

Distractions: “What if you find someone else, while I’m away?”

Parental approval: “My mother wouldn’t approve” (i.e. Mother Russia)

“Your father has other plans for you.” (i.e. US wants EU to use shale gas)

Hometown girl: “Maybe you want a girl from home.” (i.e. shale gas)

Like most love story, it is the parents that get in the way. Those guardians that seek to steer their children in the right direction. Mother Russia certainly has a strong interest to insure that the EU is only supplied by Russia. The United States, is attempting to force a gas strategy on Europe – shale gas. The recent Baker Institute Study that projects a drop in European gas dependency from 27% to 13% because of the full utilization of European shale gas, has unfortunately – I believe, influenced US policy to push the EU to delay or stop the Nabucco Pipeline. Therefore comments emerge that discourage investment into Nabucco and encourage switching to a lower capacity pipeline that is commercially viable in the short term.  Pursing the most commercially viable pipeline option today does not provide the long term boost to security of supply nor provide the foundation the EU needs to have gas fill its power plants.

Multilateral and multicultural relations are at the heart of everything the EU does. Also central to the EU is the role of energy – the foundation of the EU rests on energy. Providing the will and reasoned justification for building a robust pipeline that will serve the long term interests and needs of Europe requires significant commitment today. Many of the issues that are meant to derail Nabucco are not strong enough to trump the security of supply implications that expanded gas supplies, that are not controlled by Russia, offer. Just as love can overcome obstacles, the large and abstract notion of security of supply serves as the impetus to take resolute steps to cement a relationship. It is time to stop worrying about what the future in-laws think.

Energy investment in the CEE/SEE region suffers from political piracy

Vacations are great. A time to get away and forget about work. Time to spend with the family, to be outside and even meet new people. So while my kids were learning how not to drown in Lake Balaton this year (they are still small), they became pirates and commandeered an inflatable boat from a Romanian family.

The owner of the boat, was also the father of the two boys my kids were playing with. We began to talk. Not so much about work, but rather about the unease – or rather slipping of Hungary and Romania and the lack of economic growth and opportunity. Maybe it was just more middle age settling in for both of us, but the hope and excitement – the vibe, that ran through the CEE region the past two decades, for both of us, has leaked out.

Don't let CEE/SEE politicians sink your energy investment. Get a beer cooler that floats!

Part of my assessment of the region is based on this ‘feel.’ Living and working in Budapest. Traveling around the region is essential for ‘knowing’ what is going on. I am now preparing for my panel discussion next week at the 21st Economic Forum and so I’m putting together my thoughts on what a post-Fukushima energy investment  environment looks like for the CEE/SEE region. While reading the daily headlines, I came across this analysis from Reuters, ‘Analysis: Energy investors should look to East Europe.’

“Oh shit”, I thought could I be wrong, because this goes against my current analysis for the region. It is the feeling that was confirmed by hanging out in Lake Balaton and my experience analyzing and researching the regulatory and political environment and the markets in the CEE/SEE region.

Reading the article, and the ‘opportunities’ that exist in Eastern Europe, I failed to see significant investments and realizable opportunities for companies. There is a lack of widespread and fundamental change in the region to create a broad based reinvigorated investment environment.  Not because the need isn’t here, but rather, because uncertainty and lack of a deep change in mindset that can attract long-term, low risk, investments.

Sure the infrastructure is old and being pressured with the integration of wind power and other RES. The emergence of new generation technology is changing the operations of the grid; it is only set to put greater pressure to open up the region for foreign investment. But the regulatory and political environment is failing to allow the level of investment that is needed to occur, including to meet the significant shift to a low carbon economy that is necessary and will be required by the EU by 2050.

I only needed to find this little gem from Bulgaria, to understand that things are not improving for utilities (and the investment environment in the CEE/SEE region).

In the beginning of April, Prime Minister, Boyko Borisov, declared the three power utilities and the lobbyists who helped implement the present electricity pricing schemes have committed a “daylight robbery,“ vowed to involve the Prosecutor’s Office in the probe and even threatened CEZ, E.ON and EVN with nationalization.

From the study I conducted a few years ago that looked at the privatization process in Bulgaria, Macedonia and Romania, I see things have not changed. I’m not going to state who is right or wrong in this fight, but rather use it as an example of the social and political discourse that governments and private energy companies operate within.

It is this constant bickering and overt political pressure on the utilities and other energy companies. Like forcing losses on gas companies in Bulgaria and Hungary. This is an attempt to keep consumer prices low. Although, this prevents the needed levels of investment into the current infrastructure and to improve it to meet future demands.

Maybe a paintball game can be used as a team building exercise for energy companies and governments.

As the Reuters article rightly points out, there are good returns to be had in the region and there is a need for investment in the chronically under invested sector. One of the reasons for higher returns in the region is because of the higher risk that investors face in the region – from the shifting political winds and constant political attacks that are launched.

Just as the electricity distribution companies that were bought by foreign investors are under a constant barrage of political and regulatory pressure on their prices and internal operations, they also secured (at the beginning) a higher rate of return to reflect this very risk of political and regulatory uncertainty. The politicians have only been too willing to prove the investors right. The article describes an ‘example’ of an opportunity in Romania.

Hidroelectrica, which generates roughly one third of the country’s power production, is seeking investors for its flagship project, a 1,000-megawatt hydro power plant worth some 1 billion euros seen finalized in 2019.

GDF Suez, Iberdrola and RWE and CEZ have walked away while Enel and a local unit of ArcelorMittal remain on board.

What is great about this, is this is EXACTLY what happened when Romania was privatizing the first electricity distribution company. Every potential bidder walked away – except Enel. And now that Enel is heavily invested in the country, along with Arcelor Mittal, it may be worth it for them to participate in a generation project where they can buy directly for their consumers electricity. However, because every possible buyer walked away from the distribution privatization, Enel was able to extract a higher rate of return in the final negotiations.  Treating investors badly doesn’t help your country in the long term.

The risk premium that exists in the CEE/SEE is important to emphasize. Even in Hungary, previously one utility executive I spoke to in 2006, said the risk premium was no higher than in Germany. Well, those days are gone under the Hungarian government’s new desire to drive foreign energy investors from the country.

I will participate in next weeks discussion not on the narrow opportunities that the Reuters article identifies, but on the broader risks and political unwillingness that exist in the region to significantly increase the level of investment. This failure to plan for the long term and to meet current system requirements will begin to bite as the region does build more renewable energy projects (and at high rates of return and/or with large incentives) and even new large centralized generation plants (ditto).

There are three key reasons that privatizations were conducted. Because of the physical state of the infrastructure (also as a result of failure of state owned industry), domestic economic conditions and external pressure by the EU or other organizations. The question is whether the region wants to wait for these conditions to exist again to begin the process of allowing private investment to renew the region’s infrastructure – and at a high cost – or begin to act now to systematically and in a steady manner, lower the region’s risk premium by working with investors – many of whom are already in the region from the first round of privatizations, like Enel.

The gloom that hangs over two middle aged men, playing with their children in Lake Balaton will only be lifted when governments begin to think over the medium and long term, to build a dynamic and innovative energy system (and economy). The good old days of the 90’s and even early 2000s were filled with a sense of optimism and opportunity. The perpetuation of the carbon based regime, marked by constant bickering over unsustainable low energy prices, will continue to dominate until politicians realize money and opportunity lie with a fundamentally different energy system. The broader national economies of the CEE region will continue to reflect the state of their energy systems. Innovative thinking in the energy sector easily passes through to innovative and higher investments in the wider economy. Politicians should choose this path, not Communist era energy policies that discourage investment.

Energy will liberate Hungary from Neoliberal and Western Shackles

The energy sector in Eastern Europe benefited from the central planning efforts of the communist era. The oil, gas and electricity networks built during this time were robust and based on a high level of security of supply. While the oil and gas transit networks may have resulted in dependence on Russian sources, they were nonetheless robust and served to drive national economic activity. In 2004 when many countries in the region joined the EU their interconnected electricity network were more robust than most systems in Western Europe.

The days of central planning, when state owned energy companies were strong

The privatization efforts that begin in the mid-1990s and carried through the mid-2000s (see my Energy Policy article) were marked by selling electricity and gas distribution companies. This corresponded to the establishment of energy regulatory authorities to oversee the activities of these private companies, ensure the public good is fulfilled and keep prices in check while increasing reliability. This regulatory system, when allowed to function, can serve the interests of consumers and ensure private companies make investments while receiving a fair rate of return for their efforts.

Some would mark this last period as neoliberalism with the introduction of private capital and withdrawal of the state from the direct provisioning of public services in energy. A more accurate term would be the rise of ‘sectoral governance’ (Bulmer et al 2005), that is occurring globally. (But that is for another post and the basis of my next journal article). ‘Some’ (bad term to use, but I’ll do it here), consider private ownership in the energy sector, which is the driver of economic activity and has a direct impact on household budget and inflation as an essential state function. State ownership, it could be argued, is important to provide stability, long-term planning and investment to serve the national economy.

In Hungary, ‘the state’ is now in a process of reclaiming ownership rights lost during the ‘neoliberal era’. The need to reclaim ownership in the energy sector is about building up a strong industrial base for the country nation, as pointed out by Peter Szijjarto, the Hungarian Prime Minister’s Spokesman.

“We do not have a serious national industry so in order to reanimate the national industry we need to take such tough steps as for example reclaiming MOL…. In order to make Hungary strong again, we need to eliminate energy dependence, and we need to restore the national character of our strategic companies in parallel with their international operation,” Szijjarto said (Reuters, and my take on it).

Hungary enters a new era with reclaiming ownership in energy companies. The sweeping election of Fidesz, according to Prime Minister Orban allows them to finally end the communist era in the country, thus the need for a new constitution and to reshape the country according to their ‘post-communist vision. The introduction of high taxes on sectors of the economy that are privately held, like banking, energy and retail that were done to save Hungary from economic ruin, as it was explained at the time, now begin to appear as part of a broader reworking of the economic order in Hungary. Orban is leading the Fidesz-KDNP coalition in the process of not just transforming the country from a communist-socialist-private capital haven, which is represented in its own local form, but slaying the broader global order of neoliberalism. Hungary is now, according to Orban, leading the world into a post-neoliberal order.

“While we have put an end to the basic principles of a neoliberal era, we have yet to build up the non-liberal economic policy of the 21st century, in terms of planning, coordination and practices,” he said, adding that because there had been no planning in the real economy, financial planning was askew.

“The old world order is on the verge of collapsing; we have no reason to wait for the advice and opinions of opinion-shapers stuck under the rubble,” Orban said.“We say, however, calmly, politely and unflinchingly: this is none of your business; this is the business of Hungarians,” the prime minister said (MTI, my take on it).

The end of Neoliberalism and American post-war capitalism

It is this new “non-liberal economic policy”  that Hungary will be leading the region and the world in. While Romania and Poland pursue privatization of part of their energy sector, under the old way of thinking that private capital can modernize the sectors and lift some of the economic burden from the state, Hungary views the energy sector not as a burden, but as the fundamental building block of a state owned industrial complex (haven’t we seen this before?).

But what is the post-neoliberal era that Orban describes he is putting in place? Well, this is a huge question that only quoting Gramsci, Polanyi and the like can answer fully – or only partly. But essentially, don’t expect the worker or the tax payer to be better off. The 2 billion euro price tag of MOL demonstrates that it is the taxpayer/worker/citizen that will be paying for this new order, through higher taxes and services (i.e. feed through of ‘crisis’ taxes in inflation) while also having their working rights eliminated, as demonstrated by the total elimination of worker rights in Hungary over the past year. In fact, the post-neoliberal era looks like it is described in this excellent article by Elmar Altavar as presented at a conference in Venezuala in 2008.

The crisis of neo-liberal ideology does not necessarily result in a post-neoliberal order which aims at social forms beyond capitalism. In the contrary, post-neoliberalism in finance can result in new forms of capitalist hegemony which again include a stronger role of the state. Contrary to ‘old Keynesian’ state interventionism, the new interventionism – including austerity with regard to the social wage – will not be designed in favour of workers’ interest and the environment, but in an undisguised political support of financial interests.

Understanding Capitalism takes Marxism

National solutions become the way out of the current neoliberal crisis of capitalism. According to Altavar the state comes back into the economy to provide support to the faltering capitalist system. But while Altavar describes a heavy burden being placed on the taxpayer to finance capitalism to save it from drowning, Orban uses the public monies, not to save the banks and the capitalists which traditionally drive growth, but uses the cash, along with the capitalist’s money, to finance state acquisition of companies for the purpose of reintroducing the state into the market based economy. This occurs in strategic sectors to benefit the Hungarian nation – and state. In this case, the energy sector.

Under Hungary’s new post-neoliberal energy order, energy companies will be used to extend the Hungarian nation-state into domestic and foreign economies. Under this nationalist guise, this may include active participation in former Hungarian lands (Romania and Croatia). The Hungarian territorial state is only a core vessel for the economic activities of the Hungarian nation. If growth and economic prosperity, under this line of thinking, is to occur then the whole Hungarian nation throughout the Carpathian Basin needs to benefit.

The re-industrialization  of the Hungarian nation will be led and financed by the Hungarian people and companies. The logic continues, that MOL, with the help of state owned electricity provider MVM, will lead this economic revival. Along the way, Hungary will boost its energy security through diversification of energy sources (although this remains dubious if  100% of oil is from Russia). The Hungarian nation will become strong by energy, industrial and financial diversification. Those leaders and financiers in America and Europe that Orban scorns, will hold little sway over how Hungary carries out its economic and social post-neoliberal revolution.

 

The rebirth of Hungary and the fall of Neoliberalism

I thought I would post a few interesting statements by Hungarian political leaders I came across this week, along with a brief personal reflection.

Reuters:

 

“We do not have a serious national industry so in order to reanimate the national industry we need to take such tough steps as for example reclaiming MOL,” Peter Szijjarto told private broadcaster HirTV in an interview.

“In order to make Hungary strong again, we need to eliminate energy dependence, and we need to restore the national character of our strategic companies in parallel with their international operation,” Szijjarto said.

He did not elaborate on the possible further steps or the areas of industry involved.
Source

MTI:

Neoliberalism is over

Prime Minister Viktor Orban told a conference assessing the first year of the centre-right government on Tuesday.

“While we have put an end to the basic principles of a neoliberal era, we have yet to build up the non-liberal economic policy of the 21st century, in terms of planning, coordination and practices,” he said, adding that because there had been no planning in the real economy, financial planning was askew.

Orban went on to reject the idea that Hungary should listen to foreign criticism.

“It is worth listening to ourselves and we should not wait for either approval or the contrary,” Orban said.

“In the past we have often abandoned important plans just because someone in America, Paris, Berlin, Brussels or London didn’t like it and let ourselves be discouraged, only to give up on the whole thing in the end,” he said.

“The old world order is on the verge of collapsing; we have no reason to wait for the advice and opinions of opinion-shapers stuck under the rubble,” Orban said.

He said Hungary was still likely to come under attack for various reasons, including the new constitution and economic policy.

“We say, however, calmly, politely and unflinchingly: this is none of your business; this is the business of Hungarians,” the prime minister said.

source

The Internet:

They fought for freedom to join the West

Towards the end of the Second World War, Hungary is occupied by the Soviet army and all streets, squares, institutions are renamed. People who continue to use the old names are arrested and beaten up by the communists.

Immediately after the occupation, an old man from a village, visit’s the country’s capital, Budapest.

He gets lost. Not knowing that the streets have been renamed, he ask people for various place names.

Old man: “Excuse me, sir, where is the “Heroes’ square”?

Pedestrian # 1: “No, old man, don’t use that name! It’s “Stalin Square” now!”

Later…

Old man: “Excuse me, sir, where is the “Chain Bridge”?

Pedestrian # 2: “Oh my God! Don’t use the old name of the bridge! It’s “Red Army Bridge” now! If you say that once more, you could get into jail, be careful!”

The old man gets terrified and takes a walk on the bank of river Danube.

He’s spotted by a soviet officer who shouts at him with anger.

Soviet officer: “‘Ay, old komrade! What ‘r’ ya lookin’ at?”

Old man: “Nothing! I’m just admiring the Volga!”

Source

Hungary after the fall of Neoliberalism

MOL and Hungarians Lose – Surgetneftegaz and Orban win! (and I predicted this)

My wife came back from the children’s hospital the other night after the doctor unclogged the poo that was a major discomfort for our young son. “You would think that they could spend some money on soap in the hospital,” she said. Any hospital that we have been in Budapest does not have soap in the public areas, including the bathrooms. When my wife gave birth – no soap, when I go to the doctor – no soap. But I’m not a medical doctor, just a doctor of the books, so maybe it is alright to be in a hospital and not wash your hands.What could happen?

Exposing your backside

Oh – energy security. So the Hungarian government spent 1.9 billion Euros of the IMF money that was meant to save Hungary from economic ruin. They did this to take control of their energy security so the Russians couldn’t threaten to take over one of the few companies that is economically successful and is an integral part of the Hungarian economy. The reasoning, as stated by Prime Minister Orban, and reported by Portfolio.hu:

The PM said the government “fought a tough battle in the past year”, but Hungary has managed to “bring to safety” its national company that has a key importance for the country. One of the keys to success in the region is the reduction of its energy dependence and the revival of national industries, he said, adding that the Hungarian government must always stand up to defend its interests. “No country can be strong if its energy supply is exposed,” Orbán added.

It was a good thing that Orban didn’t turn around while stating this because Hungary is still hugely exposed to the ‘whims’ of Russia. Most – if not all – of Hungary’s oil and gas comes from Russia.

There are a lot of aspects to this story to explore, and as with the aftermath of any big game, it will take awhile to analyze it all (I’ll have another post later on this). But it is fair to state, that I predicted that this would happen, as it was previously proposed in Tajikistan. Forcing the Hungarians to pay out money for a questionable increase in energy security (you think Orban reads my blog?). It is the citizens of the country that are being forced to pay for this stock buy, over more effective investments in either the economy or social programs.

Hungarians in Tajikistan selling bread to pay for their MOL shares

I questioned following this Tajik model, because it does not improve Hungary’s economy, society or energy security position. Rather, it becomes more state owned, as in the good days of Communism. The energy security argument that the government is spinning for MOL, is there should not be Russian ownership, or even a foreign government’s ownership in a nationally important energy company. This is one of the arguments that successive Hungarian governments have used for protecting MOL. However, it is now the case that the Hungarian government also owns, through MOL, almost a majority of the Croatian oil and gas company, INA. This should really strike some pride into Hungary’s right wing – including Fidesz. But it is questionable as to how much Hungary’s energy security is undermined if is already supply dependent on the Russians.

It is also stated that relations with the Russians will now improve, since ownership in MOL was a major sticking point in any negotiations between the two countries.  Development Minister Tamás Fellegi stated that this was a major hindrance in Russian-Hungarian relations, but the buy-back was connected with no other developments. There is no doubt Surgutneftegaz’s ownership in MOL did cause friction between the Hungarians and Russians, but it is also a fact that Hungary’s relations even with EU neighbors is at historic lows due to their inept handling of foreign and domestic policies.

The fact that the Hungary could not connect the buy-back with any other projects with Russia indicates the lack of effective negotiating position that the Hungarians deployed. This is a major win for the Russians (as they made a 500 million Euro profit), and if part of this was to improve relations between the two countries, then at least there should be a symbolic cooperative development that both countries could show demonstrating that things are back on track. Essentially, if you hand over 2 billion Euros there should be some room for smaller cooperative projects to be at least publicly announced – demonstrating a new period in Hungarian-Russian relations. The fact that this did not occur, does indicate the continuing tension between the countries.*

Finally, MOL should be worried. As the Development Minster indicated, the government has plans to increase its shares in strategically important sectors. With this hefty bit of MOL, combined with the shares from the pension funds that were nationalized at the start of 2011, the government has a nice chunk of MOL. If MOL management was worried about Austrian or Russian influence in company operations, it should be equally, if not more concerned about the Hungarian government becoming involved in its operations. The success of MOL is down to it withdrawing from the gas retail sector and focusing on transportation and storage. E.ON and others, are now losing money because of the price pressures placed on them by the government. MOL, has made clear in Croatia – through INA, that losses in this distribution sector will need to be covered by the government or they will sell it –  like in Hungary.

It is too early to tell, how the government will begin to impact the operations of MOL. But the infusion of politics into company operations could be expected. If Orban’s and Fidesz’s proclamation to the nation that is now posted in every public office makes its way into MOL offices and refineries, then we will know the new owners have something planned. Essentially, if the government pays out 2 billion Euros out of the rainy day fund, and walks MOL home, they are expecting more than a kiss at the door.

The explanation that the Hungarians wanted to sooth relations with Russia for the price of 2 billion Euros, doesn’t really stand up. We took our son to the underfunded hospital because his poo was causing a big discomfort to him. Did the Hungarians really pay out 2 billion Euros to ease their discomfort? Or did they really pay that amount to begin their path at gaining ownership in strategically important industries? This last point is only half true. As I wrote previously,

With some … significant government ownership [in private energy companies], the Orban government will realize its objective of imposing state ownership over the countries energy assets – and somehow keep prices low.

As I said before, and even in my Tajik commentary, I feel absolutely crazy for writing these statements. But this is what has now transpired, and as the government continues to consolidate its ownership – in a Hugo Chavez style, the Hungarian taxpayers citizens (there are only 2 million taxpayers in Hungary), will fail to realize the benefits of either a market economy or democracy. This is how high the stakes are now becoming. So Hungarians (and foreigners) should not expect any soap in the hospitals in the foreseeable future, while they pay off their IMF loan that financed the purchase of a minor amount in Central Europe’s most successful energy company.


*note: yesterday was the first day that the metro arriving at Moskva ter that it was announced it had reached “Szell Kelmen ter.” The reaction of people in the carriage was not positive, maybe the Hungarian government could keep Moskva ter to foster better relations with the Russians. But then, they also got rid of Roosevelt ter – the Orban government really is not concerned with improving relations with any country.

Fishing for boots: My lens of change on the energy sector

The interest in the current gas market in Central Eastern Europe demonstrates the increasing knowledge about our energy sources. Over the past few weeks I have answered a lot of questions from students and journalists about the gas pipeline projects and energy security in the region. I’ve never considered myself an expert on these topics, more a student myself. The energy sector is so multidisciplinary it takes knowing (and even mastering) several topics to begin to be a true expert on the overall subject. It is important though to have a base, or a prism, that the wider changes or processes involved in the energy sector can be seen through. For me, it comes from researching and analyzing change in the policy and regulatory environment in the energy sector and how this is connected to the local. This is the basis of my approach to analysis how markets and regulations interact to diversify energy supplies by fostering investment, or more broadly improving security of supply.

The solitude of thought

The history of energy is filled with transition periods, and if you take the long view, constant change and technological evolution becomes the norm rather than the exception. But all this change occurs within systemic parameters. Due to the significant capital investments and tight legislative and regulatory conditions that are infused into every activity of the energy sector, change is gradual. Transition from one technology to another is gradual, and altering habits, industrial processes and financial regimes all takes a very long time. This is why, as described elsewhere, the transition to a low carbon economy will take a long time unless, these systemic parameters can be altered and streamlined (here is the long journal article version of this argument).

Gas and electricity diversification, or energy security, therefore does not emerge from the sudden need to alter long established trade patterns. Crises no doubt can and does play a part in this, but the constant transition that occurs is partly the result of purposeful actions by stakeholders and broader inertia of regime change. Regulatory regimes, provide the context to frame the need to create specific change, whether for market liberalization or carbon reduction. Within this regime are broader societal, governmental and scientific thoughts that make an immediate impact and hold the potential for long term impact on the energy system. An example is the reduction in car use during high gasoline prices while long term is the increase of alternative energy inputs or alternative modes of transport.

Appreciation of the political-historical context also allows a framing of today’s energy battles. A recent conversation with a reporter, had him fishing for a quote that would describe a new period of relations with the Austrians and Russians. This stemmed from the establishment of a joint company to build 50 km of South Stream in Austria by OMV and Gazprom. Do I perceive a new era in the strong historical relationship between Austria and Russia? No, not really. My Hungarian history book has a few examples of cooperation between the Austrian and Russian monarchies and the squeeze that they put on the Magyars. Should we be surprised when two state owned oil and gas companies seek to pressure the main Hungarian oil and gas company. It was only the failure of OMV and Surgetneftegaz executives to understand historical context that led to their failed attempts to storm the battlements of MOL.

Hungarian Husars - just add a suit and tie for our modern day politicans and company executives protecting energy supplies

My main contextualization of the current transition efforts to reduce carbon stem from the study of the deregulation efforts in the US and the creation of regional markets. What I discovered was the actual deregulation had nothing to do with the perceived political actions for deregulation. In two case studies, of Michigan and Wisconsin – the first deregulated and the second didn’t – it was clear that the public understanding and the technical conditions for public choice of suppliers didn’t exist. Michigan while offering choice of suppliers for consumers, did not lay an effective foundation for competitors to compete with Michigan’s existing utilities. While Wisconsin politicians made it clear there would be no deregulation. However they took strong steps to separate the Transmission System Operator from the vertically integrated utilities, and began integration into a regional market. Essentially laying the basis for competing generation companies to enter the market. This is similar to the current EU attempt in market liberalization.

Underlining these two examples is the role of the local. Local control and local attempts to position their own energy companies to remain strong in the face of competition and possible take over. The laws and new rules instituted to keep MOL Hungarian correspond with the steps in Michigan and Wisconsin. Underlining the restructuring that occurred in Michigan and Wisconsin was fueled with the idea that local manufacturing needed to have competitive electricity rates, but the electricity companies needed to be pushed into offering lower priced electricity, while also protecting them from out of state corporate take overs. It is strongly felt, and the history of electricity in the US reflects this, it is through local control or local/state ownership of electricity companies that results in the ‘best interests’ of the community being fulfilled. Companies will have vested interests in the communities and therefore will act on behalf of the local.

The lens that can be used to analyze energy policy and markets needs to account for the local. It is the local leaders and their local energy companies that will work together to ensure a locality has sufficient levels of security of supply. Within this local formula of measuring security of supply is price, local control and technologies that are used. Crises, or external knowledge, along with new regulatory regimes (i.e. thoughts on how markets and society should be organized) all influence the pace of change. Stagnation of technology or the regulatory structure will impact the ability of the system in the medium and long term to adapt to external ‘threats’. This may be shown in a single large or a series of events. It is through this prism of the historical local political-corporate interests and the role of  technology that my analysis is based. Fishing for the ‘new’ in energy will only land you with an old boot.