Tag Archives: Orban

Inter-European Gas Wars: Europe’s pursuit of Energy-cide

Also published on Natural Gas Europe.

There is a gas race in Europe. This rivals the well reported US – Europe gas price difference, due to cheap US shale gas and high European imported gas prices. In an attempt to compete against the US European industry just got handed a price break in the form of lower support payments for the renewable energy sector. However, European countries also compete against each other over the price of electricity, a race to the bottom, or rather Energy-cide: the destruction of sovereignty in the pursuit of lower energy prices.

This price war also forces countries to develop strategies to keep electricity prices low. An example is Hungary’s deal with the Russians for a ‘low’ cost nuclear power plant. This inter-European energy price war holds significant long-term political and economic costs, which can hobble Europe’s competitiveness and political independence.

nuclear

The result of this inter-European price war is Russia captures the Crimean prize by understanding how the game is played. The limp EU financial sanctions to hold Russia in-check are framed as the EU punishing Russia. But this is Europe, the ‘unified’ EU action mask the inter-country price wars raging between member states. In each region this plays out differently, for those in the west of Europe (old member states) it is the result of the high initial cost of shifting towards renewable energy and the impact on industry; for those in the east (new member states), it is reliance on Russian gas and householders proportionally high utility bills.

The impact of this price war can be seen playing out in Berlin and Brussels in April, 2014. First the German government approved amendments to its renewable energy law, lowering the cost of German industry financing for renewable energy. Second, the European Commission voted to reduce payments energy intensive industry make to fund the renewable energy shift. The pressure is now intense in Western Europe to reign in energy prices and the real and potential threat of industry flight to the United States. The US, and its cheap shale gas, is held up as a magnet sucking European jobs. Europe feels the coming climate change apocalypse, just as much as a faltering economy, Russian tanks in the Crimea are simply less threatening. But this is a Brussels’ view of the world, in the east the people and politicians feel the heat from Russia.

The Hungarian government continuously lobbies against sanctions on Russia for the violation of Ukrainian sovereignty. With Hungary dependent on Russia for gas and nuclear power, its current charade of low energy prices can only be maintained by the wishes of Russia. The Hungarian government secretly inked an agreement with Russia to take a 10 billion euro loan to build two new reactors. Despite no social or political debate, the overriding excuse for such a deal by Hungary’s Prime Minister was lower energy prices – even if the numbers show a doubling of electricity prices. He envisions to have Europe’s most competitive electricity cost for industry and be more competitive than the Czech Republic or Germany. Hungary will be a manufacturing powerhouse fuelled by cheap Russian nuclear power. In return, the Russian’s hold over Hungary a huge mountain of debt which they’ll use to manipulate Hungary’s foreign and domestic policies.

Other countries in Eastern Europe are the same, Bulgaria has been plagued with violent riots over electricity and gas bills. The country’s seven member energy and water regulatory commission had 17 different members and six different chairman in 2013. Poland has lost an environmental minister due to bungling the country’s shale gas ‘revolution’ – it still awaits a commercially viable well. Each country in Eastern Europe has the stated aim of having the cheapest gas and electricity and literally being a regional powerhouse. Each country wants to compete and attract industry from Western Europe. Poland wants chemical manufactures from Germany. Hungary wants auto manufacturers to set up shop. It is a continental race to the bottom.

Russia benefits in spades from intra-European conflict over energy prices while the continent as a whole attempts, by any means, to close the price gap with the US. In 2012, the German border price for gas was four times higher than the US Henry Hub price (even if this is a flawed comparison, it is often made as an excuse for needing lower EU energy prices). To close the price gap, somehow the solution is more Russian gas. Russia’s South Stream pipeline project will avoid Ukraine and deliver the same gas to Europe, without Ukrainian interference. The pipe will traverses the Black Sea, landing in Bulgaria and connecting Serbia, Hungary and Austria. When the going got tough over a year ago for South Stream’s competitor, Nabucco, which would bring non-Russian gas to these same countries, both the United States and the EU failed to step up to ensure its success. The project offered to diversify Eastern Europe’s gas supply. Instead the EU accepted another gas pipeline to Italy – a long running ally of Russia and thus acceptable to both those in Brussels and in Moscow.

nabucco and gazprom v4

The evolving gas map keeps the east boxed in: South Stream and Nord Stream. There is almost zero western support for diversification, the result is high prices and Russian dependency with low security of supply.  But is this paranoia? Not when the German partner of South Stream remarks over EU blocked talks with Russia, “If anything, the approval procedures should be accelerated, not delayed,” said Rainer Seele the Chief Executive of Wintershall.

Should the only means of leverage Ukraine holds over Russia be sped up? Just so Ukraine can be eaten faster by Russia? Hungary’s Orban signs secret deals with Russians because he knows he needs to compete against the west on price, Berlin or Paris aren’t going to send cheaper electricity or gas to the east.

The true price masters are the Russians. They see this intra-EU country price competition. They see political leaders hanging by economic-popularity threads, industry bent over a Russian pipeline – sucking gas, Bulgarians protesting over prices and burning utilities’ cars, while Viktor Orban proclaims an energy price war against Brussels while furtively flying off to Moscow. Even the ‘green’ German consumer demands cheaper electricity. Industry perception of the energy system as a whole matters, even if Russian gas is marginal in Western Europe. The closure of German nuclear was perceived as a blow against German industry, another blow is unwelcomed.

The Russians hear from European industrial and political leaders, “take the Crimea, but just help us compete against our European neighbors and America.” Energy-cide, the destruction of sovereignty in the pursuit of lower energy prices. Russia is the cat and Europe is the mouse. Russia eats part of Ukraine, while Russia also politically binds the Bulgarians, Hungarians and Germans over gas prices. Unless Europe stops its Walmart-like energy price race to the bottom, and shores up energy diversification routes for Eastern Europe, Russia will continue to be the top consumer.

Street Art: The Russian Mafia State in Hungary

You know all the things I write about on my blog, sometimes I feel I’m a little lost in my own thoughts. But then I came across one of the prolific billboards in my neighborhood before and after the April 6th elections. As you can see from the photos someone else in the neighborhood feels the need to publicly express themselves. I think it is important to deconstruct what the street artist is saying here.

Here in the first photo, taken before the elections, you see the artist is expressing the often used phrase ‘Mafia State’ used to describe how Hungary’s Prime Minister has built a very ‘corporatist’ state. Or rather, the intermingling of state and business.

The word ‘Maffia’ here may also  imply the use of force or coercion if a citizen does not comply with the ruling oligarchs or party line of thinking. While it is normal for the state to use force to enforce order, here we have also a reference to financial means to maintain order. For example, if one is aware of the huge amount of advertising in the Fidesz campaign in Budapest, one may observe other money was used besides that allocated by the state and political parties for financing their campaigns. Also, all the many companies the state has nationalized or bought out over the wishes of its owners, then these could be interpreted as mafia-like actions.

Later, the “Maffia” was painted over.

20140404_170221

However, in the next photo taken on April 10th, after the election, you see the street artist is expressing an even stronger opinion of Hungary’s tie to Russia. Here it is the ‘Russian Mafia’. No doubt this is reference to the many economic and ideological ties the government holds with Russia. The need is now greater than ever for Orban to promote the Russian line in the EU.  The recent Paks deal with the Russians, means Fidesz must serve the Russians. Period.  This leads the artist here to imply Fidesz is a tool of the Russian Mafia State. Often comparisons are drawn between Orban’s governing style and that of Russia’s Putin.  Just today, the government is attacking the Norwegian Fund, as privately financed social activities, which the Hungarian state wants to control. A line out of Putin’s playbook. In our interpretation of the graffiti here, the artist may also be making this statement that Fidesz and Putin are mafia brothers.

20140410_080552 v2

All in all, it is encouraging to see public art work in Budapest which is not all state sanctioned.

Russia Wins the Energy Race and Captures the Crimean Prize

The occupation Ukraine’s Crimea peninsula by unmarked Russian troops brought Russia’s energy dominance over Europe back into headlines. Europe ‘appears’ constrained in a strong response because its reliance on Russian gas. Strong economic sanctions against Russia could start a trade war, with Russian sourced gas spiking in price leading to higher European electricity and heating bills.

"Any advice on dealing with foreign energy investors?"
“So what’s the price for ‘cheap’ energy?”

The debate around potential sanctions is framed as the EU versus Russia. But this is Europe, the inter-factional fighting within Europe actually leads countries allowing Russia to walk away unmolested with the Crimea Peninsula. There is an unreported race in Europe: the energy price war. In each country this plays out differently, for those in the west of Europe it is the result of the high initial cost of shifting towards renewable energy, for those in the east, it is reliance on Russian gas.

Spain, which once offered ‘you can’t loose’ subsidies to anyone hooking up solar panels to the grid have now removed all incentives and are looking for ways to claw back previous financial commitments. From Germany, the Czech Republic to Bulgaria the standard feed-in tariff, which paid a premium on every kilowatt produced, has fallen out of favor due to consumers opening electricity bills and dying of sticker shock. Or so it seems.

The high cost of electricity in Europe is now a constant topic of discussion for European leaders. Europe has a disproportionately high priced gas and electricity system compared to the United States.  Politicians are scrambling to find ways to reduce the bill in Europe. Hungary, in the run-up to next month’s elections, has reduced electricity and gas prices by 25% over the past year. Losses for the energy providers are mounting and investments have significantly dropped. Even in the UK, the idea is floated to freeze electricity bills.

utility investments in Hungary

The energy price war is as much internal as external. The external is the low priced shale gas that has flooded the US power market. Making cleaner burning gas more feasible than coal power stations, and pushing cheap, and easily transportable coal into the European market. As the price of gas has dropped in the US, EU external dependency on imported gas has increased between 2001 and 2011 by almost 20% according to Eurostat’s dependency barometer, with Germany increasing imports by 10%. The global price of gas is relevant for Europe’s economies.

Importantly, the price war is also between Central Eastern European countries like Poland and Hungary against the perceived high priced countries of Germany and France. The drive for shale gas in Poland is an attempt to drop the price to bring the chemical and manufacturing industry from next door Germany. The recent agreement between Hungary and Russia, has Russian Rosatom building two new nuclear blocs is fueled by Hungary’s Prime Minister’s belief that nuclear in Hungary will be cheaper than heavily renewable based electricity in Western Europe. Not even the Russian invasion of the Crimea, which others compare to the Russians stomping out Hungary’s 1956 revolution, has shaken the Prime Minister’s decision – nor his support for Russia and Putin (I don’t strongly agree with this simplified comparison, but honestly, it is really disgusting that Orban doesn’t personally come out with stronger opposition to Russia and Putin’s move – this really exemplifies what kind of person and leader he is.  But I digress).

Any economic sanctions against Russia for invading the Crimea holds the potential for higher gas prices in the European market. Despite recent efforts to diversify away from Russia, the price of gas in the EU is of national economic and political importance. Voters and industry expect the cheapest energy prices possible. Economic stagnation on both sides of the Atlantic forces politicians to look at how they can cut costs, increase economic activity, and compete against each other. Lowering energy prices can be equivalent to lowering taxes, providing an economic wallop. The message is clear, Russia wins the Crimea, but Europe needs Russia’s help to compete against the US – and with each other.

Nothing says energy independence better than Russian nuclear

Energy independence, energy security and security of supply are all tightly connected concepts. Each is different and represents its own strand of knowledge and impacts. The regime of Orban that runs Hungary is dancing again with the Russians over their nuclear prowess. Back in 1999 I helped organize a conference on nuclear power in Hungary. The question then, as now, ‘Will Hungary choose Russia to build a new bloc for their nuclear power station?’ If the country is serious about energy independence, as the leadership claims, then they should not even be considering Russian nuclear power technology. But they are.

Energy is not a rational field, nor is Hungary run by rational people. This week the headline was to import Israeli gas to Hungary. It’s always good to play out the idea of independence but not actually building true independence from the Russians. The public statements by Hungary’s National Development Minister and Deputy Minister for Energy, supporting South Stream – while slamming the Nabucco consortium as high paid (private) consultants, at a recent conference on South Stream reflect the true thinking of the Government. These true feelings combined with the support of re-nationalization of the energy sector all plays into the cosy hands of Russia and the politicization of energy.

Dependency

We can begin to imagine Hungary will buy into another Russian nuclear plant and rely on Russian sourced gas being pumped through the Russian owned South Stream. Orban has stated his goal is to produce 70% of the country’s electricity from nuclear power. The country’s current reliance on Russian gas is near 80% (although this should drop slightly over time). Current electricity production is around 30% from gas. With South Stream, this dependency can be assumed to grow. Even with other diversification projects, the overall ‘normal’ business scenario is an extremely high dependency ratio. Under this scenario future domestic production from wind, solar or biomass is irrelevant, as it remains at niche production levels. Russian nuclear and Russian gas will continue to rule Hungary’s energy system.

The turn away from the EU and Western European energy companies and the embracement of Mother Russia for ‘energy security, security of supply and energy independence’ is no security at all. Once the Russian pipeline and nuclear bloc are built, Hungary will be embarking on another 50 years of dependency on Russia. By this time it will be a century of Russian dominance and dependency! Is this the ‘energy dependence’ talk that has the Orban regime on their high horse over German and French owned utilities?

Energy is politics: Hungary by accepting the subservient role in this relationship will be politically orientated towards Russia. We are only one step removed from the remark, ‘The groundwork is being laid for Hungary to join the Ukraine-Russia energy-economic alliance.’ If Hungary acceptance almost total domination of Russian in its energy supplies than it must toe the Russian line on economic, social and political matters. The EU is now being infiltrated by strong Russian influences on its Eastern borders. The choice is clear: lower gas prices for political and economic commitment to Russia vs. lost political control over domestic EU energy markets. While the EU sees its current satellites spiral back to Russia, the satellites and their revived European values and contribution to Europe are again being lost. Energy is the tip of the iceberg, it is necessary to look deeper and see what total Russian energy dependency means for Hungary, Eastern Europe and for the EU.

Hungary’s Non-Profit Utility Model: like nationalizing the steam locomotive

The typical reaction to Hungary’s Prime Minister Orban and his ruling Fidesz politicians’ efforts to make utilities non-profit is, “Oh, they are nationalizing the foreign owned utilities and driving them from the country.” I think after more than three years of Fidesz economic consolidation, none of this is surprising.

Making utilities non-profit (whether private or public) is like nationalizing the steam locomotive in the 1950s, technology progresses, so don’t be caught with a Beta-max video machine. The energy utility model, gas and electricity, is outdated and set to become the rail lines of the late twentieth century – that is the remit of government and not private industry interested in profitable growth. New technologies and businesses are present that make the electrical wires and gas lines to homes and businesses a low margin business. In essence the Hungarian government is stepping in thinking they are ‘buying’ the steam locomotives and railings at the height of the industrial revolution.

Hungary’s energy system – keeping it around like a steam locomotive

The large privately owned electricity distribution companies operating in Hungary, that the government seeks to burden the most, RWE and E.ON have already stated they are radically changing their business models to revamp or shed low margin businesses like distribution. The E.ON 2.0 plan calls for a focus on high growth markets (they already pulled out of Bulgaria), while RWE sees their role in actively participating in the energy revolution that involves distributed generation and smart energy systems. The stock price of European utilities have halved over the past five years, new business growth – or even company downsizing (as proposed by RWE) is necessary. Centralized energy systems and the utilities that manage and profit from these are becoming mere network operators with slim (or none) profit margins.

Two energy camps are now emerging in Europe. I’ve stated this before, essentially old EU member states are modernizing and updating their electricity systems with smart IT networks that are able to eliminate huge inefficiencies in consumption and in the supply network. From smart energy meters in homes, to balancing generation assets more efficiently, the integration of IT into the energy system holds huge potential for business, RWE and E.ON are both jumping into this business.

For new EU member states in Eastern Europe (I purposely revert back to the old geographic name and historical connotations) political control and perceived low energy prices are the overriding concern. Under this scenario the system will likely not receive the capital necessary to make a smart energy system develop. This results in the perpetuation of the current centralized energy system where only the price of generation can influence the end price. This is literally the ‘dumb’ business model. A simple demand and supply equation. The citizens of Hungary and other Eastern European countries, are now being forced to maintain a technologically outdated energy system while politicians claim credit for giving the people something that more developed countries now longer want. In short, Hungary and Eastern Europe purposely maintain their second tier hand-me-down status in the European family.

Politicians in Eastern Europe can claim they are lowering the cost of train travel by nationalizing steam locomotives in the 1950s (with the already amortized costs). They ignore modern technologies that can also lower the cost and lead to a more efficient system to operate and provide robust benefits to consumers. There’s a reason that in Hungary the travel time from Budapest to Lake Balaton has changed little since the steam locomotive. So I wish the Hungarian government good luck with their new steam engines. But it is too bad they don’t draw on their substantial human capital in IT to drive their country and the region to the leading edge of a European smart energy system. No doubt, if all the utilities are in government hands, then significant modernization of the grid drawing on Hungarian expertise could happen. But this I doubt, the government will be too enamored with their newly acquired steam engines to notice the smart peasants working in the fields.

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.

 

Have you nationalized your utilities yet? Build your own fairy tale utility

It actually hurts, and appears egotistical, to again say how right I was. But I was right. Hungary’s Prime Minister did want to nationalize and drive the price of energy to artificially low prices. In these multiple posts I outlined his strategy back in 2010. The plan, as outlined by the PM himself last week, is to buy back 6-7 (or let’s say all) the privatized utilities in Hungary. In the end, I’m not sure how it benefits the Hungarian utility rate and taxpayers (because if you can’t collect the money through rates, then the tax payers have to pay). They will once again become as well managed as Hungary’s large state owned bloated elephant MVM, who does everything from taking out commercial loans to pay for EON’s gas storage to monopolizing the wholesale electricity market. It remains unfathomable how globally priced commodities and technology can be magically reduced to below cost for Hungarian consumers. And it remains to be seen how any of this would be good for modernizing the energy infrastructure.

For Orban and the Government, price is the overriding political issue that they think will get them reelected. They also have an unfounded assumption that lower electricity prices (as is also the case in other countries in the region) will attract manufacturers. “After the elections the next government will need to find means to lower energy tariffs to U.S. levels in case of energy used by the economy,” Orban stated. But it remains a mystery how Hungary can compete by using imported gas or expensively mined domestic coal (apparently the new plan) to attract companies in a country where 90% of investment is done with EU money – not by companies. There’s no way Hungary can compete on coal prices against Polish coal and its economic-politically stability. Want to locate to CEE – go to Poland. Maybe greater effort should be made to retain those foreign investors in the Hungary than kicking them out and becoming the Bangladesh basket weaving center of Central Eastern Europe. Competing on the price of energy commodities (when you don’t even hold domestic sources) instead of higher value added industries and innovative industries is foolish. If the idea is to attract companies to Hungary over the US, then Orban demonstrates again his disconnect with reality. But then I think he is building a new home for himself:

Budapest to host Fairy Tale Park
A Hungarian Fairy Tale Park will open next spring on part of the land occupied by the Amusement Park, which is to close on September 30.

The main attraction is expected to be a 1,500m2 “enchanted castle” evoking the world of Hungarian fables. It is to be developed from a building that formerly housed apartments for employees of the adjacent zoo.

The park is due to open next year, but the Fairy Tale Castle will not be ready until 2015.
The Budapest Zoo has been given Ft 500 million in subsidies for the project.

Zoo director Miklós Persányi also plans to create a park with tropical animals and plants, a water safari and an adventure trail.

(From Hungary Around the Clock Sept. 20,2013)

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.

Hungarian Politics Torpedoes Nabucco Participation

The analysis of energy policy goes to the heart of a countries political and economic system. The statement by Hungarian Prime Minister, Viktor Orban that MOL, the Hungarian Nabucco gas pipelinepartner, was pulling out, can only be seen as a politicization of Nabucco and MOL decision making. It is no secret that Orban has a testy relationship with the European Union. But has he really removed a diversification option from the table? Despite increased regional options Hungary only perpetuates its present day dependence on Russian upstream supplies. Now Orban has thrown the country solely into supporting South Stream – diversifying to more Russian gas does not constitute noticeable diversification.

Continued on Natural Gas Europe…

Fukuyama gets a letter from paranoid Hungary – but why not me?

He got a letter and I didn’t. What does Francis Fukuyama know about Hungary? What does Francis Fukuyama have to do with Hungary? What does Francis Fukuyama get for writing a blog post about Hungary? A letter. A letter sent from Zoltan Kovacs, Ph.D. of the State Secretary for Government Communication. Dr. Fukuyama wrote one blog post about how Hungary provides an example of why state institutions don’t really matter, because “bad actors can undo even the best-designed institutions.” And the Hungarian Prime Minister Orban emerges as the bad apple leading the bunch.

The letter even came with the Hungarian shield and underneath the “Ministry of Public Administration and Justice.”

Not strong enough to stand against the new Hungarian state
Democracy is crushed, just as Communism was crushed by right-wing state actors

Sometimes life really is unfair. How many blog posts about the autocratic nationalistic anti-Western views of Orban, do I have to write to get noticed by the Hungarian State? Not to mention the fact that I wrote BEFORE Fukuyama about Orban upending the current international technocratic governance regime and the repoliticization of technocratic state institutions. All I got a few months ago, after writing about the Hungarian state’s nationalistic energy strategy was an email from the lawyer of the state owned energy company, MVM, to not use their logo (that was pretty cool too). But a letter from a state organ, now how cool would that be? That is like reaching the blog-o-sphere!

But there are two reasons I have not gotten a letter. First, my wife is Hungarian and I live in Hungary (I’m assuming Fukuyama’s partner is not Hungarian). Because I live here, the Hungarian government knows they got me. Having an Hungarian wife means I have an Hungarian mother-in-law  I’ll never be able to leave Hungary. Also, the last letter I got from the state, was to tell me they were taking away my private pension money. Overall, there is plenty of time and multiple ways they can get me.

Second, I am always right. I have not gotten a letter, Paul Krugman has and now Fukuyama has as well. I only wish those two popular authors could be as exact as me.

Now that I’ve gotten over my jealousy, let’s examine the letter. It is fairly clear from the letter that Dr. Kovacs sent, that Dr. Fukuyama was totally wrong and misguided on four very important points. 1) Retirement ages for Constitutional judges – Z.K. says all judges above 62 must retire (reduced mental capacity??); 2) Hungary has not infringed on the independence of the Central Bank (they are trying, but haven’t been able to do it yet); 3) the new constitution is very good for debt reduction (self-denial); and finally 4) the new electoral law is great for candidates (failed to say for which party).

Be exact!

Ah, Fukuyama didn’t cross his ‘T’s’ and dot his ‘I’s’. For anyone following the constant flow of ‘corrections’ sent out by the Hungarian government this is where they get everyone. When authors try to simplify what is going on in Hungary, sometimes they brush over an item – but this is where the State Secretary for Government Communication – and other state institutions get these authors, and try to make them look ignorant. They get letters like from Dr. Kovacs pointing out their missing ‘periods.’ But like all state bureaucrats, and even like the Communist censors of the past regime, they miss the point of the article, thereby confirming and reinforcing the message. (Maybe it is here that Kovacs was trying to demonstrate that institutions don’t matter).

The point of the blog post that Fukuyama was driving home – and stated – was that Victor Orban is a bad man. Within the structure of the state it doesn’t matter how the state is set up, with checks and balances or rigid regulatory structures, if there is a lack of mature democratic political culture within a country and in political parties, then the state structure, which is weak, will crumble when a bad person, like Victor Orban comes along. “If the political will exists to do something even in a system with a lot of veto players, it will happen.”

Fukuyama was not worried about a slash or a dot, rather he states, “The new Hungarian constitution is bad not so much for what it is, but what it reveals about the long-term proclivities of its authors.” The letter sent by State Secretary Kovacs re-enforces the point and demonstrates that Kovacs indirectly accepts Fukuyama’s perspective and argument. It does this on two points.

 

A worker performs his duties in the Hungarian Ministry of Public Administration and Justice

First, by sending a letter attempting to clarify minor ‘inaccuracies’ the institution of “Ministry of Public Administration and Justice” does not challenge Fukuyama on his argument that Orban is bad and the ‘spirit’ of the new constitution indicates this. The Hungarian state engages at the wrong level. When Fukuyama ends with “Maybe institutions don’t matter, after all.” He becomes right (I actually disagree that institutions don’t matter). Fukuyama becomes right, because Kovacs demonstrates what a bureaucrat he is by becoming a cog in the state machinery sending out letters to blog posts pointing to technical inaccuracies while being oblivious of the main argument.

Second, Kovacs’ letter is an example of the the “proclivities of [the constitutions] authors,” or rather the proclivities of state leaders and how they have employees of the state engage the public. State institutions, have people like Kovacs (and those that work for him) combing every minor detail on a published article or public comment and then writing a letter to defend the current autocratic regime of Victor Orban. This is done by state institutions, instead of accepting and encouraging an open media space in Hungary where a diverse exchange of views occurs without crippling fines for owners of media outlets. Prosecution remains possible if you use the words from the new national anthem in a rap song, as the Hungarian rapper Dopeman did. It is those people that are beyond the reaches of the Hungarian state, that receive such letters. Fukuyama’s makes the point in his blog post, Orban is “grabbing control of the media regulator,” well, Kovacs in his finely crafted and detailed rebuttal did not disagree, thus we can only guess that Kovacs also agrees – or at least accepts this point.

Watch a crime being committed: “Gabriella Skoda, spokesperson of the Attorney General’s Office has previously told the press that „the district attorney has viewed the music video and based on its contents contended that a misdemeanor crime against a national symbol has been committed and the suspicion of crime has been ascertained, therefore an investigation was initiated”.

Restraining of state institutions – including secretaries and prosecutors, should occur, rather than media outlets, so the state does not issue a letter over every little criticism. A country with an open democratic system, does not have the state attacking every criticism in the public sphere – it only makes the state look paranoid – it shows the proclivities of the state machinery. And if they are an open and democratic country, why would they be paranoid? Unless almost every international institution is examining your country for undemocratice practices, then you might be paranoid, as is the case with Hungary. Institutions don’t matter, but for people in Hungary that have their pensions taken away; companies that accrue losses, due to nationalism; and the lack of media plurality, due to government fines and prosecutions – the importance of institutions, and the views and actions of international institutions do matter – (and this, Fukuyama would agree with – added Feb. 8, 2012).

My favorite video, that sadly describes so well the views of people in Hungary – even more now after Hungary has crawled back to the IMF. (click on captions for English subtitles)